Veracyte Q1 2023 Earnings Call Transcript

There are 11 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Veracyte First Quarter 2023 Financial Results Webcast. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sheila Gorman, Director of Investor Relations.

Operator

Please go ahead.

Speaker 1

Good afternoon, everyone, and thanks for joining us today for a discussion of our Q1 2023 financial results. With me today are Mark Staffley, Veracyte's Chief Executive Officer and Rebecca Chambers, our Chief Financial Officer. Veracyte issued a press release earlier this afternoon detailing our Q1 2023 financial results. This release, along with the business and financial presentation, is available in the Investor Relations section of our website at veracyte.com. Before we begin, I'd like to remind you that various statements that we may make during this call will include forward looking statements as defined under applicable securities laws.

Speaker 1

Forward looking statements are subject to risks and uncertainties, and the company can give no assurance they will prove to be correct. Further, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte files with the Securities and Exchange Commission, including Veracyte's most recent Forms 10Q and 10 ks. In addition, this call will include certain non GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release, accessible from the IR section of Veracyte's website.

Speaker 1

I will now turn the call over to Mark Staffley, Veracyte's CEO.

Speaker 2

Thanks, Sheila, and thanks, everyone, for joining us today. I'm very excited to share our Q1 results, which were even better than we anticipated almost across the board. We delivered revenue of $82,400,000 22% growth over the prior year, driven primarily by outperformance of Afirma and Decipher. Further, with our continued focus on financial discipline, we ended the Q1 with cash, cash equivalents and short term investments meaningfully ahead of our projections at $178,000,000 roughly flat for the prior quarter even with the seasonal use of cash that we anticipated. Behind this balanced approach to growth and capital preservation is our proven framework of identifying a specific clinical unmet need, developing the test to address that need and securing the clinical evidence, reimbursement and guideline inclusion required to drive sustained market penetration.

Speaker 2

This approach is the force behind the performance of our Afirma and DECIPA tests and enables us to invest in our long term growth drivers. This quarter, we delivered close to 12,500,000 of the thermo tests for patients being evaluated for thyroid cancer, more than we anticipated given that we had expected a greater impact due to seasonality, which is typical in the Q1. We saw positive growth trends across both our ordering base and orders per existing provider. On the reimbursement front, we secured 4 new payer contracts, making the test an in network benefit for over 4,000,000 additional health plan members. In addition to the outstanding work of our commercial and reimbursement team, I'm excited to share that as part of our initiative to enhance our best in class Afirma test, we recently launched the addition of TERT promoter mutation testing to the Afirma report.

Speaker 2

There have been several studies published recently that correlate the presence of a terp promoter mutation to a high risk of malignancy, as well as highlighting that such mutations co occurring with the BRAF B600E variant are associated with a poor prognosis. Given the value of these insights from forming patient care, such as whether more aggressive surgery or treatment is warranted, Our team worked hard to develop a high quality DNA assay that allows us to reliably determine the promoter gene mutation status for patients with suspected or diagnosed thyroid cancer to further empower physicians to optimize clinical decision making. We believe that product enhancements such as this, along with the work we've done to improve the customer experience and to streamline ordering, will continue to benefit Afirma's performance in the coming quarters. Given this, as well as our strong Q1 results, we now expect the bolstered growth rate for Afirma in the high single digits for the full year. Turning to urology, We continue to expand on the body of evidence surrounding the decipher prostate test, further helping to establish the test as a new standard of care.

Speaker 2

At the American Urological Association Annual Meeting earlier this week, multiple abstracts were presented focusing on our DECIPA test. Particularly exciting was data from 2 large real world datasets encompassing more than 100,000 men with prostate cancer, which reinforce the clinical utility of our test. In the first study, researchers paired data from the National Cancer Institute's SIR database with patients who had undergone the cytoprostate testing and found that use of our test was independently associated with a twofold increase in conservative management among those with favorable risk disease. In the second study, over 90,000 DECIPRE prostate test results were linked to electronic health and claims data to demonstrate that the DECIPA score at initial diagnosis was independently predictive of risk of metastasis. And after radical prostatectomy was predictive of both biochemical recurrence and metastasis.

Speaker 2

In addition to the data presented at AUA, we published a number of studies last month that further advanced the clinical utility evidence for the DECIPLA prostate test. The first study published in European Urology Oncology found in a cohort of over 4,000 patients that the cypher prostate could help better identify those patients with early micro metastatic disease, who may benefit from upfront treatment intensification. This study adds to growing evidence around the use of DECYFA Prostate to help inform treatment decision making and initial diagnosis. Additionally, new data from an analysis of an NCI sponsored Phase 3 study published in the International Journal of Radiation Oncology Physics, known as the Red Journal, shows that the cytoploprostate test can help physicians more accurately categorize personal risk and select appropriate treatments for men with intermediate risk prostate cancer. This is important because prostate cancer deemed intermediate risk by NCCN guidelines is the most heterogeneous of all risk groups in the disease and a wide variety of treatments is available.

Speaker 2

Of note, this randomized study in which patients were followed for nearly 13 years is the first to validate any gene expression biomarker in the intermediate risk patient population. The attainment of Level 1 evidence for validation of our test in the most recent NCCN guidelines, along with the stellar execution by our team and our differentiated Cipher grid report led to Q1 decipher prostate volume of more than 12,500 tests. Like Afirma, This growth was also driven both by strong adoption from new ordering positions as well as higher volumes from existing accounts. Building on the framework we've established with Afirma and DECIPHER, we are making good progress on our long term growth drivers. Titan patient enrollment for Nightingale, the clinical utility study for our Percepta nasal swab continues to progress well, demonstrating the potential for our novel, non invasive test to help guide physicians' next steps for patients with potentially malignant lung nodules.

Speaker 2

We look forward to presenting expanded preliminary data on the familiarity phase of the trial, which enabled investigators to learn how to incorporate the test into patient management in advance of the clinical utility trial at the American Thoracic Society or ATS International Conference later this month. The global launch of our test menu to patients outside the United States is another key long term growth driver for Veracyte. Our current IBD product offering, Prosigna for breast cancer patients, had a record quarter delivering close to 3,000 tests, demonstrating traction and adoption supported by clinical evidence. With the submission of our Envisia Genomic Classifier to European regulators in December We are now responding to feedback from the notified body. In the meantime, we continue to build clinical evidence for Envisia and are looking forward to the presentation of abstracts at ATS demonstrating the test impact on patient management and its ability to predict disease progression in patients with interstitial lung disease.

Speaker 2

We believe our focus on evidence generation will help drive adoption of Envisia globally, bolstering the LVT in the U. S. While gaining important KOL support in Europe in preparation for the international launch of the IBD. We are also making good progress building out our broader menu of diagnostic IBDs for the OUS market with the cypher prostate expected for submission in 2024 and our nasal swab expected for submission in 2025. While our biopharma business is facing significant headwinds over the course of this year, Given the impact of a sizable customer pulling back on planned spending and the current macro environment, we continue to advance our unique multi omic offerings.

Speaker 2

We were pleased to share 3 abstracts and host a spotlight theater at the AACR Annual Meeting, highlighting our distinctive set of assets to help biopharma partners at all points along the drug development process. We are continuing to build out our pipeline of new customers to fuel the long term growth prospects of this business. As I laid out on our call last quarter, one of the strategic focus areas for 2023 is to by new opportunities to expand our testing menu beyond our currently available products and the pipeline I outlined. As part of these efforts, we held our 1st Annual Discovery Day in April, bringing together our R and D, medical, clinical and commercial teams from across the globe to imagine the future for oncology diagnostics and Veracyte's important role as a leader in shaping that future. I'm extremely pleased with the work our teams are doing on this front and our investments to drive the next phase of growth for the company.

Speaker 2

Before I close, I'd like to highlight the publication of our inaugural environmental, social and governance report earlier this week. This ESG report highlights how our mission and values are deeply embedded in our business and demonstrates not only our dedication to transforming patient outcomes all over the world, but also our commitment to our shareholders, employees, business partners and other stakeholders. I am pleased to provide transparency into our ESG efforts, I'm excited to build on the foundation we've laid to further advance our program. So in summary, Q1 was a fantastic quarter marked by solid execution across the team. We're excited about our progress to date and our clear focus for the future.

Speaker 2

With that, I will now turn to Rebecca to review our financial results for the quarter and update the expectations for 2023.

Speaker 3

Thanks, Mark. As Mark said, we had another excellent quarter with $82,400,000 in revenue, an increase of 22% over the prior year. We grew total volume to approximately 28,800 tests, a 24% increase over the same period of 2022. Quarterly testing revenue was $72,400,000 an increase of 29% year over year driven by higher than expected DECIPRE prostate and Afirma volume as well as strong cash collections in the quarter. Total testing volume was just under 26,000 tests.

Speaker 3

Testing ASP was $2,800 per test benefiting from approximately $2,000,000 of out of period collection. Adjusting for this impact, testing ASP would have been slightly greater than $2,700 1st quarter product volume was approximately 2,900 tests and product revenue was $3,900,000 up 31% year over year. Biopharmaceutical and other revenue totaled $6,100,000 down 30% year over year, primarily due to lower IBD contract manufacturing and overall spending constraints across the industry as previously discussed. Moving to gross margin and operating expenses, I will highlight non GAAP results, which exclude the amortization of acquired intangible assets as other acquisition related expenses and restructuring costs, but does include routine stock based compensation. Non GAAP gross margin was 68%, up approximately 300 basis points compared to the prior year.

Speaker 3

Testing gross margin was 73%, up 400 basis points compared to the prior year, benefiting from higher lab volume, mix and long data collection. Product gross margin was 44%. Biopharmaceutical and other gross margin was 29%, down year over year given lower fixed cost absorption. While we are forecasting a sequential step down in consolidated gross margin as we invest to support our better than Non GAAP operating expenses excluding cost of revenue were up 18% year over year at $58,100,000 driven by ramping clinical trial and IBD development expenses as well as higher personnel costs. Research and development expenses increased by $4,200,000 to $12,700,000 Sales and marketing expenses increased by $2,700,000 to 25 point $2,000,000 and G and A expenses were up $2,100,000 to $20,100,000 We recorded a GAAP net loss of $8,100,000 which included $8,100,000 of stock based compensation expense and $6,700,000 of depreciation and amortization.

Speaker 3

Overall, we ended the quarter with $177,900,000 of cash, cash equivalents and short term investments well ahead of our expectations. Turning now to our 2023 guidance. We have updated our projections to $330,000,000 to $340,000,000 higher than our previous revenue guidance of 325,000,000 to $335,000,000 This increase is a result of our strong performance in the Q1 and updating testing revenue expectations of mid to high teens, offset by a greater than previously expected decline in biopharma and other For the remainder of the year, we are forecasting sequential revenue to increase into Q2 and then decline going into Q3 given typical seasonality in the summer holidays before finishing 2023 with quarter over quarter growth in the 4th quarter. Moving to our expectations for cash, cash equivalents and short term investments, as always, our comments are barring potential M and A. In 2023, we now anticipate maintaining our 2022 year end cash balance of approximately $180,000,000 even with the impact of prior acquisition related contingent consideration.

Speaker 3

I am proud of how we've started 2020 and look forward to continuing to deliver on our plans and financial projections. We'll now go into the Q and A portion of the call. Operator, please open the lines.

Operator

Thank you. At this time, we will conduct a question and answer session. Our first question comes from the line of Puneet Souda of SVB Securities, your line is now open.

Speaker 4

Great. Thanks. So Mark, Rebecca, thanks for taking the question. So first one, Afirma, And I'd say congrats on the really solid beat here and the guide raised. So if you could talk a little bit about that product, What's driving the strength there?

Speaker 4

Is it the sales force optimization? Is it data? Is

Speaker 2

it just

Speaker 4

more conversations around that product? Maybe just talk to us what's driving the strength in the pharma? And you're modeling high single digit for the year. What could can you talk a little bit about what could push that a little bit higher or maybe a little bit lower as we go through the year?

Speaker 2

Yes, thanks Puneen. Thanks for recognizing the strong performance of the Afirma Products and the Apurma team. I think it's pretty much all of the above that you mentioned, but mostly I'd say it's driven by Really strong commercial execution, continued enhancements in the product and the kind of the process of ordering and engaging with physicians. A good example of an enhancement in the product is the launch of TERT that we recently launched in the quarter that enables In further clinical utility of the test, there's always publications, including around TERT and more data and evidence As well. And I think I really do have to give a lot of credit to our sales team who are visiting physicians, visiting customers, Talking about the benefits of Afirma with them, there are some competitive dynamics out It feels like we've got some real tailwinds there as well, at least anecdotally it feels that way.

Speaker 2

So Very excited about how Afirma has been going so far. In terms of kind of potential for that growth rate to be any different, I think. I think one of those drivers could always be competitive dynamics, but We're continuing to add new physicians. We're continuing to broaden the adoption within current physician and provider basis. And so to the extent we're able to take incremental share, that would be helpful to drive that up.

Speaker 2

Again, Yes. There's always competitive dynamics that can go the other way too. We just that's why we keep investing in the product and ourselves. Anything you want to add?

Speaker 3

No, you covered it well.

Speaker 4

Got it. That's great. And then just quick one on the TERT mutation. Does this change the LCD pricing or what can obtain from commercial payers here in the near term or longer term.

Speaker 3

Yes. Thanks, Puneet. I'll take that one. The answer for all intents and is not necessarily. So TERT will be ordered for a subsection of Patients.

Speaker 3

And at this point in time, while there is a code, there isn't necessarily pricing associated with that code. And so we are doing this primarily for the benefits of patients and To ensure continued enhancement of the product, we'll obviously work over time on getting that price. But given the list price being in the $300 range, we wouldn't That's materially impact ASC one way or the other, even if we're once we're successful with once we're successful getting this contracted and covered. Again, it's a very small percentage of patients for which TERT will be ordered, which is why we don't think even once we are successful in getting Covered lives for TERT will have a meaningful impact to ASP, but it's important for those patients critically.

Speaker 2

Yes. And just to add to that, I mean, Only 1% to 2% of pyrite nodules that undergo molecular testing are expected to have permutations. Right now, the test will be potentially ordered For more than that, that would be the outcome. But yes, as Rebecca said, it's a small subset of cases, but important to have.

Speaker 4

Makes sense. And then just last one for me on biotech funding, obviously, the macro situation in biotech funding It continues to be a challenge and somewhat reflected in the biopharma revenue this quarter as well. So maybe just talk to us about sort of What is the level of moderation through the year? What should we be imagining for us to step down for the full year within the context of the guide for biopharma? Thank you.

Speaker 2

Yes. I mean, remember, Puneet, this is something I think we called out several quarters ago as a potential headwind and I think we were fairly early in seeing that. But then again, A, we have a pretty concentrated position with a small number of customers accounting for a large portion of our biopharma revenue. So that's one factor. And B, we're very early we're very much involved in the early clinical research work, which is I think the area across all the biopharma that is most impacted versus existing ongoing clinical trials and on market products.

Speaker 2

So So we're feeling the brunt of it that one of our goals has been to diversify our customer portfolio There and I think we're making well, we are making good progress at doing that, but we still remain fairly concentrated. It's a QSajet going over. It's a very small percentage of our revenue. Biopharma and other is roughly 10%. Biopharma is around just slightly more Half of that.

Speaker 2

And so a little movement here and there obviously translates to a fairly big percentage change.

Speaker 3

And Puneet, just to help with the math a little bit, we've given updated Afirma guidance of high single digits as you cited earlier. We've given updated testing revenue growth for the year of mid to high teens. We continue to expect the product business To do around mid teens and so obviously your Baxalt is that biopharma and other line. So you should get pretty close to it with that math.

Speaker 4

Got it. That works. Okay. Thanks guys.

Speaker 3

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Mason Parikhou of Stephens Inc. Your line is now open.

Speaker 5

Hey, guys. Congrats on the quarter, really strong performance. Maybe just a quick question here. I know it's probably not this simple, but how promotionally responsive is the thyroid market? Is there Somewhat of a linear relationship to repetitions and growth.

Speaker 5

Could adding a few reps Potentially bump up that growth rate or how are you thinking about adding reps going forward within your thyroid franchise?

Speaker 2

Yes. And we've been at this for a lot of years in the thyroid business. So we've got a lot of experience there. And there's always an optimal Yes, point that you get to with commercial teams and of course when you start adding reps, it's not as simple as adding a rep, you have to redesign territories and Reallocate territories and that creates some disruption and when you have very good relationships between existing reps and their accounts. And We always ask ourselves that we have continued to grow that team, but we don't have to grow it significantly in order to achieve the kind of results we're getting.

Speaker 2

I think what really matters is sales rep effectiveness and the sales reps having Lots to talk about with their customers and a good reason to go and visit another customer and have a conversation. So a good example again is TURT. Again, while it wouldn't be ordered in every patient case, it's another reason to go out and talk to the physician about the addition of TERT and what it means when they should order it and so on. So just that routine cadence of good strong communication between our existing sales reps and their customers. And then obviously being out on the street finding new customers and converting new customers over to Afirma It's a big part of it.

Speaker 2

As we talked about before, this product, total, thyroid testing, molecular diagnostic testing is about just over 50% penetrated. There's a lot of customers out there, a lot of physicians who aren't ordering this test and should be. When you actually look at the yield in terms of the number of surgeries that have been avoided, thanks to Afirma, It should be a fairly easy conversation, but it takes some investment from the sales team in going out and visiting those accounts.

Speaker 3

And the only thing I would add to that Mason is, while we are adding headcount here, we're not nearly adding, at the same growth rate as revenue is Right. So we're seeing immense leverage over the sales and marketing line and expect to continue to do so, which is one of the benefits of the specialty Oncology channel, these markets can be served with call it 50, 55 sales heads and you don't need to build sales forces that are 100 100 to just serve different types of physicians. So, we obviously really like this model and really are benefiting from a differentiated Cash position and cash generation as a result of the leverage we're getting through the sales and marketing line.

Speaker 5

Got it. Thank you. That's helpful. And maybe on the site for prostate, I think last I checked you're at like 195,000,000 covered lives, something like that. Still seems like there's a lot of room to run there.

Speaker 5

You guys have been Publishing a lot of studies. So could I just get your updated thoughts on potential coverage wins or how you're Thinking about that going forward?

Speaker 2

Yes. As you quite rightly pointed out, there is a lot of room there. There are Some key coverages that we need to get. And if you think about it, you've got a test here that is very well Reasonably well penetrated, Elyse, so far is that NCCN Level 1 guidelines, more than 70 peer reviewed publications, There's so much evidence out there supporting the use of the test that it's still a little surprising that it can take this long. It's not for lack of trying.

Speaker 2

There are a lot of we have a market access team that this is what they do, and they're working with payers in order to drive the coverage decision. So More to come on that in the future. That's one of the opportunities that we have for future tailwinds here and just We just got to keep driving it. We're still getting, as you heard today, Affirma has been on the market, what now, 11, 12 years, 12 years. And we're still driving Commercial coverage in some cases.

Speaker 2

So it's a core part of what we have to do in diagnostics as you know.

Speaker 3

And Nathan, as we shared on as we shared, I think, on the last earnings call, we're expecting the vast majority of the Decipher growth to come from volume As it already has quite a favorable ASP. And this quarter was no different. AFFIRMA volume grew in the mid-40s. Pricing did add a little bit, but I'm sorry, I said Affirma, I meant to Cipher. Decipher, I mean, I would be very happy with Affirma volume growth in the mid-40s as well.

Speaker 3

But Decipher grew in the mid-40s And price there was not necessarily it added a little bit to it, but the vast majority of the growth came from Volume. Thanks for bearing with me for stating the wrong

Speaker 5

All good. Thanks guys. Appreciate you taking the questions.

Speaker 2

Pleasure. Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Matt Sykes of Goldman Sachs. Your line is open.

Speaker 6

Hi, good afternoon.

Speaker 7

Thanks for taking my questions and congrats on the performance this quarter. Maybe Rebecca, I just wanted to start out On the OpEx side, I know there was a bit of an increase. Obviously, the revenues were up as well. You had mentioned, IVD development ramping clinical trials. But just what should we expect from an OpEx standpoint this quarter?

Speaker 7

You gave kind of the gross margin guide, but just sort of below that. Can you kind of give us a sense for OpEx trends over the course of this year?

Speaker 3

Yes, happy to. And obviously, if you look at our year over year growth, A good chunk of that came from increased R and D as we cited in the prepared remarks. And we're investing heavily not In IBD development, but also in the Nightingale study for the benefit of nasal swab. We expect that trend of sequential growth for R and D to continue throughout the course of the year. R and D growth will be the largest contributor to OpEx growth over the course of 2023.

Speaker 3

As I mentioned earlier, sales and marketing is not expected to grow that materially throughout the year, if anything. And so again, that's a great source of leverage for us. And on the G and A line, as we invest in really ensuring the systems and facilities and Infrastructure to scale over the course of the coming years, especially with the incremental volume growth we're seeing, we will expect G and A to grow slightly, albeit at much less of a rate Growth rates and R and D.

Speaker 8

Got it.

Speaker 7

And then just maybe to follow-up on some of the comments or questions have been asked on Decipher and thank you for that volume number. I'm just wondering just I think in your March corp presentation you saw the penetration rate around 25%. So I assume that's Probably pretty consistent with where we are today, but just maybe any update on sort of the competitive landscape that you're seeing there And where you're seeing sort of the most traction with that product just given the volume growth?

Speaker 2

Yes. And remember, I think a couple of factors at play here. One is, as we talked about last time, the incidence of prostate cancer is growing. You can see that it was around 7% growth and so that's partially driving the whole market to be larger. In terms of the 25% Penetration that was our rough math at the end of last year.

Speaker 2

So, it's tough to update that when not everybody gives you numbers and it's hard to tell. But I would say clearly we're continuing to take share when as Rebecca just mentioned, this business grew in the mid-40s Quarter over quarter, it certainly feels like that represents some share gains as well as taking share and Growing the overall market.

Speaker 7

Got it. And if I can just ask one last just clarification question, because I think you talked about in your prepared remarks, but Remind me on the ramp in Europe for the IBDs. You obviously have Prosigna. Is it Envisia to cytoprostate then Percepta Sort of like 2024, 2025 time period or could you just maybe help me outline that a little bit better?

Speaker 2

Yes. So yes, thanks for the question. Envisia, so Starting with Prosigna, which is on market today and actually had a good quarter and we talked about the growth there and how well that test is so far. We're close to 3,000 in the quarter, which is actually a record quarter for that product, which is great news. And then Envisia, we submitted in December last year, a little ahead of schedule.

Speaker 2

And as I mentioned in the beginning of the call, we're dealing with comments from the notified body, which is normal part of the process what we expected and is a back and forth there and I still can't give a sense of time and when that will be approved as the IVDR process is so untried and tested still at We're going to submit you got your timing right there. We're going to submit DECIFA prostate in 2024 and we're going to submit nasal swab in 2025 and then they'll go through a very similar review and response process.

Speaker 7

Great. Thanks for clearing that up. Appreciate it, Mark and congrats again.

Operator

Our next question comes from the line of Andrew Brockman of William Blair. Your line is open.

Speaker 4

Hey, good afternoon and thanks for taking the questions. A lot has been asked already, but maybe if I could just Do a housekeeping question here. Can you just sort of reiterate or remind us around timeline for the Nightingale study? Is it still on track To finish enrollment later this

Speaker 8

year and how should we

Speaker 4

be thinking about a potential readout? Thanks.

Speaker 2

Yes. Thanks for the Question there. And Nightingale, yes, the actually the progress has been really good in terms of signing up new sites. And our clinical team has done an excellent job of contracting and getting those going and with patients starting to enroll in those sites, we're starting to see a nice uptick here. Still expecting around the end of the year to pull through the last patient in the trial.

Speaker 2

In terms of the readout, that's where there's a variability because as I think I've talked about before, we're going to take a few bites of the apple here in terms of looking at some short term analysis And clearly, how well that we how much we can use that to drive the appropriate clinical utility conversations for reimbursement will depend on the results That analysis. So there's a couple of pathways there that we're pursuing in order to move as quickly as possible to reimbursement. But ultimately, As we've said before, we've got to get the clinical utility data published, which is takes time and Then that drives the reimbursement conversation, which also takes time.

Speaker 3

Yes. And just one thing to add there is The guidelines point to a 2 year follow-up and we hope that we'll be able to effectively do a shorter follow-up than that, but the longest follow-up That would be required before we go through the publication or early readout would be up to 2 years.

Speaker 4

Okay. Thanks. And then, Rebecca, I've got a boring modeling question for you. I think you mentioned a sequential step down in gross margin. Can you just maybe give us a little bit more color around what's driving that?

Speaker 4

Thanks.

Speaker 3

Absolutely. I'd be happy to. So obviously, we were very pleased with our gross margin this quarter, and especially the testing gross margin line. But overall, we really did benefit from fixed cost absorption both on the labor and overhead side this quarter. The benefit of mix as well as the benefit of the $2,000,000 of prior period collections flowing down at 100%.

Speaker 3

If you look forward with the sequential impact you cited, we will not necessarily have that benefit of the Prior period collections and so that will be a headwind sequentially. And we have been running incredibly lean in the lab. A couple of 100 basis points with the majority of that mean from labor absorption is not a sustainable business model. And so we will be To ensure the ability to continue to grow at increased volume levels we're seeing, we are going to have to staff up in the lab, which will also impact gross margins on a sequential basis. In addition to that, we are expanding our laboratory here in San Diego to Take into account the growth of the DECIPRE franchise.

Speaker 3

We will be buying instruments. We'll see taking on incremental space. All that also will impact margins. So It's a good news story in the end because we're growing a little bit faster than we had expected. But obviously, we need to invest in that growth.

Speaker 3

And And even a mid-60s margin is a pretty solid one. And so even though it's a slight sequential step down, I'll take it all day long for the growth we're seeing. Okay, great to hear. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Mike Matson of Needham and Company. Your line is open.

Speaker 8

Hi, guys. This is Joseph on for Mike. Maybe another question on Affirma, now that cure testing has been added, maybe looking back So when I guess, Expression Atlas was introduced for the test. I guess I'm assuming that You know, Expression Atlas is probably ordered or will be ordered a lot more. But in terms of your sales force and productivity, maybe when that add on was introduced, Did you see a large uptick in interest from new physicians or what have you?

Speaker 8

And maybe Do you kind of expecting a similar thing going forward with the care testing? Thank you.

Speaker 2

Yes. I wouldn't the way I would look at it is, as I said earlier, the TERT testing, it's really important For some of our physicians because it's important for some of our patients that we're able to provide a readout on TERT. But it gives the sales team a really good reason to go and The conversation with the physician about the enhancement to the product and XA would have done the same thing. And now we're making this kind of More of a blended product sale. The salesperson is speaking to the physician about Afirma As a group of products, which includes Afirma and it includes the genomic season of the classifier includes Exane as well as Curt if you check that box.

Speaker 2

And so, it's actually just very more straightforward Conversation at this point. I wouldn't look necessarily to drive, as Rebecca said earlier, in terms of the ordering patents with Significant incremental sales on its own, but I just think it helps to continuously enhance the product to make sure that We're providing physicians what they need to be able to deliver the insights to patients.

Speaker 8

Okay. Thanks for the color on that. Maybe a question on nCounter. Just looking at the installed base, maybe without getting into the numbers. In Europe, just looking where these machines are installed, whether Hospital labs or clinical labs, maybe that versus academic institutions or pharma.

Speaker 8

If you have an idea on the split there and maybe the same question for the U. S. Installed base?

Speaker 7

I think I don't really think about it

Speaker 2

in terms of the nature of the installed base. I think if you think about Europe, we have to go Once we get the regulatory approval for a new test to add to the nCounter menu, which is obviously the strategy here, we have to go even if we get The regulatory approval, we have to go country by country to drive reimbursement. And then once you've got that reimbursement decision in Country you go lab by lab to drive placements. Now the placements could be in academic labs, it could be in smaller clinical labs. Yes, it's really going to be driven by the menu and the flow through of patients in those facilities.

Speaker 2

And so and it's not really about the current installed base because we're also going to have to place new instruments In order to drive that and to do that we need to have the menu on the platform, hence the strategy. So, yes, I think about it more in terms of going country by country and that's the One way to focus on it, including in the U. S. As well.

Speaker 3

Yes. The only thing I would add is, we obviously are selling Prosigna in the U. S. It is I would say the vast majority of revenue is actually outside the U. S.

Speaker 3

I think that is where we put the majority of our investment to develop Those OUS markets, so just something to keep in mind.

Speaker 8

Yes, okay. That makes sense. And then maybe just one last one. In terms of the biopharma revenue, you had mentioned in your prepared remarks that not only from IBD development that You're seeing some pullback, but as well as some of the, I guess, earlier stage services or clinical trial services that you guys do. Has there been any effect in terms of maybe licensing revenue from Decipher Grid database or your guys' other databases, maybe how is that trended here in 2022 and The start of 2023?

Speaker 2

Yes. Just maybe a reminder, the majority of our biopharma revenue is coming from our immuno oncology Which itself stems from the Hay ODX acquisition and a lot of it is outside of Europe outside the U. S. There is a little bit of U. S.

Speaker 2

Related revenue that is associated with the kind of the form of Veracyte DeCypher businesses. But the majority of the impact we're seeing in the decline is on that immuno oncology side. And so that's where we're seeing effect. And that's the bit that's involved in the very early biomarker development work where you're more likely to see that impact. Work where you're more likely to see that impact.

Speaker 2

So no, I'd say there's no read through there in terms of the Decisive grid related activity. There's a lot of interest in that. But yes, I wouldn't say that's the biggest driver.

Speaker 8

Okay, great. Makes sense. Thank you very much for taking our questions.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Tayo Savant of Morgan Stanley. Your line is now open.

Speaker 6

Hey, guys. Good evening. So maybe I'll start with a real simple one for you, Rebecca. Is it fair to assume that in terms of those out of period collections that you called out $2,000,000 impact In the Q1, there's you're essentially zeroing it out in the guide for the rest of the year?

Speaker 3

Yes, that's fair.

Speaker 6

Okay, perfect. And then Mark, A big picture one for you on biopharma. I know you called out sort of the sizable customers are pulling back on spend, etcetera. But As you look to the next sort of 3 years or so, are there any key missing pieces in your offering that will make it sort of really step up here in terms of the And help Veracyte sort of participate more substantively in that opportunity?

Speaker 2

Yes, it's a great question. I don't think that there are the extent that we're working on developing those, but the biggest of which is our biopharma Atlas, because we believe that there's a Really interesting market demand for that. And so that's what we're working on because that's one of the things we think is going to drive revenue growth in this business. But I think we have most of what we need today. I mean, we have custom assays, whether they be immunohistochemistry for proteins or We have RNA expression based assays, multiple versions of that.

Speaker 2

We have DNA that we can do out of our So here, so we've got the capabilities. We've got plus, of course, AI capabilities on top of that, which is a lot of what's behind the Atlas work. So we've got the capabilities, we've got the assays, we've got the lab, we've got the people. We just need to drive more Success on the selling side and bring more of those biopharma customers in. In the current macro environment, that's a more difficult conversation.

Speaker 2

Don't expect that current macro environment to last for the next 3 years. I would certainly hope not. So we're starting to get traction and we'll see how that pans out. We're In our guide, we're being a little bit more bearish on this side of the business right now given some of the trends that we've seen.

Speaker 6

Got it. Makes sense. And then on the nCounter menu mark, I think you've pointed Decipher prostate in 2024 is a particularly important submission. Is there anything you can do that's within your control to pull it forward? I mean, obviously, the approval timelines and then the reimbursement timelines by country are sort of largely out of your control.

Speaker 6

But in terms of the submission Sales, to the Europeans, anything you can do to accelerate it?

Speaker 2

No, it already has been. I mean, relative to the original timeline that We looked at for all of these products on the platform, we pulled it through pulled it forward substantially. It's not happening in series. I think that's an important point to make. We don't work on Envisia, then start work on DECYFA, then start work on NasalSwap.

Speaker 2

All three have been happening in parallel, But they were just at different stages of development. So the work to bridge over the DECIPHER assay to the eCounter platform has Been progressing very well and we've made good progress there and we're moving to the next stage of that. So it's going to go as fast as it can go with our current Plan and roadmap, there's not really much we can do. The most important thing we can do to speed things up is on the Notified body review and making sure that what we submitted is a very thorough and detailed dossier. The work that we're doing on Envisia and we always thought it would be this way, It's kind of like a pilot for us.

Speaker 2

It's giving us some of that sense of what the notified the new notified body under the new IVDR process is looking That might be different from what it used to be. Our team has got 15 years of experience in doing this, but the regulatory process is new, as you know. And so there's a lot of learning for the notified body and anyone who's submitting. So that should help hopefully Steve decipher Hold on and make it a little bit smoother. The other thing is we can point to the extensive evidence that we have for The Cypher test in the U.

Speaker 2

S. And outside the U. S. And hopefully that drives the notified bodies accordingly because Yes, there are patients at the end of this that need this test in Europe. So lots more to come on that, but yes, we're going to go as fast as we can.

Speaker 6

Got it. That's helpful. And then one final one for me on M and A. I mean, in the past you've talked about sort of staying away from The cash guzzlers in this space, so to speak, either in cancer screening or perhaps even in the metastatic setting via MRD, etcetera. Is that sort of a red line for you as you think about the M and A opportunities in the pipeline?

Speaker 6

I mean, obviously, and I'm assuming seller willingness here has gotten a little Better following the regional banking crises. So could we at some point sort of see you dabble in that space or is that just sort of off limits in terms how you think about it philosophically?

Speaker 7

It's the only thing, no change

Speaker 2

in our philosophy around M and A, right? So I've said it before, we No. We'll obviously not be blind to opportunities. We'll keep our eyes open for things that make sense, but the bar is very, very high for us. In terms of the Care Continuum itself, yes, we're not necessarily looking to enter that healthy screening The area because there's a lot of people doing that and it's a significantly heavy investment.

Speaker 2

But as far as dealing with Cancer patients or patients who are suspected of having cancer, that's right in our sweet spot all the way across the care continuum once you've been identified as a patient And that's where you're going to see us always continue to focus.

Speaker 6

Fair enough. Thank you, guys. Appreciate the time.

Operator

Thank you. One moment for our next question. Our next question comes from Sung Ji Nam of Scotiabank. Your line is open.

Speaker 9

Hi, thanks for taking the question. One more question on your nCounter IBD strategy. Mark, do you think there will be market opportunities for laboratories wanting to just adopt one test on the platform? Or do you think for this model to work That you would have to see multiple tests being adopted. How do you see that playing out?

Speaker 9

I don't know if it's too early to tell, but.

Speaker 2

No, it's actually the right question because we've said all along, you need an extensive menu to drive adoption And that's what we're building. I mean, to an extent if you think about it this way, having a breast test, Which we do have. Envisia is more of a rare disease. So I don't think that necessarily steps up the adoption on its own. Prostate significant indications, significant disease, pent up demand, that starts to really move the needle.

Speaker 2

And then if you think about adding nasal swab on Top of that, where the population, the potential use cases are much more significant, then you really get into that. That is the point where you get to a very extensive menu and that makes it much easier to have those placement conversations than just having Prosigna today. Having said that, we are seeing some traction will be a small with just the breast can't attest today, but it's going to take the menu to drive it.

Speaker 9

Got it. And then one for Rebecca. Thank you for the cash flow guidance for the year. Sorry, I missed it. Sorry, if I missed it, but was wondering, if there might be any kind of upcoming pipeline, Development initiatives or any activities associated with any of the commercial launches next year that could potentially drive Accelerate attached use next year.

Speaker 3

Fair enough question, Sung Ji. We haven't gone into our budgeting And that is one where we're going to do our best at any point in time to balance investment with cash generation. And so Well, in any given quarter or any given year, the scale may tip slightly one way or the other. Overall, we're absolutely focusing on Balancing those two sides, if you will. So not committing to anything given we haven't budgeted yet, but I think that's the overall philosophy That we abide by day in, day out.

Speaker 6

Yes. Great.

Speaker 2

The only thing I'd add to that, something that I think is evident to everybody that really fuels And drives our business, whether we're talking about Afirma and Decipheral, the adoption of BIMVISIA or the IBD strategy outside the U. S. Is evidence Generation Evidence Development. And so this year, we're investing heavily in Nightingale for nasal swab. We always invest somewhat in Driving more evidence for DECYFA and we're going to be investing in evidence development for our IBD business outside the U.

Speaker 2

S. And so to the extent, We feel that there is the affordability to be able to do that within the parameters that we have set. We will continue to do that and fund studies and make sure the evidence development It's really helping drive our business.

Speaker 9

Great. Thank you so much.

Speaker 3

Thanks, Sung Ji.

Operator

Our next question comes from the line of Andrew Cooper of Raymond James. Your line is now open.

Speaker 10

Hey, everybody. Thanks for the question. A lot has been asked. So maybe just one more on sort of the margin side of things, the cost side of things. In terms of one of the You made, you talked about personnel costs.

Speaker 10

Can you just give us a sense as you look to add maybe some heads in R and D, some heads in sales and marketing, maybe a little bit more measured away, How much of that is incremental head versus a wage inflation is really starting to kind of hit you? Just a sense for kind of the hiring environment out there and what you're seeing on the wage and labor side would be helpful.

Speaker 3

Yes, happy to do so. I would say it's a little bit of both. On the wage side, given the inflationary environment, when we set our merit budget for this year, we did take that into account. And so I would say it was slightly elevated, though not materially so versus prior years. And I would so that would be one point.

Speaker 3

The other point is we are adding heads and doing so in areas where we think both from a Laboratory perspective as well as across the operating lines, we'll get a meaningful return from, and I think that's relatively I would say the third thing in the Q1, you always have your benefit resets and your benefit and tax reset, which obviously does impact the quarter more so than others and you obviously see that in our OpEx figures this quarter as well. So I would kind of think about those three things as being the primary drivers. And I think going forward, while we're adding some heads, we're very comfortable with the budget we've set, And we're very comfortable with even being vastly ahead on the cash side than where we had expected to be at this point in the year. I think our investment levels are quite prudent. And I think from a cash ending cash forecast 23, we're really happy with where we are ending forecasting to end at this point in time.

Speaker 2

And from a hiring environment standpoint, I would say it's only a lot better than it was before. And we're really at most levels having very little trouble finding great people to join our company. And We placed them and brought on some really good talent recently. So it's nice to be able to be hiring right now.

Speaker 10

Great. And then just one more from me. Can you give us a little bit more detail on some of the efforts and the progress being made on the manufacturing front in terms of Continuing down that transition from NanoString to yourself internally, what are some of the guideposts we should be thinking about through the year? And Has there been any surprises or anything that has changed from the last update on that front?

Speaker 2

No, nothing new. It's continuing well and the activity to Transition that over to our team in France is progressing as we had planned and the idea is to have that done at the end of this year. And so we're on track To be able to do that.

Speaker 3

And I wouldn't expect, I mean, this is a day in, day out type of thing at this point in time. You probably won't get meaningful updates Until it's done. So no news

Speaker 2

is good news, if you will? Yes.

Speaker 10

Okay, great. Well, nice quarter and I will stop there. Appreciate it.

Speaker 2

Okay.

Operator

All right. Thank you so much. This concludes the Q and A portion. I would now like to turn it back to Mark Stapley for closing remarks.

Speaker 2

Thanks, Stephen. Appreciate it. So just to wrap up, obviously, I'm very pleased with the performance of our core testing business in the Q1 with both Afirma and Decipher exceeding our expectations. And it's good to see our efforts on market access adoption in Europe drive a strong quarter for our product business. Our focus on the evidence development, product enhancements and commercial excellence is really fueling the growth of our business, will be further supplemented in the long term by the new products that we're developing for global markets such as our nasal swab for lung cancer and our IVD menu.

Speaker 2

I'm really proud of the great work the entire Veracyte team is doing for patients all over the world. So with that, I'd like to say thank you.

Operator

Ladies and gentlemen, this concludes our call today. Thank you for joining us. You may now disconnect.

Earnings Conference Call
Veracyte Q1 2023
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