Veracyte Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Veracyte Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a 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, Investor Relations.

Speaker 1

Good afternoon, everyone, and thanks for joining us today for a discussion of our Q2 2023 financial results. With me today are Mark Stapley, Veracyte's Chief Executive Officer and Rebecca Chambers, our Chief Financial Officer. Veracyte issued a press release earlier this afternoon detailing our Q2 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. Our Q2 was incredibly strong with revenue of over $90,000,000 representing growth of 24% compared to the prior year. This success was driven by our core testing business, which grew an impressive 37% and is another clear demonstration of our proven framework of driving test adoption through robust clinical evidence, reimbursement and guideline inclusion. Our performance in Q2 once Again, demonstrates our ability to consistently deliver strong top line results as well as our commitment to enhancing our already differentiated financial profile. To this end, this quarter we generated approximately $17,000,000 in cash from operations, a record for the company.

Speaker 2

We reported approximately 15,000 deciphered prostate tests in the quarter with our level 1 evidence status in the most Recent NCCN guidelines, we believe now contributing to a meaningful step up in tests delivered to patients. This and the execution by our talented commercial team led to us recording the highest number of new physicians receiving a DECIPA test result that we have experienced so far. We are proud to be empowering so many physicians with key insights to guide Important treatment decisions for their patients with prostate cancer. We last updated our penetration estimates for the prostate market at year end. Given the outperformance of our DECYSAFE franchise year to date, we now believe that the market for molecular diagnostics in prostate cancer is approximately 30% penetrated, with Decisive continuing to represent the majority of that penetration.

Speaker 2

While we've made significant progress in adoption, We believe that there is still ample opportunity for continued growth for many years to come as we work to make this test available to more patients facing a prostate cancer diagnosis. In line with our strategy of developing clinical evidence for our tests, we continue to add to our impressive library of over 75 We were pleased to share a real world study that published in JNCI Cancer Spectrum, which matched the data from our decipher prostate test with that from the Cancer Institute's Population Based SEER Program. Results of the clinical utility study suggest the use of the DECITRAL prostate test helps Physician's personalized prostate cancer treatment approaches as intended. Specifically, the findings show that physicians treat patients With higher risk to Cypress scores more aggressively and patients with lower risk to Cypress scores more conservatively, demonstrating clear real world utility for the test. Our dedication to evidence development extends to leveraging our testing capabilities and data sets to help advance scientific understanding in the disease areas that we address.

Speaker 2

A good example is our research use only to cite a grid offering in prostate cancer. This quarter at the American Society of Clinical Oncology Annual Meeting, findings from 3 separate studies were shared demonstrating the ability of Decisogrid help provide new insights into specific molecular profiles that may predict individuals' response to certain treatments. In endocrinology, we delivered another record quarter with more than 13,000 Afirma tests performed, helping physicians make better diagnostic and personalized treatment decisions for their patients with thyroid nodules. This outstanding performance is due in part portal, including online ordering. Our excellent commercial team leveraged these enhancements to add over 70 new accounts in the quarter and drive further penetration of existing accounts.

Speaker 2

Given this performance, we are now raising our Afirma revenue growth expectations to be in the lowtomidteens for 2023. We are excited about the potential to leverage our testing capabilities and data sets to also help provide researchers with further insights into thyroid nodule biology, similar to how we are using this cipher grid. This quarter, for example,

Speaker 3

in a study presented at

Speaker 2

the ENDO 2023 meeting, investigators developed We tested hundreds of genomic risk signatures based on Afirma's whole transcriptome gene expression profiling. Interestingly, They were able to identify risk signatures that showed potential to differentiate indeterminate thyroid nodules that were low risk for tumor invasion and regional lymph node metastasis.

Speaker 3

Insights such as these may help fuel product development efforts in

Speaker 2

the future as we continue to improve our test and enhance our ability to help patients facing thyroid cancer. Turning to our biopharma business, like others in the space, We continue to face significant challenges this year given the current macro environment. As a result, we are seeing reductions in existing projects as well as length and timelines for signing new business. At this point, we have not yet seen a shift that would indicate this trend is reversing in the near term And so we continue to expect declines in our biopharma and other revenue line and have updated our guidance accordingly. Moving to our long term growth drivers, we made significant progress in the Q2 on-site initiation for Nightingale, the clinical utility study for our Percepta nasal swab test.

Speaker 2

I'm extremely proud of our clinical and medical teams who have signed up almost 70 sites from principal investigators or PIs and patients with the vast majority of lung module patients who are offered the test choosing to participate. However, the pace of individual site ramp up and patient enrollment is lower than we and our PIs anticipated, driven largely we believe by ongoing staffing challenges at Given that, we have conservatively adjusted our estimates for enrolling the last patient in the trial to now be during the Q2 of 2024. Our IVD strategy, which will enable us to deliver tests The physicians and their patients outside of the United States is focused on our current IBD offering, the Prosigna breast cancer test, as well as the development of Envisia, DECYFA and NasalSwap IBD Products. Beginning with Prosigna, we had another solid quarter. Compelling clinical utility data for the test was presented at the ESMO Breast Cancer Congress from the EMIR study in Norway, a prospective multiyear The results of these initial data demonstrated that Prosigna test results Also treatment decisions including significantly reducing the use of chemotherapy among patients with clinically high risk disease.

Speaker 2

Consequently, Prosigna has been adopted as the definitive breast cancer test in Norway and is now used routinely for patient care. On the development front, with Envisia already submitted for regulatory approval, we continue to make good progress on our DECYFA In summary, Q2 was an exceptional quarter with strong execution in our core testing business and progress across our diagnostic long term growth drivers. We're excited about our performance through the first half of the year and as such have meaningfully raised our expectations for the full year. So with that, I will now turn to Rebecca to review our financial results for the quarter and updated guidance for 20 20.

Speaker 4

Thanks, Mark. As Mark mentioned, we achieved excellent results in the Q2 with $90,300,000 of revenue, an increase of 24% over the prior year. We grew total volume to approximately 31,800 tests, a 28% increase over the same period of 2022. Quarterly testing revenue was $81,700,000 an increase of 37% year over year driven by higher than expected DECIPHER prostate and OFIRMA volume as well as strong cash collections in the quarter. Total testing volume was approximately 29,000 tests.

Speaker 4

Testing ASP was over $2,800 per test, benefiting from approximately $2,000,000 of out of period collection. Adjusting for this impact, testing ASP would have been more than $2,700 2nd quarter product volume was approximately 2,700 tests and product revenue was $4,000,000 up 29% year over year. Biopharmaceutical and other revenue totaled $4,600,000 down 55% year over year. Reductions in customer projects and extended sales cycles driven by overall spending constraints across the industry led to the decline. Moving to gross margin and operating expenses, I will highlight non GAAP results, which exclude the amortization of acquired intangible assets, other acquisition related expenses and restructuring costs, but does include routine stock based compensation.

Speaker 4

Non GAAP gross margin was 67%, up approximately 100 basis points compared to the prior year. Testing gross margin was 71%, up 2 50 basis points compared to the prior year, benefiting from higher lab volume, test mix and $2,000,000 of out of period collection. Product gross margin was 42%. Biopharmaceutical and other gross margin was 12%, down year over year given lower fixed cost absorption. Non GAAP operating expenses excluding cost of revenue were up 21% year over year at $59,300,000 driven by higher personnel costs as well as clinical trial and IBD development expenses.

Speaker 4

Research and development expense increased by $3,400,000 to $12,500,000 Sales and marketing expenses increased by 1 point $7,000,000 to $24,900,000 and G and A expenses were up $5,100,000 to $21,900,000 We recorded a GAAP net loss of $8,400,000 which included $10,400,000 of stock based compensation expense and $6,900,000 of depreciation and amortization. Overall, we ended the quarter with $191,000,000 of cash, cash equivalents and short term investments well ahead of our expectations. Turning now to our 2023 guidance, we have raised our revenue projections to $342,000,000 to $350,000,000 as compared to our prior guidance of $330,000,000 to $340,000,000 This increase is a result of our strong first half results as well as updated full year expectations of mid-20s growth in testing revenue and $18,000,000 to $19,000,000 of biopharma and other revenue. We are forecasting Q3 revenue to be down sequentially across testing, product and biopharma and other given typical seasonality and normalized testing collection before finishing the year with strong quarter over quarter growth. On full year non GAAP gross margins, we are raising our total company projections to mid to high 60s from the prior guide of mid 60s.

Speaker 4

This assumes second half testing in product gross margins that are roughly in line with Q2 results, as well as lower biopharma and other gross margin given the fixed cost structure of this business. Moving to our expectations for cash, cash equivalents and short term investments, as always, our comments are barring potential M and A. We now expect to end 2023 with $190,000,000 of cash on hand, accounting for the impact of upcoming contingent consideration payments, capital expenditures related to our lab expansion and other working capital trends. Importantly, this updated guidance represents an increase of Approximately $25,000,000 compared to our expectations at the beginning of this year, driven by the strength of our testing portfolio, as well as the fabulous execution of our managed care and billing team. I am proud of how our entire Veracyte team has performed through the first half of the year, and I'm excited to continue to deliver on the financial goals we set for 2023.

Speaker 4

I'll now turn the call back to Mark for closing remarks.

Speaker 3

Thanks, Rebecca. Before closing, I'd like to Share some organizational updates. Given the underlying strength of the Decipher business and our focus on succession planning, Tina Nova has decided that now is a good time for her to step down from an operational role. So effective on September 3, Tina will be transitioning from GM of the urology business and will continue to support Veracyte in a consulting capacity. Tina has been instrumental in the success of Decipher, refocusing the company for growth in 2018 and has provided valuable leadership of Veracyte since our acquisition of Decipher Biosciences in 2021.

Speaker 3

We thank Tina for all of her contributions, including building an incredibly strong team to support our clear business going forward. To that end, John Light will move into the role of Chief Commercial Officer of the Clear business, providing leadership and oversight to our urology, endocrinology and pulmonology businesses, as well as our managed care team. We just had an excellent quarter and we're on track for a strong 2023. I'm especially pleased with the growth in our core testing business, the progress we are making on our long term growth drivers and our differentiated financial profile to enable I'd like to thank the Veracyte team for their hard work, execution and commitment to the patients we ultimately serve and to our vision to transform cancer care. We'll now go into the Q and A portion of the call.

Speaker 3

So operator, please open the lines.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Mike Sykes of Goldman Sachs.

Speaker 5

Hey, good afternoon. Thanks for taking my questions and congrats on another strong quarter. Thank you. Maybe if I just start with Afirma. Mark, you gave a couple of different sort of dynamics That led to that sort of the guidance raise for Afirma Growth.

Speaker 5

But just given what we've seen, I know obviously COVID had an impact, but it's been pretty impressive to see that growth Continue. Just wondering if you could dig in a little bit more into some of those dynamics you were talking about, obviously the new accounts you signed up, but also the online ordering. And just kind of help us understand what are some of the bigger levers within that that's driving that increased growth?

Speaker 3

Yes, thanks. I appreciate that and I appreciate the comments as well. So Affirma has been a very key focus for us for quite a As you know, we've talked fairly consistently about enhancing the product, which includes, as you also just pointed out, The improved ordering capabilities as well as recently our addition of the promotion Mutation a promoter mutation gene as well. So something that a number of our customers would be looking for and is now available to them. And we've really focused on sales execution and communications with our physicians.

Speaker 3

We've had multiple reasons Over that timeframe to engage with our customers, including even ironically back to the supply chain challenges that we had kind of around this time last year, Which you kind of go a little take a little bit of adjustment for in terms of the comp. But even then, an opportunity to engage with our Customers reassure them that we were on top of that and clearly we were. And then obviously with the ordering process and the turf since then, we just have this regular drumbeat now of Communication helping us to continue to gain new customers, gain share in existing customers and grow In both current accounts and new accounts. So I'm attributing this a lot to great execution by our Very talented team and a lot of focus internally.

Speaker 4

Yes. And just one thing, Mark's comments are absolutely spot on with regard to the volume drivers, Matt, in addition to the volume drivers, we've also had a good news ASP story. Thanks to the managed care and billings teams, as I mentioned in my prepared comments. If you recall last year, we were battling through the headwind of the CPT co change, which obviously We have the benefit of having that behind us now as well as we did collect a couple of $1,000,000 of prior period collections of which About half of that was tied to Afirma. So if you look at where we are year to date on the prior period collections totaling around $4,000,000 again, that's Half of that coming to Afirma, that's going to be a great tailwind to the growth story as well.

Speaker 4

So this is both the volume and ASP story currently and we're obviously very excited about raising the guide to that lowtomid Teens from where we started earlier in the year, which was mid to high single digits. So all in all, a great story all around and congratulations to the Afirma team for their execution.

Speaker 5

Great. Thanks for all that color. And then just for my follow-up, just on the biopharma business, you guys have flagged this very early, so it's clearly not a surprise, Some of the dynamics in that industry, but just given sort of the level of revenue where it sits today and the gross margin, which seems to be dilutive to the group a little bit. How are you thinking about that business? It's obviously longer term attractive just given kind of the buyer repository you have and the relationships you have.

Speaker 5

But how are you thinking about that business in terms of level of investment and sort of commitment to that business moving forward just given the strength in the rest of your portfolio?

Speaker 3

Yes, it's a great one. And so maybe just to recap a couple of things. Biopharma sits within the biopharma and other line, which in aggregate is Less than 10% of our total revenue in the biopharma pieces, slightly the majority of that are less than 10%. And so also included in there is IBD services and contract services revenue. On the biopharma side in particular, we did call out quite a while ago Some macro level headwinds, which we're continuing to see and those affect us in 2 ways.

Speaker 3

1, we have seen terminations of projects in particular a very significant large project that was based out of our Marseille organization that terminated. We talked about that a few quarters ago. And so that clearly affected the backlog that we had there as well as signing up new business. I mean, there's been we have a lot of good conversations, but Them transitioning from conversation to contract is taking longer than it has done in the past because of these macro headwinds. So thinking about that business going forward, of course, just like we always do, we always think about the strategy For our various businesses in our portfolio and making the right investments and balancing those investments when we see the opportunities for growth right in front of us and when those opportunities are going to come.

Speaker 3

The visibility so far to the end of these temporal macro headwinds is not clear at this point. So we have to continue to be very prudent in how we grow or stabilize that business, given these So something as you can imagine, all of us, myself, Rebecca and our General Manager, that business are very focused on Right now and will continue to be until we start to see the opportunity for that to continue to ramp up again.

Speaker 5

Got it. Thanks, Mark. Appreciate it.

Operator

Thank you.

Speaker 1

Please hold for our next question.

Operator

Our next question comes from Tejas Savant of Morgan Stanley.

Speaker 6

Hello. This is Yuko on for Tejas. Thank you for taking our questions. Maybe following up on that biopharma question. You previously mentioned that you're putting efforts towards diversifying that customer portfolio.

Speaker 7

Could you talk about some

Speaker 6

of the strategies that you're employing and

Speaker 3

Yes, it's a good point. The Comment that I provided previously is that there has been a very concentrated customer base with a few large customers making up a significant portion of the revenue And that's obviously impactful when you start to see those customers holding back on their spending. And so we've been on a drive here to bring in more new customers even for those initial small pilots that often lead into Bigger contract. So as I said earlier, one of the things that we have seen is an increase certainly more conversations than we were having with more customers previously. But again, it's that issue of those transitioning to firm contracts and arrangements that we are able to deliver on and then turn into revenue.

Speaker 3

So some of those are happening, but not at the pace that we would like to see. But we're continuing to

Speaker 2

be very focused on that.

Speaker 3

A couple of other areas where I Diversification opportunities are very much in the U. S. Most of our revenue, as I think you probably aware, is very focused on our customers that are based can also leverage in the U. S. And globally.

Speaker 3

And so those create other opportunities for customer diversification. And there are conversations again continuing there, but it's the same macro level issue of getting those over the finish line. So continue to focus on that and diversification of that customer base is clearly going to be something that we're going to continue to strive for.

Speaker 6

Thank you for the color. And then also for Rebecca, could you provide early color for 2024, Particularly for Decipher as we began to lap tough comps, how should we think about steady state growth in the medium term?

Speaker 4

Yes. I'm happy to, Yuko. I think when you think about Decipher, we've obviously had an outstanding year this year and have now penetrated this market and around to be around 30%, right? So when you think about where we are with Different products like Afirma that are longer in their life cycle, if you will, there's still a number of there's a lot of headroom for us to move from that 30% even up to 60% or 70%. So I don't have any worries that we will continue to 23, let alone to start commenting on 2024.

Speaker 4

So we're not going to do that today. But when it comes down to Decipher, we have a lot of Confidence in our ability to continue to penetrate this market and grow this revenue level, for an extended period of time. I mean, Affirma now is on year 12 or 13. So, Decipher is very much further behind that. So, when it comes down to it, We're going to start lapping tough comps in the back half, but over the course of 2023, we're now expecting to grow in the mid to high 30s for Decipher.

Speaker 4

So that still is ending the year at quite a high growth rate and cadence on a go forward basis. So not going to comment on the level for 2024 again, but Very excited about the ability to continue to grow in this market and continue to help more prostate cancer patients over time.

Speaker 6

Thank you.

Operator

Thank you. One moment for our next question. Our next question comes from Puneet Souda of Leerink Partners.

Speaker 8

Hey, Mark, Rebecca, thanks for taking the questions and congrats on the quarter here. And Tina, great work on DECIPHER all along and really wonderful working with you. So good luck going forward. Maybe with that, let me ask a question on DECIPHER. I'm wondering, obviously clinical evidence is built That's helping you get to the 30% penetration you talked about.

Speaker 8

Could you talk a little bit about the commercial sales force that's in place? Were there additions to that? Was there anything that changed on the commercial that helped you drive strength in the current quarter? And What are you contemplating for the commercial side for Decipher in the rest half of the year in 2024?

Speaker 3

Yes, Puneet, thanks for that and appreciate your kind words. One of the things that we've consistently talked about is the excellent performance of our sales team And how they knock it out of the park quarter after quarter on Veracyte's efficiency metrics and then the great leverage that we get organization who have built these very strong relationships with existing urologists and practices and continue to Go and hunt out new ones as well. Every year or so, we tend to think about some small territory realignment. We did that this year That proved to be very successful. We've added a handful, small handful of reps, and that's proven to be successful as they get up to speed in the And they've been very successful.

Speaker 3

Our entire sales team there, which is only roughly about 45 or so people have been very successful at growing in existing accounts and also growing new accounts. So both those levers contributed to the performance this year. If you think back to this time last year when We announced we had roughly 10,000 tests and this quarter 15,000 tests. So that's a 50% growth in volume just in the 1 year alone. And I really do attribute that mostly to the sales excellence, but also as you know, we always talk about the evidence generation that you brought up at the beginning of the question.

Speaker 3

And with over 75 publications and then NCCN Level 1 guidelines, I'll be honest, first, I didn't know that would be such a significant step up In ordering, I think it's pretty clear now that we're seeing that has resulted in a step function increase there And it's probably also one of the reasons why we're seeing so many new customers this quarter. So, yes, I think that bodes well for Decipher For the long term, there's so much additional white space to go after here in the marketplace with still even without 30% estimate of penetration, still A significant number of patients with prostate cancer who aren't getting any kind of molecular diagnostic and so our goal is to Try and drive DECIFR to be that test and some more patients to be able to get access to that, not just in the U. S, but globally as well.

Speaker 8

Got it. That's very helpful. And on Afirma, Rebecca, I mean, you gave context around the Cipher and the prostate. Could you maybe just provide some context in about 2024? I know it's hard to sort of give overall guidance, but How do you expect that business to trend given these higher growth rates for Afirma that you're seeing now?

Speaker 8

Thank you.

Speaker 4

Yes, Puneet. I mean, we continue to be excited about Afirma. And as I mentioned with the Cipher, it is a it's later in its life cycle, but I think this year surprised all of us and the execution of the team surprised all of us. So I am not going to comment on the firm, but just like I didn't comment on the Cipher for 2024. But this is a well established franchise.

Speaker 4

We're continuing to invest in enhanced product differentiation And the team is excited about continuing to penetrate this market. We haven't updated the penetration numbers beyond what we shared at year end and that was around Afirma being around 50% penetrated in the market alongside the other tests available and Afirma having the majority of that. I think we're in a decent spot, but there's still white room here too or white space here too. And so we're just going to go after it and get it done. And we think this is going to be a continue to be a good story for us in 2024 and beyond.

Speaker 4

I think that's Where we're at, Afirma and Decipher are driving the vast majority of our growth and we're in a good spot given that they're approaching 90% of our revenue.

Speaker 3

That's fair. Thanks guys.

Operator

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

Speaker 7

Hi. Thanks for taking the questions and congratulations on the quarter. So just on the Envisia IVD submission That was completed at the end of last year. Just, I was wondering if there's any active engagement with the regulators in Europe. You might be getting any feedback on that?

Speaker 7

And then also, is there a possibility we might be you might be able to see that clearance in the next 12 months or

Speaker 3

so? Yes, I certainly hope so. So thanks for that question. Again, this goes back to just To ground everybody, this goes back to our IBD strategy where we are launching multiple of our products including Envisia as you mentioned and then DECIPHER Prostate and Nasosorb, as I mentioned in the prepared remarks, outside the U. S.

Speaker 3

As IBDs and you're quite right, we Submitted Envisio in December last year, a little bit ahead of our own schedule. There is absolutely communication with the notified body. Yes, we've had several rounds of you always get several rounds of questions. The first round comes back with a lot of questions and you answer those quickly. And our team did an excellent job of responding to those very, very fast.

Speaker 3

And then you hope to get fewer questions coming back and We did get fewer questions by an order of magnitude in the second iteration. And so those handful of questions also are being responded to or have been roughly at this point. And so hopefully at some point in the near future, we get some Approval, if not more questions. We just don't know. The problem is it's still very early the IBDR process.

Speaker 3

I'm proud of what our team has

Speaker 2

been able to accomplish and

Speaker 3

I'm very encouraged by the feedback that we've been getting so far. But it's not over the finish until it's done. So I wouldn't want to set any expectations on when that might happen, but we're going to continue to respond and answer all their questions and Give them what they need and continue to generate the evidence to then drive adoption. Remember, even once we get approval, that doesn't then mean adoption by every country. That just Means we've got approval in Europe.

Speaker 3

We then still have to go country by country, get reimbursement, drive adoption using the body of evidence that we've got for the test and just keep pushing the test throughout And then the same will apply once we submit and get approval for prostate as well and then nasal swab.

Speaker 7

Great. Thank you. And then just a quick follow-up for Rebecca. For the IBD contract manufacturing revenue that's part of biopharma and other, I know there's a A portion of that, that would be prioritized, right? Just remind us again when you expect that to anniversary that?

Speaker 4

I would love to say that's an easy question to answer Sung Ji, but it's a little bit more fluid than that. So I would think about the majority of the impact kind of being in the run rate now, If you would, and not necessarily anniversarying out. So I apologize if I'm Not being clear because they think it's just a challenging question to answer because those resources are relatively fluid.

Speaker 7

Okay, got you. Thank you so much.

Speaker 4

But it's not going to be a major driver one way or the other in terms of the $18,000,000 to $19,000,000 guide above and beyond where we're at now.

Speaker 7

Okay. That makes sense.

Speaker 2

Does that

Speaker 4

make sense? Thank you. Okay. Thanks.

Operator

Thank you. One moment for our next question. Our next question comes from Andrew Brackmann of William Blair.

Speaker 9

Hey, everyone. This is Dustin on the line for Andrew. Thanks for taking our questions. Very strong cash generation a quarter. Just wondering what the number one priority is now or What does changes the most?

Speaker 9

Is it M and A reinvestment in the business or just continuing to build up the cash and anticipation of something else in

Speaker 2

the future? Yes, it's a

Speaker 3

good question. I don't see at this point, it really changing anything. Our This is and our strategy is still the same. We're very focused on investing in these long term growth drivers of both nasal swab and the IBD strategy, Moving those as quickly as we can and this doesn't allow us to go any faster. We were going as fast as we can anyway on both those projects.

Speaker 3

But I think just continue to push on those as our core strategies for long term growth And continuing to make DECIFREN and AFERMA be as successful as they clearly are being at the moment. So those are the key. On M and A, it doesn't change our thesis at all. I mean, for me, the bar, as I've always said, is very high. We would not we would be focused on businesses like Decipher that contributed very quickly to the unique financial profile that we have.

Speaker 3

And as I said before, the funnel is not very broad for that. So no change. I'm proud to see that Strong cash generation by our team and I think there's been a lot of focus by many people in our company to achieve that kind of outcome and they're going to continue to do that.

Speaker 9

Understood. Rebecca, on the prior period cash collections, Are any future collections anticipated in the guide? And was this any part of the raise that you had in revenues?

Speaker 4

Can you repeat the second part of that question? I didn't catch it fully. I understood the guidance portion, but you were a little We broke you broke up a little bit on our end.

Speaker 9

Okay. Sorry about that. Yes, I'll just repeat all. No worries. Prior period collections, Yes.

Speaker 9

Was this anticipated in any part of the raise and what would the full year total be if so?

Speaker 4

Yes, totally fair. So, with regard to the guide, the only thing that's contemplated in the guide is what we have Booked year to date, which is that $4,000,000 So on a go forward basis, we're expecting more normalized ASP and that's what's implied in the guide. And just on again, on a year to date basis, it's around fifty-fifty to CipherAffirma.

Speaker 9

Great. Thank

Speaker 4

you. And we do believe that's prudent to just take that one step further. And the reason why we believe that's prudent is because Those are very much related to both the increasing performance Of the number of managed care contracts that we had on the DECYFIR side, which has been relatively stable now for a couple of quarters, as well as The normalization of the Afirma CPT code issue and so we're now starting to anniversary those. So it is prudent that we are not necessarily counting on Collection performance to the extent we saw it year to date because those were temporal issues in nature that have been resolved.

Speaker 9

Okay, understood. Thank you.

Operator

Our next question comes from Mason Carrico of Stephens Inc.

Speaker 10

Hey guys, this is Jake Maybe one on the Cipher here. Appreciate the color you guys gave on the updated penetration for that market. But could you just maybe update us on the competitive dynamics within the market? Have you seen any competitors gaining traction? Or do you guys feel like you're capturing share at the rate you were in 2022?

Speaker 3

Yes. I mean, if you think thanks for the question. If you think about that growth rate, as I mentioned, There's a 50% growth in volume this quarter versus the same time last year. And you look at you can look at your own competitive Reports and outcomes there to the extent that they've been announced. I think it's pretty clear that we're continuing to take share.

Speaker 3

It certainly feels that way in terms of anecdotally what we hear from our sales team in terms of where they see other tests and where they don't. Of course, you're going to always find examples where there's puts and takes at a customer level, but if you take it at a very high macro level, I think the numbers speak very loudly for themselves. And I really do attribute that to the two things I talked about, the incredible evidence generation that we have for DASIFO, which Led to the NCCN Level 1 guidelines and also the excellent sales team that we have that's really performing on every metric.

Speaker 10

All right, got it. Thanks for that. Maybe switching gears a little bit here. On the on your guys' manufacturing transition, Assuming that's completed by the end of the year, what factors should we take into account as we think about the products gross margin going into next year? Thanks.

Speaker 3

Yes, I mean, I'll let Rebecca comment, but you really shouldn't take too much into account because in terms of how it shows up in the income statement because where it really is going to make Biggest difference is when we have volume in our IBD test outside the U. S. So today, as you all know, we're selling Prosigna. The volume is good. The test has been performing well, but it's a few 1,000 tests a quarter.

Speaker 3

And What we really need to see is I think the cyprostate even once we launch Envisia, remember that's a rare condition. And so we'll see some volume from Envisia, but we really need a test like the cypher prostate on the market commercialized To be able to really see the benefit of the manufacturing transition show up in the income statement and we're going to submit that test as I said in 2024. So it will be commercial sometime after that. So we've got some room there, but still important for us to do. We have a team very focused on this And it's tracking nicely and we're in the final phase now of making that transition happen.

Speaker 3

Anything to add on the P and L, Rebecca?

Operator

Well done. Thank you. One moment for our next question. Our next question comes from Mike Matson of Needham and Company.

Speaker 11

Hey, this is Joseph on for Mike. Just one from us. With the, I guess, pushback of the Estimated completion for the enrollment in the Nightingale study. I was maybe wondering if you could give an Updated expectations for when you would be able to release like preliminary data from that study?

Speaker 3

Yes. So as I mentioned in the beginning of the call here, we pushed back the final patient coming through that trial into the Q2 of next year, which I view as a conservative estimate, but One that we absolutely want to achieve even with the lower enrollment that we've seen and the lower ramp up that we've seen in a number of our sites. What I'm really encouraged by and pleased about is the almost 70 sites that we've Initiated so far, our clinical, medical and commercial team have done an excellent job of identifying and enrolling those sites. The level of excitement is very high by both patients and the PIs and the teams involved in this at these sites. And so that's all very encouraging.

Speaker 3

Now in terms of the data itself, as I've said before, once we finish the Enrollment and even actually before then, we are able to look at the data. We are able to see what it tells us. Having said that, you do need To some extent, for clinical utility, we are going to need to see the benign status and that can take time, obviously, to follow that up standard Guidelines there are 2 years, but there's certainly evidence to suggest 1 year follow-up maybe sufficient. So No change in our strategy there. We'll unmask the data.

Speaker 3

We'll take a look at it. We'll see what it's telling us. We'll do the necessary follow-up and publications on that and The appropriate conversations with Medicare on that and our goal is to get this test commercialized as soon as possible in the U. S. The second Elements of this, of course, is the OUS launch as well, which, as I mentioned before, we're going to submit in 2025.

Speaker 3

And we'll get that through Regulatory approval in Europe and then we'll be able to launch NasoSwap globally. Very excited and encouraged by The reaction to the test so far from what we've seen and looking forward to getting it through this pivotal study.

Speaker 11

Okay. Yes. Thank you for answering that and congrats on a great quarter.

Speaker 3

Thank you.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now

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Earnings Conference Call
Veracyte Q2 2023
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