Veracyte, Inc. (VCYT) Earnings Call Transcript & Summary

Thanks. Good afternoon, everybody. Welcome to the Jefferies 2020 Virtual Global Healthcare Conference. I'm Brandon Couillard. I cover the life science tools and diagnostics sector here at the firm. Very happy to have Veracyte with us back at the conference this year. And here to share an update on the new things going on with the company, Chairman and CEO, Ms. Bonnie Anderson. Bonnie?

Thank you, Brandon. I'd like to start by thanking Jefferies for the opportunity to be here at this virtual healthcare conference today and of course, remind everyone of the safe harbor statement that we all have to be aware of. Veracyte is a global genomic diagnostic company, and we are transforming care throughout the patient journey. I'm excited to give you an update today about all the great things we have going on. It seems like just yesterday, back in 2008, just 12 years ago, that we founded the company with a mission to improve the diagnosis of disease. And we've achieved that, bringing 3 clinical products to market that are building positions and creating a new standard of care in diagnostics. But since then, we have advanced significantly in the strategy of the company and the reach and expansion of everything that we're doing, answering clinical questions today across more indications, 4 of these in oncology indications as well as advanced lung conditions, and also moving our testing forward and downstream in the clinical care journey so that we can both improve the diagnosis of disease and prognosis as well as inform treatment decisions. And this movement up and down the care pathway has also helped us to forge some really valuable and really exciting partnerships in biopharma, and I'll be telling you more about this. We pulled our 2020 guidance after our last earnings call. And so we'll just start here with where we ended 2019 on a really nice trajectory of growth, showing that in 2019, we began to see the benefit of the layering effects of the multiple sources of revenue that we now have driving our company. Looking at that another way, in the first quarter of this year, we reported a very nice product and testing growth of 20% over prior year. And as you can see, also have a small amount of biopharma revenue, which we separate from the core product revenue as that revenue can very -- be very lumpy as it tends to be milestone-driven, and while a very nice part of our revenue stream, certainly not what we want the core company and core business to be rated on. In December of last year, we made a very exciting announcement where we announced the exclusive global rights -- acquiring the exclusive global rights to NanoString's nCounter platform. And this platform is now the nucleus of a broader global strategic expansion strategy that we have. We think this platform is a best-in-class design with a very high content that we can put into each of our assays, up to 800 RNA, DNA or protein targets, but it's also so elegantly designed that it can run tests in a very lower-capacity environment, such as you would find in medical centers and laboratories around the globe and require a very minimal amount of hands-on time. Through the acquisition of the platform, we set ourselves up to have the cost basis of our testing downstream, which permits us to build a global expanded operation but also achieve our goal of driving profitable growth. This slide shows our current indications address a $40 billion global market opportunity. While we will continue to build this testing capacity and drive revenue in the U.S. through our CLIA lab, we also have the option to deploy the nCounter as a distributed model. But predominantly, we're using the nCounter and the menu growth on the nCounter as the vehicle to achieve our goal as a global enterprise. We also have the opportunity to attract other companies to port their assays over to the nCounter for global distribution. And we were excited a few weeks ago to announce a partnership with CareDx, where we have granted CareDx the exclusive ability to develop their transplant rejection testing, being the leader in transplantation on the nCounter platform, where they will drive the sales and marketing of their tests, and we will achieve financial rewards through milestone payments, et cetera. We will provide the test kits to them for distribution on a global basis, and we will also have the ability to place and sell the nCounter system that will be used. The benefit of this is really multifold in that our clients benefit by having more menu ported to the platform, which helps justify the acquisition of the platform to a point where when the menu gets large enough, we'll be able to place platforms without having to have capital purchases and we'll just drive menu revenue from those installed base. And so CareDx wins by having one of the best platforms available and the menu that attracts others to use every other test on the menu. And of course, to us, it's the best way to drive products into the global marketplace. This slide just illustrates what we are trying to do as a company. We really envisioned a couple of years ago that we had the opportunity with the success that we had in building advanced genomic tests across many indications to begin to think about how we can build a global diagnostic testing and platform company and be a leader in doing what other traditional diagnostic companies. I like to think of this as maybe the Cepheid of advanced genomic testing. And of course, to do that, you have to have a fantastic platform, but you also have to have a menu of high-value tests that our customers around the world are going to want to use to improve patient care. The building blocks to achieve that vision are well underway, as you can see, where we started early by building our tests using a whole-transcriptome sequencing basis for the rich data that we collect on every patient that runs through our laboratory in these tests. That data has allowed us to expand our menu to move upstream, for example, in lung cancer, where we're aiming to bring a nasal swab test for early detection but also answer questions downstream so that at the same time of diagnosis, we can inform on treatment decisions. This early work allowed us to attract Loxo Oncology and J&J into very exciting long-term collaborations. And then in comes our acquisition in December, which brings to us the best-in-class nCounter platform, along with 2 other clinical indication assets, Prosigna in early breast cancer disease, oncology indication and lymphoma (sic) [ LymphMark ] in the lymphoma subtyping area. As this has advanced, we've then attracted additional partnerships: Acerta Biopharma (sic) [ Acerta Pharma ], where we are partnered with the lymphoma test to drive value there; CareDx to expand menu. And it moves on and on to where we achieve this vision of having an installed base around the world, all pulling test menu revenue through a long-term sustained profitable growth model. And I'm very excited about it. We would not be able to do this had we not built a very strong foundation as how we work as a company. We start by really nailing the clinical question, where in the clinical pathway of care is there an unmet need? Can we use technology to improve the outcomes based on what happens today? Those relevant questions are very well honed before we ever build the science. But then we do apply the richest science today. All of our discovery and development is happening on whole-RNA transcriptome technology. This allows us to tease out the details of the genome that reach to DNA mutations that are expressed within the transcriptome, fusions, copy number changes, all the content that our rich bioinformatics team has built pipelines for. And because these tests are positioned carefully in the clinical care pathway to create a benefit of either not going to surgery because it's not beneficial, informing treatment decisions earlier, there is an inherent clinical utility and economic value that has allowed to have a tremendous amount of successful reimbursement as we've brought these products to market. And our science and technology engines that are in place are really the foundation for this. Building clinical cohorts that are extensive, thousands of patients often in these clinical cohorts, all the clinical data that you would ever need to want to tap to build a classifier around the rich whole-transcriptome sequencing data. And then, of course, we bring in the big machines, the machine learning that can pick all the features out of the clinical data and the genomic data to give the binary answer that we're trying to achieve. Does the patient have cancer or not? Is the patient high risk or low risk? Does the patient have the pattern for IPF or not? And these are complex clinical questions that really require this rich approach to the data to have high-performing tests that can safely change clinical care. So today, we have multiple commercial models now where our genomic classifiers are offered through the U.S. out of our CLIA lab, which is an excellent way to reach U.S. patients. We also picked the variance out of that whole transcriptome data to inform treatment and surgical decisions. And now lastly, we've added the third element to that commercial option, which is to put the test on the nCounter platform and distribute to patients all over the world so that local laboratories and medical centers can aid in their care. The clinical problems are many. And so when each of our tests are designed, we understand what the unmet need is, where the patients and the physicians need more data to make a different decision. And we basically build a classifier to make that decision. And I won't spend a lot of detail in each of these clinical examples, but for example, in the case of Afirma, where today, over 0.5 million people are evaluated for a thyroid nodule, and over 100,000 of those are going to be told their results are inconclusive on whether or not they have cancer or not from a simple biopsy. We build Afirma around using that exact same biopsy that's already collected and building a very high-performing classifier that can today classify over 70% of the true benign patients in advance of surgery as being benign. And for those patients that are still suspicious for cancer, inform on all the variants across the whole transcriptome that might inform a different clinical care or treatment decision. Very similar in lung cancer, where over 0.5 million people -- patients each year are found having lung nodule, worked up for early lung cancer diagnosis. About 150,000 of those will undergo a bronchoscopy but yield an inconclusive result. We've positioned our Percepta airway brushing detecting the airway changes in the field of injury. And from that test, we can reclassify about 40% of the patients to either high risk, where they can move on to get the treatment that's going to help them; or low risk, where they can be moved out of the invasive procedures that would ultimately otherwise be performed to get them to a diagnosis. And that's a pretty exciting advancement for patient care. But what's more exciting is what we're going to add to the Percepta in lung cancer paradigm. As we move through 2021, we anticipate the commercial launch of the first-of-its-kind nasal swab test to aid in the early detection and early guidance of patients with lung nodules suspicious for lung cancer. As we all know, finding the patients out of the pool of millions of patients that are at risk for lung cancer requires a very good screening tool. Today, low-dose CT screening is mandated to be covered by all health plans without any cost to the patient. And the reason low-dose CT is such a good tool is it's highly sensitive, can find these nodules early and put the patients into a recommendation for workup. But the negative of imaging is that it's so sensitive that it finds everything. So of the 750,000 patients that are found to have nodules today, the overall pool has about a 25% risk of malignancy. And so if that were you or I that was given -- getting that result, we wouldn't want to do nothing with a 25% risk of malignancy. We'd want to be worked up. At the same time though, the workup can be very invasive to make a diagnosis of lung cancer, and that risk and complications and cost of that procedure may not be warranted given that 75% of these patients at the end of the day are going to be benign. So with the help of all of our Lung Cancer Advisory Board members, we decided to position our new nasal swab right at this point, where we can have the patient that's reserved -- referred for nodule workup have a nasal swab taken as the first test. We unveiled preliminary data on this test back in October at the CHEST conference, showing that with this nasal swab test -- and again, this was preliminary data. So we're working on bringing the final classifier through to market and launch next year, and we may see some slight changes in this data. But the results were incredibly compelling, where we were able to take a 2 cut-off classifier and basically find half of the malignant patients through a nasal swab test and classify them as high risk for lung cancer. And think about that, with a 94% specificity, meaning that we would put very few benign patients into the task of being confirmed with lung cancer and getting treatment. In today's paradigm where new tools are coming to market for less invasive surgeries, you can imagine a high-risk patient with a very small nodule, the next step for them might be surgical resection, which could save their life. On the other end of the spectrum, we have all of those patients, a total of about 500,000, that are going to be benign for lung cancer. This classifier showed the ability to move over 40% of those benign patients out of workup by calling them low risk with a very high sensitivity, 90% -- 98% NPV, so only 2% risk of malignancy in that group. And that's super exciting. The patients left over that are in intermediate risk would likely go on to bronch and potentially would also be candidates for the Percepta classifier. In IPF, a very devastating lung condition that has no other test available for diagnosis, improving the confidence and accuracy of diagnosis, this test is going to create a new standard of care for patients with interstitial lung disease. And lastly, one of our acquired assets from our NanoString transaction back in December, we now are the owners of Prosigna, a really exciting early-stage breast cancer test. In the U.S., Prosigna provides a risk of recurrence score to help guide treatment decisions. Outside the U.S., we also report on 4 intrinsic breast cancer subtypes. This is getting a lot of attention out in the clinical research world today, where there has been many studies and new publications unveiled even as recently as ASCO last week, showing the use of these 4 intrinsic subtypes to potentially guide decisions in the neoadjuvant setting. So we're -- very exciting to now have Prosigna within our portfolio. The march to standard of care requires a lot of evidence. We don't cut corners, and each of our tests will build out a very deep and broad portfolio of publications that will guide the evidence needed to get full reimbursement not only in the U.S., around the world. And of course, it doesn't start with the first test to market. In each of these indications, now 4 oncology indications, along with our Envisia in dramatic lung conditions, lung disease, we have a rich pipeline of advancements coming to market over the course of the next few years, some of those in the near term. And each of these indications represents a very substantial market opportunity, both in the U.S. as well as the opportunity we can now tap in the global markets. And we're truly excited to be able to bring these forth. I'll pause for a moment to just remind everyone that isn't aware. We gave a deep update on our last earnings call. We believe that the recovery from the pandemic will occur in a rather U-shaped approach. We do think we hit the bottom in the early part of the second quarter. We're keeping a close eye with all the analytics we have at every territory for every product around the nation. And as we come out of the second quarter, we believe we'll have more data for you to kind of help guide your thinking on how this business will emerge. But we do expect to be back to more normal conditions by Q1, Q2 of next year. Veracyte has created a pretty attractive profile. Our total revenue growth was 31% coming off of first -- ending 2019 over 2018. We have an attractive gross margin profile with a model for sales and marketing that provides leverage across our products, a very extensive R&D, medical and clinical capability and a really solid cash position with $153 million in the bank. And that's going to get us through the slow time here as we emerge out of the impacts of the pandemic, and it gives us the cash to prosecute all of those pipeline products that we're really excited about advancing and bringing to market. In fact, what we've laid out here on our catalyst page is a view not only to this year but through 2021 because I want to draw your attention to that bottom-right block, where we've identified that 2021 is going to be a pretty big year for us: our plans to launch our nasal swab test for early lung cancer detection in the U.S. market; our plan to add Envisia onto the nCounter for international launch, our first -- second menu expansion move; and Percepta Atlas launch in 2021, where we will be able to take the rich data from our Afirma Xpression Atlas product that informs on all the variants important for decisions around surgery and treatment there and apply that same approach in lung cancer, providing this information at the same time of diagnosis from a small biopsy sample that we have perfected our assay on. In between all of that are a series of collaborations that will continue to advance new data and evidence that is underway as we speak and pipeline advances that we should be able to update you as this year goes on and as we enter 2021, where we'll look to expand reimbursement on our pulmonology products, potentially influence guidelines, advance all of our collaborations and ultimately launch 3 new exciting tests that are going to just continue to drive the great momentum that we built in the company. And I just want to highlight just a really great team with lots of experience and deep ability that's allowed us to drive the business to where we are today. So I have a couple of minutes to maybe refer over here to the questions.

So I do see one question here on the list as to whether or not this vision, this strategic vision, that we've had in using the nCounter and how that might change our strategy in the U.S. market. And I think that's a really good question because the way I would answer it is that what this new vision gives us is a lot of optionality in the marketplace. We set out 2 years ago to determine what it was going to take to build a global enterprise and made the decision that we really need to have our own platform to make that a reality. As we've moved through that process, acquired the rights and the ability to now build the menu on the nCounter platform, we're sitting here with the optionality that if we ever wanted to move our products through FDA and distribute it in the U.S. once we had full reimbursement, we would have the option to do that even though the primary reason for acquiring that platform was to build a global expanded enterprise team. So maybe with that, that's the best slide to leave us on as we close our session. Thank you for joining us today, and I look forward to speaking to you more about Veracyte's success. Thank you, Bryan (sic) [ Brandon ].

Thank you, Bonnie. Appreciate it. Have a great afternoon.

You, too.