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

Good afternoon, and welcome to the virtual fireside chat with Veracyte President and -- with Veracyte Chairman and CEO, Bonnie Anderson. My name is Brian Weinstein, and I'm the analyst here covering Veracyte. I also cover certain areas within diagnostics, life science tools and medical technology for our firm. Joining me is my associate, the team's COO, if you will, Andrew Brackmann. A quick reminder, the Team Weinstein is hosting some events, along with the conference. We did a Peloton ride both yesterday and this morning, and we have another one for people tomorrow at 4:00 Central. Instructions for joining, that can be found in last weekend's Backstreet, or you can e-mail us or check our recent notes that were posted on the conference. We're also -- Team Weinstein is also hosting a nightly recap dial-in that we're calling the Lido Lounge, named after the Lido Shuffle, that is the official song of Team Weinstein, and that takes place tonight at 5:45 Central. And hopefully, people can dial-in for that. Finally, before jumping into the call, the best compliance officer in the business, Michael Besenjak, has told me that I'm required to inform you that for a complete list of disclosures or potential conflicts of interest, please visit our website at williamblair.com. Okay. All that's out of the way, Bonnie, and now we can talk.

Thanks for the opportunity and the invitation to join you.

Of course. It's great to have you, as always.

So I thought we would just start out where everybody seems to want to start out these days, and that is, obviously, March and April were difficult for a lot of companies and even going into May. Can you give us an update on what you're seeing in the business through May and early June? Others are talking about things being a bit more positive than what they expected. So curious how that may differ from kind of what you would put out there as a more cautious stance than others, which, by the way, I totally agreed with the way that you were positioning things. So just it seems like others are talking about things maybe being a little bit more positive. So I'm curious what you're seeing.

Well, we've definitely seen some emergence, reemergence in certain segments of the market. A lot of it is coming from the more rural areas. And as we have predicted, the Afirma product is the one product that seems to be starting to emerge in advance of others. I mean what gets me excited is when we're back 20%, 30% over prior year and down 30% or 40%, so to 50%, so it's all a matter of perspective. But yes, we still believe the U-shape is probably going to unfold. We're hoping to not have any big surprises on the second wave, but we think we're well positioned with the new products we'll bring in 2021 to weather this.

Yes. Great. Yes, we're definitely going to talk about those businesses. But it is still your view that the U-shape would kind of take you out to about a year from when all this started. Is that kind of where the back half of that U kind of gets back to those more typical kind of growth rates or dollars than -- that you had seen previously?

Yes. I mean it may come a little bit faster than that, but we certainly don't want to be overly optimistic and then be disappointed. So it's all about when that U begins to lift across the portfolio and how wide that U base is before we see that lift and then how quickly it comes up the other side. So yes, we're hoping by Q1, Q2 that we're back sort of in the right cadence of the business.

Yes. And as you mentioned, Afirma is sort of leading out here. But are you seeing anything as it relates to the other core products in the business?

Yes. I mean we're seeing a lift in certain segments of the business. I mean one of the things that we have, so really, really strong and deep analytics. Or you can imagine, every customer that sends us any sample by product and when that -- those samples come in the door. So we can look any day at any part of the country. And certainly, it's not every territory that is starting to see that bounce back, but it is starting to happen in certain places. And it's happening with all the products, but I think it's most obvious with Afirma probably because that's where a huge base of the business is.

Yes. And I think the answer to this is pretty obvious. But maybe this geographic basis, what you're seeing, so states that have opened up are the ones that are -- where you're seeing stuff. There's nothing odd about your business other than that.

Yes, yes.

Yes. Okay. That's great. Great. So broadening out a little bit here. There's obviously going to be a lot that changes in a post-COVID-19 world. So I'm curious, your thoughts, as you've been in this industry for a while now, just first, broader health care changes that you see. But then how does the role of diagnostics change in a post-COVID-19 world? And how does Veracyte play into this with all the different things that you're working on?

Yes, absolutely. I mean I think as probably most everyone is projecting, interacting with physicians in more of a virtual and digital manager -- management style is definitely going to be the way of the future. We've pivoted, we've prepared for that and we're doing a lot more of our activity, even doing actual customer new training and adoption and getting new accounts up and running actually with Envisia and Percepta. We had a couple of those examples. So -- and then a lot of education that physicians, I think, actually prefer to do online. So all of that's going well. We're fortunate because, today, we have all the tools you'd ever need to turn into a virtually and digitally enabled sales team. Veracyte, in particular, I think one of the things that really excites me about our portfolio is that all of our leading clinical diagnostic tests were aimed at having an impact on patient care to help patients avoid unnecessary procedures and invasive procedures, specifically that they don't benefit from. And so there's no better time in a marketplace with what is going on now. Nobody wants to take a patient that can avoid surgery, going under anesthesia, being in the operating room environment even in a hospital if they're not going to benefit from that. And so I think that's where we'll really have a strong position across all of our products. And then when you add to that some of the new advances we've been making with our Atlas products, where we are extending beyond the pure diagnostic answer to be able to inform treatment decisions at the time of diagnosis on that tiny pre-surgical biopsy, that's just adding a whole lot more information to the clinical picture of the patient, so that the physicians and patients can decide what to do next on a much, much richer set of data. So I think we're very well positioned there. Our nasal swab, of course, has a lot of excitement by a lot of our investigators out there that can't wait to get their hands on that. In fact, I would say, one of the first calls we got from one of our top academic centers on the back of the COVID shutdown was whether or not they could start using the nasal swab for nasal -- for lung cancer workup. And we had to decline that since the test isn't validated. But it certainly, I think, is going to be a powerful tool to come in and be able to collect a sample really almost anywhere and try to decide who do you take in to work up and who you don't. This is all just playing into the hands of this backdrop that we're now seeing in the new reality.

Yes, and it clearly seems like you guys are very well positioned for this new world. I'm curious if we just take a look at diagnostics as a sector. Do you think that there's anything that is going to come from the idea that diagnostics are going to be more appreciated going forward? And is there an opportunity for the industry to kind of come together and drive for greater appreciation with reimbursement, in particular? I know that the focus has been a lot on the infectious disease side of the world, but is there a broader opportunity for diagnostics to come together? And are you aware of anything that the industry is doing to try and do anything like that?

No, absolutely. I think that we have always sort of been the step-child in biotechnology, and all it takes is one disaster to realize how important diagnostic testing is. So in this case, it happened to be diagnosis of virus. But as we think about like Envisia and our interstitial lung disease patients, these patients are going to end up going in to be worked up for COVID, for other potential challenges, for ILD. These things are going to overlap. And I think, more and more, in order to give the right treatment to the right patient or do the right surgical intervention, there's going to be more of a demand to actually have the diagnosis accurately defined.

Yes, I would agree with that. Okay. Let's talk more about Veracyte. So the strategic vision here, at least as it's unfolded to Wall Street, appears as if it continues to grow and build. I'm sure that you've had this vision for a while now. But as more of that vision kind of comes to light, can you just describe what the strategic vision is for the company and the added opportunities that you have given all of the changes over the last couple of years, how it all fits together? I think investors, that's probably the first question that they ask me is, where has the company been and where is it going and how does it all come together? I know you're going to love that kind of a question.

I love that kind of question. And you're right, it was not by accident that this all came together. But we've actually added a slide for those of you that will download later on Slide 11 of our William Blair deck. We begin to try to articulate for everyone how this all fits together and what the ultimate goal is. We set out literally 3 years ago with our Board to determine, did we want to become an advanced genomic testing global enterprise, and the answer to that question was yes. We then began building the building blocks and taking each step one at a time to advance our strategy toward achieving that. Ultimately, we want to be able to deliver genomic test to patients anywhere in the world. We believe, to do that, you must have a distributed platform. It's very big hard to tap patients everywhere, with the cost of shipping samples back to the U.S. And so about 3 years ago, we began the journey to evaluating many different platforms, looking at could we partner, was there any opportunity to have our own platform. I mean I grew up in the diagnostic business with 20 years to back in culture, and we took all sorts of technologies and built them into global enterprise businesses through the distribution of research and diagnostic testing on these platforms. But there's a lot of things that have to be right for that to be able to be successful. Number one, a platform has to be very automated and very easy to use, if you're going to put it in the hands of technicians all over the world. Secondly, you have to have a cost basis that supports relatively low-volume testing. Unlike us in our CLIA lab and other companies like us who are running thousands and thousands and tens of thousands of samples every year in our own CLIA lab, where we consolidate testing, and can be profitable on a very relatively high-cost platform, we can do that because we're getting economies of scale in volume, but also because we're billing retail payers in the U.S. who are paying the highest price. When we're going to sell to hospitals and medical centers around the world to do this testing on their patients, we're going to be selling to them at a wholesale rate, and they'll end up billing the payers or using their DRG allocation money, however this health care system evolves. So we had to have a very low-cost basis for the strategy to know that, long term, we can still be a profitable growth company on the back of this. And in fact, that's exactly what we've done. And the third success factor is menu, menu, menu because the way to drive installed base is by offering very attractive, high-performing tests that address very important clinical indications. The way to drive more installed base is to add more of those menu. The way to add more menu is to have the best platform in the market, so that not only yourself but other partners want to build out that menu. And this is exactly what we've executed on. So if I could just take a couple of minutes and remind you that not too long ago, we were a company selling our Afirma, Percepta and Envisia classifiers out of our U.S. CLIA laboratory, growing at not a bad rate, 20% to 25% growth year-over-year as we brought these products to market, got them covered by Medicare. We then shifted all of our testing in our U.S. laboratory and rebuilt second-generation classifiers for Afirma and lung. Why did we do that? Because we wanted to make the test even more high performing than what the original early generation tests were that were based on Array Technology and take advantage of the whole transcript on very, very rich data, the richest data we can get, which is what we did. Thirdly, we then use that platform and scientific and technology approach to not only answer the clinical diagnostic question for thyroid cancer, lung cancer and IPF. We then were able to extend our data and information to include variance that can inform surgical and treatment decisions at the same time of diagnosis with the tiny biopsy used to make the diagnosis. That all brought to bear our first couple of very high-profile biopharma collaborations, Loxo Oncology in thyroid cancer and J&J in lung cancer. And from that, we were then able to leverage strategically the value of these collaborations, not only to drive revenue growth, but to basically help pay to accelerate our pipeline. And so from that, we're going to get our Percepta outlets, our nasal swab. We've got our second-generation Percepta tests, et cetera. So then we were ready to think, with this broad of a menu, it was time to think about platform. We evaluated many, probably every platform out there. And when we approached NanoString, we were very excited to come to a deal whereby we have the broadest and deepest attractive menu to put on the nCounter. And by pulling Prosigna and LymphMark assets and with that, it positioned us to really be the first company in this entire space to have products addressing 5 indications, 4 of those in oncology indications, and clearly positioning ourselves to serve this $40 billion market opportunity, which is very real, that we keep talking about. But then by bringing our own platform into it, that we can distribute these tests locally around the world, that realized the ability to actually serve the market. So not only do the tests address that size of the market, we're now positioned to actually go out serve it. And on the back of that acquisition, we then had some very attractive additional partnerships that have expanded, CareDx being one of those, which is kind of an interesting one. For CareDx, they're really a global leader in transplant testing. We didn't think we wanted to compete with them in that market, so why not give them the exclusivity to develop a transplant rejection test on the best platform in the world. And I think they agreed. And so we announced a deal with them. And what will that do? It will be win-win for everyone, more menu, more advanced genomic testing for all of our patients and doctors and medical centers all over the world; more menu to drive placement of platforms. And at some point, with the menu that we're going to have on this in a couple of years, we may not even have to have capital available to buy the equipment. It could be very easily justified just with the menu itself. So we are extremely well positioned. We're really excited. And all threads together, we acquired the team, we have the team in place to launch Envisia on the nCounter in 2021. We'll launch our NasaRISK or nasal swab classifier and our Percepta Atlas in the U.S. in 2021. And then the nasal swab will be the third menu that we put on the nCounter in 2022, going after the global, very high value early detection for lung cancer market. So that's the story.

Yes. It's come a long way. And it's interesting because a lot of it really has happened just in the last couple of years. The pace of change to the story or advancement of the story, I should say, has really accelerated in the last 24 months, and it's certainly an exciting time for you guys. As we think about nCounter for just a moment here, one of the things that we get asked a lot about is, how do you think about the economics to the company of having a centralized versus decentralized. And you touched on it a little bit in your comments, but can you talk about one versus the other in terms of -- you talked a little bit about the reimbursement. But can you talk about reimbursement in one situation versus the other? Servicing, getting systems out there, there's costs associated with some of that. So how does all that play into kind of the broader economics of a centralized versus a decentralized model?

Absolutely. Great question. And you have to have a long-term view, right? Because in the early few years, we've set ourselves up to have no impact to supply. We have a great partnership with NanoString. They're an outstanding manufacturing operation, and they will be -- they are today our contract manufacturer, and so they get the benefit of the pure cost basis today. But at the point where we are ready and able to take over the manufacturing of the reagents kits, we'll have that extra margin that we'll be able to realize because we will have the cost basis. That was the important element of owning our own platform and technology, if you will, versus partnering because when you partner, you've got 2 or 3 players that all want to make 80% margins, and there isn't that much margin in these products if you're going to really drive true adoption. And so we want to be able to go out to medical centers and hospitals and sell these tests at, say, a $1,500 end user price point in global markets given their cost constraint and in the way that reimbursement is done there, allow those labs to use not only reimbursement dollars from reimbursement of the test, but also tap research funding for clinical studies in certain disease areas. And also these hospitals get DRGs to help make the diagnosis. Because they're going to be using and choosing their vehicle for paying us for the test, they will pay us directly and get the kits into their lab. If you're a lab in the U.S. and you want to run tests here, the only way to get paid for it is to have them fully reimbursed to you. So what we're opening up here are more mechanisms to be able to sell kits and get institutions using them and for us to financially get rewarded for that. And then that gets to the next point was making sure that you're going to have a platform and a cost structure that allows you to get to 75% to 80% margins in this business, and we fully believe that we will be able to do that over time on a whole breadth of menu that we'll bring out for these physicians and patients around the world.

That's great. And you mentioned the magic word again for me, which is menu. As a guy that's been in the space for a while as well, I keep shouting menu, menu, menu. Menu matters, right? For us, the menu and the importance of that menu is critical. So you talked about CareDx, and I believe that was something that was already sort of in process, maybe to some degree, when you had acquired the nCounter system. Are there other menu items that you think can be brought on inorganically versus organically under the system? Or will it favor one versus the other?

Well, obviously, our priority is supporting our own menus. It makes sense doing it very methodically. We think there will be an opportunity to expand more pharma relationships. NanoString has a very, very active reach through to many, many biopharma customers that are using all of their platforms to create signatures and look for ways to advance biomarkers, along with their therapeutics. And when those programs get to a certain point in the process, we have a handoff relationship, so that we can take over those that are most advanced, that are ready for prime time and those that could turn into diagnostic testing opportunities. And in fact, obviously, the AstraZeneca deal we announced very quickly after we acquired LymphMark. So it's obvious that, that negotiation was running in parallel. And it came to us, obviously, through NanoString, and I think there will be more of those. Pharma companies are very excited about the potential of a very sophisticated platform with true simplicity, excellence through simplicity in a design that would allow them to have patients sourced for clinical trials, tested for therapeutic regimens, et cetera, at anywhere around the world. And so it's a very attractive platform for that as well as other diagnostic companies that might want a simple reach into the international markets and find our profile of how we want to work with these companies to enable that very attractive. We're not a tools company that has to make 80% margins on everything we do and let the customer deal with all of it. We're trying to cluster nCounters around the world eventually in every major medical center there is, and we're happy to allow other diagnostic companies to have a pathway to make their tests available on the platform. And the fact that this platform measures up to 800 targets across DNA, RNA or protein, it is the most powerful platform in that regard. And all of the complexity of these assays is all built into the reagent engine, the cassettes. And that's very powerful, like 1 hour of hands-on time to run a patient run through this system.

Yes. And the margin profile is going to be better than your current corporate margins.

Well, eventually, it will take a while off of the platform we're on and all of that. But yes, eventually, I would say, any time you're on your own technology running in either your own lab or placing in someone else's lab, you're going to have better margins than partnering with someone who's gaining 80% on everything they sell you.

Yes. No, of course.

We're a big -- I mean, on the back of that, though, I mean, we're obviously a very lucrative, happy, Illumina site. Our discovery engine, our R&D engine, everything running in our lab today, couldn't -- we couldn't be doing what we're doing without that technology. It's incredibly powerful. We don't intend on giving that up.

No. I would imagine that you have a lot of work and a lot of proprietary know-how on how you do things there. And of course, you're going to continue with that. One of the things that I think investors always like to talk about or like to see are a series of catalysts that are coming up. You talked about where you've been to where you are today. So maybe we can talk about where you are today to where you think you'll be over the next couple of years in terms of specific catalysts that we should be focused on, thinking about as we continue to evaluate the business.

Absolutely. So the cool thing about the impact of the pandemic was we did update our catalyst slide, the thinner deck, but the only segment that needed to be updated was pulling what the revenue volume growth and testing volume growth was predicted to be for the year because we pulled guidance. But because of the rich set of biorepositories, the work that had already been done toward advancing publications with Envisia, Percepta, Prosigna, all the work to advance our nasal swab and the LymphMark advances and Afirma advancements, which we could already start checking off, we have not realized any significant impact to any of our pipeline programs or any of the evidence development that we entered the year projecting to occur. So that is really, really good news. And so we're -- we fully expect to see publications coming along this year, with all 3 of our products that are not full-scale routine testing, like Afirma. All the pipeline advancements are teed up, and we've just announced LymphMark advance through our 510(k) de novo classification filing just yesterday. That product is part of our collaboration with AstraZeneca and Acerta, so that tells you that, that collaboration is moving along. And then that all tees us up for guideline inclusion and reimbursement expansion for the pulmonology, both Percepta and Envisia. We're hoping 2021 will begin to be the catalyst of seeing that grow. When we get the full commercial reimbursement, the revenue on those products will double because only about 50% of the patients are Medicare, and that's pretty much what we're getting reimbursed for today. So that gives you a really nice tailwind on the revenue, while the nasal swab launch product, the Envisia on nCounter internationally and Percepta Atlas gets launched, gets through that early stages of data to get to Medicare coverage reimbursement, at least the 2 lung products, and we use our portfolio of evidence for the international launch of Envisia to tee up to get reimbursed for that, and it's -- everything kind of falls in place to build a great '22, '23 and beyond.

Well, it sounds like you guys aren't doing much. It sounds like it's pretty quiet over there, and you are busy. No, that's great. We would have loved to be able to dig to many of these different opportunities. And I always say in these things that 30 minutes just flies by. And so we can't dig into them here, but certainly offline and in additional conversations, we'll dig into that. But I want to thank you for taking time to speak with us and to go through all this. It's obviously an interesting and very exciting time for you guys, and we're excited to hear all the updates that you have.

Thank you so much. We agree. It's a great exciting time in the company. Look forward to seeing you soon.

Take care. See you. Buh-bye.

Bye.