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

All right. Hello, everyone. Thank you for joining us today. I'm Catherine Schulte. I cover life sciences and diagnostics here at Baird. We're very excited to have Veracyte here presenting at our conference today. Veracyte is a global diagnostics company that uses genomic information to improve diagnosis and treatment decisions for patients with thyroid cancer, lung cancer and IPF. So here representing the company, we have the CEO, Bonnie Anderson. So thank you so much, Bonnie, for being here with us.

Catherine, thank you so much for the great introduction and thank you for the invitation to be part of Baird's Global Health Care Conference this year. I'm very excited for that. I just want to remind everyone briefly of the forward-looking statements that we'll make before we begin. And walk you through the Veracyte story, which has changed quite a bit over the course of the last year, as we've executed on a number of avenues of long-term growth for the company. . But at the fundamental level, nothing's really changed. We are leveraging very deep genomic insights to transform care at every step of the patient's journey. We set out at the beginning of this year with a set of catalysts, really bridging a 2-year view because of some of the exciting things we have coming up in 2021 and the key steps that were required to be achieved this year to set us up for success on that. As you can see, we have checked off many of these boxes as we've moved through the year, despite the backdrop of the COVID situation. And we're quite excited to be advancing all of the collaborations that we've entered for the company. We've been -- had a terrific success at getting a number of key evidence publications out in peer-reviewed journal. That's very important as on the back of all of this evidence, we're building a library that we hope will help us begin to see reimbursement expansion of the Envisia Classifier and Percepta Classifier next year. At the same time, we've been able to keep our pipeline on track. We've launched enhancements to our Afirma Xpression Atlas, hoping to inform treatment decisions at the time of diagnosis in thyroid cancer, also fueling our Loxo and Eli Lilly collaboration. And we also look forward to presenting some updated data on our nasal swab program, certainly a key exciting area and leading into a culmination at the end of 2021 with the launch of 3 brand-new products next year in the market. What drives our business is a strategy that has been in place since we founded the company back in 2008. We focus in -- on each clinical indication and understanding the clinical question that if answered will deliver significant clinical utility. We believe that understanding how a question can be answered in a way that will change patient care for the benefit of the patient and for a lower cost of care is really key in driving success. Of course, once we identify that clinical question, then it's addressing that clinical question with the most scientific rigor that we can. Veracyte has a terrific history of doing that. And to date, all of our tests have been shown in peer-reviewed publication to deliver clinical utility and value creation for all stakeholders, the patient as well as the payer. And that has allowed us to deliver a really pretty top of industry results in reimbursement. Our business is powered by a phenomenal scientific and technology platform in the company. And it enables innovation in everything we do, starting with the building of large clinical biorepositories from which we use the clinical data and early patient samples that build these biorepositories to perform discovery of our classifiers, then development of these classifiers and assays with ultimate commercial success in mind. Our discovery engine is built around a clinical database that is built in every clinical indication and the whole transcriptome RNA sequencing assay, what we call our unified assay that has actually been perfected on very tiny biopsy samples. To date, we estimate that we have collected over 2 billion genomic transcripts on over 20,000 patient samples that have been built on patient consent and through IRB-approved clinical trials. We then have an engine of advanced machine learning that deploys on all of this rich genomic data and the clinical truth labels that were created from the prospective clinical repositories that are built. From there, we build the genomic classifiers and answer the clinical questions that we want. This can be clinical results, such as is a patient benign or malignant? Do they have a certain feature that would make their diagnosis [indiscernible] IPF as examples. In addition to that, though, because these tests are running on a large-scale transcriptome sequencing assay, [indiscernible] to build data pipelines and pull out the comprehensive variance that can also help inform treatment decisions but do it at the time of diagnosis. And lastly, and more recently, we also acquired rights to our own diagnostic platform, which will serve as the vehicle for global expansion. And now we have a third leg to this commercial wheel, which allows us to deliver the right test to the right market in the same -- in the right model that will deliver it for ultimate patient adoption and reimbursement. We estimate out of our CLIA lab today, we've already issued results and over 40 billion genomic transcripts on over 200,000 patients. So we're well on our way. Up until a couple of years ago, we were able to use this process and deliver 3 market changing tests to the market, where we're now standard of care in thyroid cancer, making great strides in improving lung cancer diagnosis and making that earlier. And building a first of its kind test to aid in the diagnosis of a devastating disease IPF, which is one of the many interstitial lung diseases. This market opportunity presented about a $2 billion market opportunity. And of course, since then, we've now entered an inflection point in the company, where we are now delivering answers in over 5 clinical indications, oncology plus the IPF, devastating lung disease and now addressing a market opportunity of over $40 billion of TAM. I'm excited to lay this all out for you today. And I'll start with our strategic growth pathway, which is pretty exciting. I talked you through that scientific excellence, which really has been the foundation of the company that we've built from 2013 through '18, getting this assay perfected, moving our tests onto this platform so that we could deliver clinical results that truly would change clinical practice and they have. Secondly, we've built answers to questions up and down the clinical pathway to where today in thyroid cancer from a tiny needle biopsy we can tell the patient whether they are benign, or likely malignant, and we can inform on the full variant panel of some of the newer stage drugs that are coming to market, and that patient knows at the time of diagnosis, whether they could be an eligible candidate for some of these newer treatments. Late last year, we transacted a really exciting acquisition from NanoString technologies, where we exclusively licensed the diagnostic rights globally to the nCounter platform, which now has become our new diagnostic platform. With that, we acquired the Prosigna and LymphMark assets outright, bringing us entry into 2 new oncology clinical indications. This was the key inflection of the business where today we are now on a journey to build a long-term, sustained, profitable growth enterprise. Using the nCounter as the vehicle to reach global markets and continuing to build our test volume in our U.S. CLIA lab, where we can serve the U.S. market so well. The platform and our strategy has also brought us a number of fantastic biopharma collaborations, a couple of diagnostic collaborations as well, and as we continue to expand menu on our platform, we will build an engine of demand from laboratories and medical centers around the world, to give patients everywhere access to these cutting edge genomic tests that typically are only available to U.S. customers, and we're going to change that. As this menu grows, either from our test or from our partners tests, that will drive installed base. And so it will be a circle of execution around menu expansion, installed base expansion and using our CLIA lab in the U.S. to stay ahead in each of these clinical indications. Two of our diagnostic partners we announced earlier this year, one is with CareDx, who wants to take advantage of the really awesome design of the nCounter, a very rich in capability platform with up to 800 genomic features allowed to be put into a single test that gives vast content to develop tests that really are high performing. But at the same time, the complexity is actually built into the cartridge design. So to the end user, it only takes about an hour of hands-on time to deliver a test result in a fully automated way in just 2 days of turnaround time. That compares to our own platform and our laboratory today running on RNA sequencing, where it takes up to 4 days and about 30 hours of hands-on time. So there's no questions. Some of the other top diagnostic companies out there want to tap the simplicity. We announced CareDx, we'll now have the right to develop transplantation rejection tests on the nCounter. We will benefit through becoming their supplier, benefiting from milestone payments as well, and we will certainly be able to help drive installed base of the nCounter to benefit both them and our own menu. We also announced a second diagnostic partnership with the original founder and CSO of NanoString, an inventor of the technology that is built into the nCounter, MaviDx. We did not believe Veracyte's strategic interest [indiscernible] chasing COVID testing. However, MaviDx believes the platform's phenomenal multiplexing capability could allow them to deliver a platform and test that could measure up to 400 patients -- 440,000 -- I'm sorry, patient samples in a given day. So we took a small equity stake in the company, and we'll be their supplier as well and are wishing them a lot of success as they work toward an EUA with the FDA by the end of this year. So I want to step back now and walk through each of our product portfolios. We are super excited, as you should all be about what we're doing in the lung cancer space. We entered lung cancer with the introduction of our Percepta classifier a few years ago. Test is fully covered by Medicare and gaining a lot of evidence being published that should allow us to begin to expand that coverage beyond Medicare in the next year and moving forward. Percepta is designed to help improve the diagnostic yield from broncoscopies, which is a very common tool for workup of patients suspected of having lung cancer. Our plan is to move forward in the patient journey and come in an earlier point in the workup with our nasal swab classifier, which is going to help diagnose patients at an earlier stage and get those patients with cancer into the first step of treatment, early stage cancers, that could be the cure. And then also identify patients that can avoid the workup so that they are not undergoing unnecessary invasive procedures that won't benefit them. In addition, we're excited in the future to move even further upstream with our nasal swab technology with an aim of finding patients precancer. There are companies such as J&J, with which we have a long-term strategic collaboration, hoping to identify drugs that can -- when patients are found to have precancer that these interceptive therapies could hold progression to disease. This would be the ultimate [indiscernible] in lung cancer, I believe. At the same time, as we move forward in early detection though, we also have plans to advance technology to answer questions of treatment at the time of diagnosis. And I'll tell you a little bit more about that in a moment. Everyone always wants to get a little bit closer look at our nasal swab classifier, the first ever truly noninvasive test that we believe has positioned immediately after the detection of patients having nodules by CT screen will be able to transform the risk assessment and which patients should move forward to get treatment decisions, which could include surgery, which could be for cure in early-stage cancers and which patients can avoid workup altogether. But because of our 2 class cutoff, patients not classified to high-risk or low-risk will be caught in an intermediate risk bucket and will undergo the type of workup that they could benefit from as well. And I want to spend a little bit of time on the size of this market. As many of you probably already know, screening tests are a challenge because most screening tests are not covered unless the government has issued a preventative task force initiative, agreeing to cover these tests. It's exciting to know that low dose CT screening is a covered test and covered to the point where it is not permitted by the payers to charge a patient for the screening. What's great about that is it's a very -- it's a noninvasive, very, low dose radiation, but highly sensitive tests that is offered, as I said, $80 to $100 reimbursement in offering free to patients. This technology is ideal for screening because of its sensitivity. And then when patients are found to have a nodule, if that nodule is of size that makes it more suspicious for cancer, they will be referred for workup. We want our nasal swab test to be the very next test in this sequence so that we can guide what happens next, saving unnecessary workup on patients that are benign and getting high-risk patients in for an immediate treatment or surgery decision, hopefully, to save more lives. When patients go through the workup and are found to be cancer, we want to be able to deploy our lung cancer Atlas, Percepta Atlas, which is also going to launch in the last half of next year, along with our nasal swab test by answering questions downstream in the patient journey. What's really exciting about Percepta Atlas is that because we are at the call point at the time when the patient is being worked up, we can get a small, tiny piece of that biopsy on the actual tumor and deploy our entire transcriptome and sequencing Atlas on that sample, detecting all of the variants recommended by NCCN guidelines, looking at a broader disruption of the genome on SMBs and CMBs, and at the same time, identify all the novel as well as known fusions that can be pulled out of the transcriptome, delivering on the broadest set of genomic variance that would exist in the market today. What's more important, though, about this lung cancer Atlas and the point at which we're going to be able to get these samples at the time of diagnosis is that we have the potential and have partners interested in joining us of building the most powerful biorepository of biological insights that would exist in earlier stage lung cancer. Other companies that have built these type of biorepositories have done it mostly in late-stage and metastatic lung cancer, and that data has been very valuable for companies to mine for treatment decisions. But moving this technology forward could mean that we would have a resource to mine for pulling some of these targeted treatments into earlier stage disease, where there is a much greater likelihood of helping patients be cured. Our idiopathic pulmonary fibrosis classifier, we call the Envisia Classifier is already changing lives, launching a few years ago. We aim at being the first test available other than surgical lung biopsy to aid in the more accurate and confident diagnosis of IPF. That's pretty important because without that accurate diagnosis, many patients take years to get diagnosed and often miss the opportunity to be put on treatments that could save their lives. We acquired from NanoString through our acquisition last year, breast cancer assay called the Prosigna prognostic gene signature, and we're really excited about Prosigna. It is gaining great traction outside the U.S. where it is distributed on the nCounter platform, much like we want to do with the rest of our menu to reach patients across the globe. The Prosigna risk score allows early-stage breast cancer patients to be informed on and guide treatment decisions. And at the same time, brings with it the underlying biological intrinsic subtypes of breast cancer, which we believe is gaining incredible interest in the international markets today where this is reported as part of the patient result but also has the potential for us to expand indication in the U.S. market as well. And lastly, our earliest test to help build this franchise in thyroid cancer, our Afirma test, which today is able to take over 70% of truly benign patients and move them out of what historically would have been a thyroidectomy and lifelong hormone replacement therapy. In addition to the benign call that is the most robust benign call in the industry, we also today can inform on variant panel to guide treatment decisions and surgical decisions on patients that are likely or cancer diagnosed. This test is continuing. We're about 35% penetrated into the market and continue to drive traction with the expansion of Xpression Atlas and our ability to actually inform on both sides of the equation. And I think, as you can see from my value proposition presentation across all these tests, in the backdrop of COVID, there's no better driver of adoption than being a test that can help patients avoid invasive procedures that they don't need. And we're excited to have identified that as a big unmet need, even in advance of COVID. We've driven a history of acquisitions and strategic partnerships in the company and of course that has accelerated a little bit in the last several months and a year or so after the NanoString acquisition. This is a key part of building out a global franchise, being able to deliver on multiple levers of growth in the company, each of these bringing value by accelerating our own pipeline. The best way to invest in pipeline advancement is with other folks' money, and we're doing that quite well. And then building a future around partnerships that can also deliver on menu that can help accelerate the expansion of our nCounter installed base for global expansion. On the last quarterly call, we had a series of takeaways from that call with the business progressing nicely even in the backdrop of the pandemic. We actually delivered very solid results in the quarter. And our testing and product revenue showing a little bit ahead of where we originally thought the pandemic might land at, and more importantly, showing our June volume doubling over April, and we also reported that July volume was predicted to be on par with last year. It still remains a bit of an uncertain market to predict, so we did not come back with any additional guidance, but we did deliver a very strong $3.8 million revenue quarter with our collaborations. Pipeline is advancing well. As I mentioned earlier, we are on track to deliver both on noninvasive nasal swab test for early detection, as well as our Percepta Atlas to fill out and expand our lung cancer portfolio to answer a broad array of patient questions that are important unmet needs and those products will launch on the last back half of 2021 as well as our Envisia Classifier, which is set up to launch on the nCounter international markets very late next year. But we already have a lot of market development work going on, a lot of thought leaders getting lined up to be able to be early adopters for that test. And we're really excited to take that first step in expanding our nCounter menu. LymphMark also is making progress. As we announced a request by FDA to review the LymphMark test as a de novo 510(k). We expect that we'll follow this for a number of months and work with the FDA on how to get that product to market and are predicting that we could launch LymphMark next year as well. And then last but not least, generating revenue from all 4 of our biopharma partners and advancing 2 major diagnostic company partnerships, which I walked you through earlier, which will be key to menu expansion. From a financial overview standpoint, Veracyte has quite an attractive financial profile. We delivered 31% year-over-year growth last year. We have very attractive gross margins, which, over time, will expand both in the U.S. from additional reimbursement decisions, which will drive ASPs up on both our Percepta and Envisia Classifiers. In addition to that, our low-cost platform play in the international markets will allow us to deliver tests at a very attractive wholesale price to laboratories everywhere and still over the long term deliver 70% to 80% margins on that business as well. We could never do that if we had to partner or rely on another company to deliver us reagents and instruments at 80% margins on their own books. So this was a very strategic move. Our selling and marketing leverage is still there. We are scaling under a single -- ultimately, single structure in the U.S. with some specialists in [indiscernible] We've pivoted in the world of COVID to a very virtual and digital platform that now is allowing us to do medical education and interact with our customers, not only virtually but using the digital approach that they prefer, and all of that is managed through the pipelines and platforms we have access to. Our R&D, medical and clinical operations is still the power engine behind the company. And as you can see advancing tremendous success in both new indication biorepositories, advancing our pipeline and expanding menu and nCounter all at the same time. And on our last report, we have $340 million in cash based on the last raise that we did and no debt which makes us quite attractive from a financial perspective as well. And what this revenue growth slide just illustrates is a pretty exciting CAGR on the back of a company that needed to build out very specific menu in order to build a very large TAM now over $40 billion that we are teed up with current and pipeline products to address on a global basis. Those products are moving forward to market. And so it becomes a pretty exciting pivot point for the company. But as you can also see while we layer in the sources of revenue both from multi-products but also from biopharma and other sources, we can accelerate that top line that have maintained a lot of discipline in the operational expand, again, using partnerships to accelerate pipeline and acquiring technology that will allow us to enter global markets with a very cost-effective level of investment as well. And I would say, probably one of the most, if not the most R&D productivity out of the investments that we make as any company in the space. So we'll continue to drive top line growth while exhibiting financial discipline. And I thought I would also just spend a couple of minutes on our COVID response. I'm sure this is still on everyone's mind, and certainly, we aren't out of this mode anytime soon, at least in our experience and opinion. So our employees, we pivoted very quickly and still have many of our employees who can work from home, working from home. We also have a number of employees in our laboratory and elsewhere that are coming into work and producing results and working in an environment that's been reconstructed to allow for distance safety. We also have experienced no material downtime in our supply chains or any disruptions in patient reporting. We acted early to preserve cash. We did announce 30 terminations that we have made, most of those field-based just based on the fact that a lot of our interaction is moving to a more digital framework than face-to-face. And in doing that, we've really spent the course of the last few months really lining up this personalized nature of how we interact with doctors, being able to deliver national speaker programs instead of local, peer-to-peer speaker programs, and these are just a lot more efficient way of driving sales and marketing programs. So we're going to try to take advantage of that. And that will help us remain quite disciplined on the financial side as well. I just want to give a big shout out to this team and to others that have joined our new GC, Jim Erlinger, who we soon will have his picture up here as well. Tracy Morris, who's our VP of Investor Relations and Communications as well. And just a great team that's been at this Giulia Kennedy, my first hire in the company back in 2008, and has been just an exceptional leader in delivering products that really matter. And last, I'll just leave you with a slide I'm personally proud of just showing that as we have built Veracyte from the very beginning, we've built it on the back of diversity. We really embrace inclusion and love the fact that everybody's experience brings a different benefit to the company and to our patients, to the world. And with that, I will ask Catherine to open the call for questions.

Well unfortunately, I think we are a little over time, but we really look forward to following your progress with your global expansion and all these exciting product launches coming up. So thank you so much for your time today and thank you, everyone, for tuning in.

Thank you, Catherine.

Yes. Thanks, Bye.

Bye.