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

Before we get started, I just want to read my disclaimer here. Please note that the webcast is for Morgan Stanley's clients and appropriate employees only. It is not for members of the press. And if you're a member of the press, please disconnect and reach out separately. For important disclosures, please see morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So with that, thanks for joining us today on day 1 of the Healthcare Conference. I'm Tejas Savant, and I cover the life science tools and diagnostics sector here. I'm delighted to have Veracyte join us today. And representing the company is Bonnie Anderson, their CEO. Thanks for joining us, Bonnie.

Thank you very much for inviting us. It's great to be here.

Of course. So Bonnie, maybe to kick things off, I read an article that you wrote in the Timmerman Report not too long ago, which I thought was really great. And I think it's the perfect way to set the stage before we get into the weeds on Veracyte. So talk to us about sort of your thought process there in terms of the pandemic shifting the way we value diagnostic testing. And obviously, it's an important point for the industry, not just for you guys. And are you starting to see some of that buy-in from stakeholders?

Yes. Yes. So I think that it's interesting how, at a time like this when the world turns into chaos, you end up getting clarity around the key things that really matter. And diagnostic testing was propelled into the spotlight because of COVID for all the right reasons. It's always important, whether it's a pandemic or it's cancer, it's always important to be able to get access to testing, to have payers agree to pay for testing and to be able to get an accurate assessment of whether you are positive or negative because that has implications, really, to the whole world we're living in today. So my hope is that this new backdrop and understanding how important testing is and the differences between tests that are maybe speedy but not so accurate and the implications of that versus tests that are going to change how a patient can move forward and get treatment will all be thought through and applied more broadly in the world we live in. I'd love to see oncology early diagnosis take hold because, as we all know, that's the only way to really save lives.

Got it. I agree. That's all I can say. And it was a very good article.

Thank you for that.

So moving to Veracyte, Bonnie, I mean, obviously, the story has evolved a fair bit over the last 3 or 4 years but especially over the last 12 months. So walk me just at a very high level through the evolution of the company. And it's not complete by any means, but it's on its way.

Yes.

And if you could just walk me through the strategic sort of thought process which sets you upon that path and where you see it ending up, that would be a great way start.

Sure. Yes, we kind of break it into 3 different segments, right? I mean the first is the founding -- the foundation that Veracyte has built from our founding days back in 2008 through about 2018. We demonstrated the ability to bring very high-performing clinical tests to market that were positioned in cancers, replacing the need to go to surgery and get a pathology diagnostic cancer that when was benign sort of was already an issue because the surgery had already been done, right? And when we founded the company, we actually focused in on this point of really improving the diagnosis of disease not just because of COVID but because of the importance of this in oncology and other clinical diseases. And we unfolded the richest scientific approach collecting whole transcriptome data on all of our patients, building very large-scale biorepositories from which to answer these clinical questions. And that foundation set us up as being able to bring 3 clinically valuable tests to market in thyroid cancer, lung cancer and IPF, all clinic -- great clinical areas of unmet need, and then expand on those diagnostic decisions to inform treatment decisions from a tiny biopsy at the time of diagnosis. So we were in a very, very solid place in 2018. And strategically, our vision was to scale the company to become a global enterprise. And we wanted to do that in a way that would not require patient samples to be sent back to U.S. labs because, quite frankly, that just has not worked at building scale and penetrating markets and giving patients all over the world access to these tests that can truly change their lives. And so we set out in '18 to identify, evaluate various platforms. And again, I've been doing this for a long time and always believed that the only way to address the global market is with our own platform that could be used to distribute testing to laboratories and medical centers close to where the patients are and allow that care team to be involved in running the test, interpreting them and deciding what would happen next. So at the end of last year, we did a really exciting transaction, whereby we exclusively licensed all diagnostic rights to the nCounter platform, which is now Veracyte's diagnostic platform. In addition to that, we acquired 2 additional oncology assets in lymphoma subtyping as well as breast cancer. And with those added to the foundation of science that we've built, we are now on a pivot and a new trajectory to build out a global enterprise on our own platform, where we have 5 clinical indications that we're in. We have additional partnerships of other diagnostic companies that can develop their tests on this platform because it truly is, I think, the best platform in terms of comprehensive design and capability but truly simple operation by the end user. And with that, we believe we're on a trajectory like no one else to build a long-term, scalable growth, profitable company.

Got it. So maybe just digging a little bit deeper into some of the individual tests that you have in the market today. So we'll start with Afirma. It's your largest, most mature sort of platform at the moment. Can you provide some details on the recovery trends that you've seen between the physician office setting and the hospital setting since the second quarter? Things seem to have gotten a lot better across the board, knock on wood, but there are pockets where the virus has come back or the second wave and so on. And so are you seeing any return to shutdowns at all or no?

No. We're not seeing return to shutdown. And you're right, the market is definitely recovering. We had mentioned on our last call, our June volumes doubled April. That was a really nice rebound trend. Our July volumes were in line with last year. We didn't reinstate any guidance because there's still a lot of uncertainty of what will happen in August with vacations and then coming into the fall. But I think all of the trends were really exciting. And I think for us, because our tests all have an element of value creation that helps the patient avoid going into the operating room, we're seeing a lot of interest in making sure the test can be broadly adopted and may be used on every eligible patient to help save that risk to the patient. And then at the same time, we do know that doctors' offices and hospitals don't have the same volume of patients going through their offices, and so that creates a little bit of caution on how quickly we'll be back to normal. But I think with the adoption of telemedicine, where patients that don't need to be seen by the doctor being moved aside and taken care of through telemedicine, this means that patients like fibroid nodule patients that need to get in to have that sample collected should be the mainstay then of the patients going forward that are coming in. So a lot of good trends, we're very encouraged. And of course, we're very focused on those 4 product launches we have lined up for next year and making sure we're getting ready to take those to market during this backdrop and rebound as well.

Got it. So -- and obviously, you had your Xpression Atlas for Afirma come out in the first quarter. And remind us in terms of just reaccelerating coming out of the pandemic for Afirma specifically, what's your strategy to make sure that those volumes come back? And then like you said, I mean, penetration even today is not anywhere close to where it could get to. So how should we think about that?

Yes. So I think it's a really good point. So it's the complement of the testing results that we answer that have become so compelling with the launch and then the extensions that we've continued to launch with Xpression Atlas. There are now a series of new class of therapeutics that target fusions that are, quite frankly, very rare in the patient population. But because of our market reach and the number of samples that we run through our own laboratory and the extensive nature of the variant panel that we can report on off of our whole transcriptome assay, we are now garnering the attention not just because of the benign patients we can keep out of surgery that don't need it, we can also inform at the time of diagnosis on a tiny biopsy on the entire variant landscape that can guide surgical and also treatment decisions. And this framework that really leverages the whole transcriptome assay and our machine learning capability and data mining capability we are rolling out in lung cancer. And I've often said that while thyroid cancer is not the poster child for targeted therapy, lung cancer certainly is. But it's that complement of results. It's the patient education and advocacy programs that are starting to unfold in thyroid, and we believe we're well on track to continue. We've penetrated the market almost every single year by an additional 5,000 samples. It's sort of been the cadence that we've built our operational and hiring model, too. And we like a trajectory that can keep that cadence of CAGR moving at an attractive rate without seeing big ups and downs in different years, and we're well on track to continue that with Afirma.

Got it. And then switching gears to the lung side of things. Percepta, I mean, you obviously have a potential impact from these draft USPSTF guidelines, would they -- if they become final. But on the other hand, there is also the issue of this sort of secular decline in smokers, which may or may not sort of impact adherence to guidelines to begin with, right? And then there's a third angle where because now you're just screening younger people, there's a higher chance you'll find benign nodules, so a good classifier is even more important. So how does those 3 dynamics -- walk us through the interplay and how you see that impacting Percepta going forward.

Exactly. And I can't talk about Percepta without also bringing in the conversation around our nasal swab test that we'll launch next year because the 2 work hand-in-hand and then also Percepta Atlas, which will not launch next year. So lung cancer is an area that we're focused on really, really building a significant portfolio. In this franchise, as we launch these 2 additional products next year, I think is going to leapfrog where anyone else is in this space. And while smoking rates may have declined, let's face it, lung cancer still kills more cancer -- more people than the next 3 cancers added together. So it is not going away anytime soon. Let's also remember that lung cancers can be caused by -- while most people are smoking, it's also environmental causes, things that we inhale. What I love about the underlying technology behind Percepta and our nasal swab is the ability to gather genomic, very rich, deep biological insights from the airway. The Percepta test is collected in the bronchial airway to help improve the sensitivity and diagnostic yield of a bronchoscopy. The nasal swab is actually positioned to be the very first test performed following the identification of a patient with a nodule that meets the guideline criteria for workup. So if the U.S. -- if the eligibility for screening increases and 10 million goes to 15 million, you're right, it's even more important that we intervene in that next step with something that's also noninvasive and can stratify patients to high risk or low risk without missing or overcalling cancers because they will land in an intermediate risk bucket. And the idea here is if we, from a nasal swab, can identify patients at high risk for cancer, their next invasive step could be a surgical procedure that isn't being done to get tissue to start a diagnostic odyssey that unfolds today, their next step could be a surgical procedure to either remove or ablate the nodule for a cure. And that is the power of earlier detection. At the same time, if we can move half those benign patients to a benign call and they don't even have to entertain any workup, we're adding incredible value right upfront following the screening step. Percepta will remain in its place as patients that have intermediate risk end up undergoing workup. Most of those will be done with bronchoscopy, so Percepta will still be there to add value. And then Percepta Atlas will complement all of these brushings in genomic airway, risk stratifiers by being able to take that tiny biopsy that's collected from the first diagnostic sample, whether it be from a bronch or a TTNA, and reveal the variance that can drive next steps around targeted treatment but not 2 to 3 months later at the time of diagnosis. So we're really excited about the way this portfolio has the potential to transform care for patients.

Got it. That's very helpful. And in terms of -- a couple of follow-ups there. I mean one, in terms of data readout time lines for NasaRISK, I know you've mentioned CHEST and ATS sort of as being preliminary readouts later this year. But do you have any updates to share in terms of when we can expect to see clinical validation data? Will it be sort of first half of next year? Or will it be more towards the second half of the year?

Yes.