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

Hello, and welcome to the 32nd Annual Piper Sandler Health Care Conference. I'm Steven Mah, Senior Research Analyst at Piper Sandler covering diagnostics. I'm very pleased to have with us today Bonnie Anderson, CEO of Veracyte. Bonnie, for the benefit of those who are new to the Veracyte story, could you give us an overview of Veracyte before we get into Q&A?

Absolutely. Steve, thanks so much for the opportunity to join you in the conference today. It's really our pleasure to be here. I want to just provide a broad-based overview of where Veracyte is. We are a global diagnostics company today leveraging deep genomic insights to transform care for patients at every step of their journey. From the beginning of the company's funding, we've always focused heavily on answering clinical questions that have strong relevancy that, if answered, are going to create a great benefit for the patient, but also an economic value. We then dig in and use very deep science to build out significant evidence that can be used by physicians to make a change in care decision. And we build clinical utility in -- from the beginning. And therefore, we've had a very strong reimbursement approach in the company. I'll refer to a couple of slides in the deck that is up for investors to take a peek at as they go through the story. The first being Slide 7 in that deck that really lays out our enabled strong and deep scientific approach to our product development. By nature, we build large-scale clinical indication biorepositories that really bring together hundreds, if not thousands, of patients in our clinical cohorts. We now have these in thyroid cancer and lung cancer and IPF and are building them in our future indications as well. In our R&D lab and our CLIA lab, we run a whole transcript on sequencing assay, which allows us to capture enormous amount of genetic content and therefore, build these biorepositories that not only are used to develop and validate the tests that we bring to market, either in our CLIA lab or on our new platform, but also allows us to build incredible value with biopharma partnering. Today, we are addressing 5 clinical indications serving nearly a $4 billion market globally. And this includes our flagship product, which was basically the founding of the company in thyroid cancer, our Afirma brand. It includes our Percepta and lung cancer initiative, which we're investing heavily and expanding beginning next year. Our Envisia franchise for IPF and interstitial lung diseases. And most recently, Prosigna in breast cancer and LymphMark in lymphoma. So it's a really exciting time in the company's history, and we are at a place of really a pretty exciting transformation. On Slide 10 in our deck, we talk about the stages of building the company and where we are today in a pretty exciting global transformation. In the early days, of course, we focused on the scientific excellence, bringing our first 3 products to market, gaining all of the evidence needed to get very broad-based coverage on these tests. In December of last year, we transacted an acquisition acquiring the diagnostic global rights to NanoString's nCounter platform for diagnostic testing. And with that, acquired the Prosigna breast cancer assay as well as the LymphMark asset for subtyping of a certain subset of lymphoma patients. With that acquisition, we are now expanding our channel reach and global reach to be able to both offer tests through a service lab to U.S. markets, but also expand the menu on the nCounter so that we can take these tests to patients all over the world. We've been able to also strengthen our partnerships through this acquisition given the incredible design and great technology behind the nCounter. We have announced a couple of diagnostic partnerships, one with CareDx to put their menu onto our platform for global reach, and another with MaviDx, who is working with the platform to try to develop a very high throughput COVID testing machine. So that's a backdrop of where we are. It will be an exciting year in 2021 as we begin to execute on bringing 4 new products to market that are going to expand our current product position. And one of the most exciting portfolios that we will be expanding in 2021 is in lung cancer. Today, we have a product that is used in lung cancer diagnostic workup to improve the sensitivity and information from a bronchoscopy. Next year, we will introduce a nasal swab test to aid in the earlier detection of patients with cancer and be able to inform at the time of CT screening on patients with nodules that are at high risk or low risk for cancer, allowing those patients detected to have cancer getting into surgery and treatment decisions much more quickly. And of course, those that can be identified as not having cancer, allowing them to avoid workup at all. These 2 tests in lung cancer will then be complemented by the introduction of our Percepta Atlas, which is taking advantage of the rich date information that is available from our whole transcript on sequencing Atlas and being able to inform on all the variants that are important for targeted treatment at the time of diagnosis on a sample that is collective at that time of diagnosis. So very transformative to patient care. Secondly -- or thirdly, we plan to introduce our Envisia classifier for the identification of IPF patients from those with interstitial lung disease on the nCounter platform for international expansion. We've had Envisia available in the U.S. market for a few years. It's gaining great reputation. We are expanding reimbursement and coverage of the test as we speak. And we'll be very excited to introduce this product at the very end of 2021 into the international markets on our nCounter. And in breast cancer, of course, our Prosigna assay is able to inform on early-stage breast cancer patients and form prognostic information that provides treatment decisions. This test has been available and is the one global product that we sell today on nCounter and our Afirma franchise, which was the franchise we founded the company on. All of these at various stages of market penetration, but all with lots of market opportunity for growth. So it's an exciting time at Veracyte, and 2021 is going to be a really pivotal year as we look to launch 4 new products, expand out our franchise and our global presence and drive growth in the business.

Great. Thanks, Bonnie. That was a great introduction. You have a lot going on. So congratulations.

Thank you.

So maybe, yes, just backing up, I know we're just coming off of COVID-19 lockdown. Maybe just talk about your testing volumes. I mean Q2 was undeniably weak and affected a lot of your peers as well. But in Q3, there was a nice testing rebound. Can you comment on that and how much of that was maybe a testing backlog? And what are you seeing in Q4 as we're entering into the respiratory virus season?

Yes. It's been quite an amazing year. Obviously, us and many other companies began to see the COVID downturn in March, and we hit bottom of the business in the April time frame. And Q2 was definitely a quarter that we got hit. And we had always predicted a bit of a U-shaped recovery, looking at entering 2021 being back at the point of growth mode over prior year. And we essentially still think that it will play out that way. Of course, there's so much uncertainty still, especially with these cases now starting to ramp back up. But we were very, very pleased with our third quarter results. We had a very strong rebound in the quarter. Both revenue and volume exceeded our Q3 '19 results for the first time post pandemic. And in fact, our testing and product revenue exceeded the prior quarter, the Q2 results, by just under 80%. So it was a very, very strong rebound. We were also really excited with our product revenue, which is predominantly Prosigna, our breast cancer test, achieving by the third quarter of this year what we originally anticipated will be the full year revenue for that product. So again, on volume and revenue, quite pleased. At the same time, we had quite a bit of commercial momentum as it relates to getting reimbursement expansion. While Afirma is broadly covered and reimbursed under contracted rates across the nation, our pulmonary products are at the stage where we're just gaining the new traction around new codes and expanding that reimbursement that will bring a nice tailwind to the revenue piece that will follow on the volume growth. And we were excited to announce that our Envisia classifier was accepted as ADLT status under the new Medicare PAMA provisions, and that set our new price for the product beginning in October at $5,500. And we're excited. We believe we're in a very good place to continue to manage the current commercial claims so that we will remain at or about near that price when the PAMA rate will kick in next July for Envisia. So we've done a really good job at moving that product into a higher reimbursement and therefore, higher revenue-generating product. We also were able to gain new CPT codes and set us up for a good preliminary reimbursement strategy with commercial payers for Afirma MTC, which is our medullary thyroid cancer detector, as well as Xpression Atlas, which is our broad-based whole-transcriptome variant panel that we launched a couple of years ago with Afirma. And this product is actually helping Afirma to gain continued reputation and traction because of the new drugs that are now available for use in thyroid cancer patients that are targeting these rare variants that we actually pick up with XA at the time of diagnosis. So we're set up nice to continue reimbursement expansion there. And we announced last month that one of the largest markets in Europe, Germany, just announced new coverage for our Percepta -- Prosigna breast cancer test, and we are in a great position there to enable local labs to begin offering that test to patients in the marketplace. And then when you combine that Q3 momentum with the fact that we are still on track for all 4 new products that we plan to launch next year, including our nasal swab and Percepta Atlas in lung cancer as well as the Envisia test in international markets on nCounter and LymphMark, which will be -- right now, we have that product under review by FDA and pending a positive FDA outcome, expect to launch that test hopefully by mid-next year, and that will allow us to enter a new market in the U.S. for lymphoma subtyping, which will really be great. And all of that on a backdrop of pretty strong financial performance as well in the third quarter, where margins remain the same. We actually generated $1.8 million of cash in the quarter from operations and did a financing and are now at a very solid $345 million of cash in the bank.

All right. Well, fantastic. A lot of stuff going on. So that's great. So yes, you mentioned nCounter a lot. And I know that's a recent acquisition, almost a year. Obviously, it's of high strategic value to you. And you mentioned some of your partnerships with CareDx, the launch of Envisia. Can you give us a little bit more of a sense on kind of the cadence of those tests that are going to be launched? I know Envisia is supposed to be in 2021, but maybe give us a sense for the CareDx time line.

Sure. First, I'll just explain so that everyone is clear on the rationale behind the strategic move. I think there's been, over the last couple of decades, a lot of innovation coming out of U.S. companies, lab-based companies mostly servicing the U.S. market through a centralized CLIA lab. And it works well with these advanced genomic tests because the technology is actually quite expensive. And for a laboratory to be able to leverage the costs, you have to really run at peak capacity. And so in the U.S. market, we have no real barriers from a reimbursement standpoint or from a shipping of physical sample standpoint to be able to centralize all the testing in our CLIA labs and deliver results in a very reasonable time frame for patient care all over the nation. But as -- because of the complications or complexity of trying to do that on a global scale, many of these products have not been made available to patients all over the world, and that is the strategy that we have. We know that for physicians and patients in Germany or France or Japan, to be able to get access to this testing, it's not always optimal to take samples. And sometimes, it's not even legal to send samples back to the U.S. for testing. And then the reimbursement is often partially governmental, where governments really are very hesitant to cover testing by paying a U.S. central lab for running tests on their patients. So we determined several years ago that we wanted to become a global enterprise. We thought we had a fantastic menu being in thyroid cancer, lung cancer, in interstitial lung disease at the time. Those were great markets to expand globally, but we didn't want to expand globally until we could bring these tests to market on a platform that would be our very own platform and one that would be designed for ultimate simplicity so that we could place the platforms into laboratories anywhere and have technicians in those laboratories be able to perform these tests local to the patient. There's many benefits from that -- from just the way care is delivered, the way these kind of tests are reimbursed or not reimbursed. And lastly, it gives you a global thought leader network that really helps to drive the adoption. But the key to that kind of strategy being successful is having a platform that is -- has very large-scale capacity, which the nCounter does. It allows us to put up to 800 genes in a single test. So we're very confident that we can deliver very high-performing tests with that level of capacity. But at the same time, it needs to be very, very streamlined and very easy to operate because we don't want to have complicated operations around the world. This platform can run one of these tests with a 2-day turnaround and less than an hour of hands-on time, where today, we're running 4 days in our own laboratory and up to 30 hours of hand-on time on a deep sequencing type platform. So the platform was really ideal. And we believed at the time of the acquisition, part of the thesis was that we could now have a platform for diagnostic testing that could attract other diagnostic companies that want to be able to leverage that platform installed base and our investment in driving that installed base to bring tests out on the platform as well. And that -- we announced the CareDx deal earlier this year. Following that, we announced a deal with MaviDx to do the same thing in COVID testing, and there could be others. And at the same time, we were able to expand our partnerships in biopharma because biopharma companies want to make sure that when they are partnered up with diagnostic testing, that the testing ultimately can be made available to patients all over the world. And we believe we are the most well positioned company today now to advance this strategy. So we have Prosigna on this platform globally today. We will complement that with our Envisia classifier for IPF diagnosis by the end of 2021. We have plans to move our nasal swab test that we'll launch in the U.S. market out of our CLIA lab next year over to the nCounter for international expansion. We hope to finish the development of that by the end of 2022, so likely a 2023 commercial introduction following regulatory approval. And we'll continue to drive menu expansion on our own, through partners as it makes sense because the more menu we have on the nCounter, the more we will drive installed base. And the more installed base, the more menu will be pulled through on the platform. And it's really a first of its kind to go after the global markets that are quite huge in these indications. We're pretty excited about it.

Yes. No, that's great. And so Europe is going to be sort of your first foray into globalization. I'm assuming it's Germany and then France, I think?

Yes. Actually we brought a team from the EMEA territories over when we acquired the assets from NanoString. So today, we have about a 15-member team. We've got leadership in the Nordics, in the U.K., where we've had really great success with Prosigna. We now have a coverage decision in Germany, which will become a growth market. We're in Spain and Portugal and spans in France and Italy. We have an operation in Israel. And then we also have a network of 4 to 5 distributors across the APAC regions that give us global reach. But our investment in driving the growth of platform expansion won't come until we begin to expand the menu on the platform because that's really the key to success. You have to have great content and a reason to invest in a platform. And once we start expanding that menu, that will drive it.

Got it. So the way to think about it, as you expand the menu, you'll broaden out the sales force. So is that how we should think about sales and marketing expense globally?

Yes. I mean I think we've been able to drive to very attractive percent of revenue investments in our sales and marketing team. We just announced earlier this week a new structure that we're going forward with. I'm really excited about now that we're in 5 clinical indications and a major investment in the pulmonology space with our Envisia product going global, with 2 new products coming to market in the U.S. in lung cancer. It was really important that we bring some leadership and focus into the different clinical indications. And so we've hired a general manager, who will join us early January, Morten Frost, who's coming to us from Agilent, who will be the general manager of our pulmonology franchise; and John Hanna, who's been with us for some time, will continue to lead the Afirma breast cancer and lymphoma business. And this is just going to strengthen our clinical indication reach and our reach into our customers. And we'll align our marketing and MSLs and medical affairs to these clinical indications as well, and it'll just give us a much more powerful competitive position.