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

Hey, everyone. Good afternoon. Thanks for joining us at our Healthcare Conference. I'm Tejas Savant, and I cover the Life Science Tools and Diagnostics sector here at Morgan Stanley. Delighted to have Veracyte join us today. And representing the Company are Marc Stapley, CEO; and Rebecca Chambers, CFO. Welcome to you both guys. Before we begin, just some important disclosures I need to read out. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep. Marc, I believe you want to go through the safe harbor as well.

Yes. Thanks, Tejas, and appreciate you having us here. I'd like to remind everyone that all of today's comments are covered under our safe harbor statement, which can be found in our corporate presentation on the Investor page of our website at www.veracyte.com.

Perfect. So Marc, maybe just to set the stage, it's been about sort of 3.5 months since you took the CEO role at Veracyte. Just to -- can you talk to us about what's impressed you most about the Company? And where do you see sort of the most room for improvement or progress?

Yes. So as you know, I took this position here at Veracyte with eyes wide open and very aware of everything that we had planned, and it's actually the reason that I joined the Company. We've been building a strategy here over a number of years to become a global diagnostics leader in oncology and beyond. And that's been a strategy there's been -- every couple of years, there's been like a new components to that. It started, like I said, many years ago, actually, in 2017, with the decision to acquire a platform for expansion outside the US, and in 2019, we've got the global diagnostics rights to nCounter. And then, since then, we've been working to build menu, both for the US and the OUS market. And recently, this year, we acquired Decipher with the urologic platform and portfolio. And then just recently, very recently, acquired HalioDx, which gives us a lot of benefits, but most importantly, the ability to manufacture our kits outside the US. All of that was planned, all of that was a strategy that I'm completely bought into, and now I'm really excited about being able to execute on that. Bonnie and the team did an amazing job with building a great company with a great scientific culture. I will tell you there's nothing really that surprised me. All of the things we knew we have to deal with, we still have to deal with. There's a lot of work ahead of us to build platform, to build menu on the platform, the nCounter platform, but we're well poised to do it. We have a fantastic team, a team that comes from Veracyte for many years, recently hired into the Company, or joined through these great acquisitions that we've done. So we're very well positioned to execute on that strategy at this point.

Got it. And as you look back on your time at Illumina and more recently at Helix, Marc, what are some of the key learnings from those companies that you hope to leverage at Veracyte?

Yes. I'd say, Illumina was a really great experience for me, because it was a company that -- when I joined, was in a very competitive space, in particular, around the next-gen sequencing platform. And we were able to grow that company year after year at a very, very high rate of growth due to, again, scientific expertise, good commercialization, great talented team and everything else that goes with that. So I've seen a tools and diagnostic -- a tools company grow globally. I've seen operations all around the world. And Illumina has been a key part of my experience in that, not to mention my experience with other global companies like Pfizer and beyond. And then, at Helix, the opportunity to build a COVID testing lab, one of the largest COVID testing labs in the country in just a matter of months, again, gave me tremendous experience in diagnostics, in operating CLIA lab, and doing -- getting a lot done in a very short period of time, and dealing with a lot of complexity. But that really helped me -- positioned me well for taking on this role here at Veracyte as well.

Got it. So diving into the portfolio, starting with Afirma, and Rebecca feel free to chime in here as well. You saw a nice bounce back in volumes in the second quarter. How should we think about the number of fine needle aspirate biopsies relative to pre-pandemic levels at this stage? And have you seen any sort of month-over-month headwinds, if you will, as COVID cases have spiked here due to the Delta variant?

Yes. And, Tejas, if you don't, it probably makes sense to kind of back -- take a step back into the macro level COVID environment and then how it translates out to how it affects our entire portfolio, and so I will cover thyroid in that. But if you think about COVID and the way it affects industries in general, I think there are really 3 ways -- 3 dimensions that impact a business like ours. One is are there procedures taking place in the hospitals and health systems that generates the samples for our test? Secondly, are patients going for those procedures, something I'd call patient hesitancy, in a pandemic? And thirdly, does our sales team have access to physicians to continue to drive our products and assist them with their procedures? I think if you take all 3 of those in very hotspot COVID areas where things like the Delta variant are having a really significant impact, and particularly where the intensive care unit is very stressed, you're going to see all 3 of those dimensions impacted. I think if you look around the United States, you can certainly see hospital areas where there are health systems and hospitals that have stopped elective procedures again or even inpatient procedures or outpatient procedures, particularly procedures where there might be risks that might require the ICU. And there are hospital systems and health systems that are restricting access to vendors. But when you look across where you don't have those COVID hotspots, you see very little impact. And then you've got everything in between around the country. If you translate that to our portfolio, the part of our portfolio that is mostly impacted is pulmonology. One reason for that is it's very heavily weighted towards the hospital system, in particular, in the large hospitals. Bronchoscopies are challenging procedures as well, and the physicians that are doing this work are also working with COVID cases and COVID patients. So that's the part of the portfolio that's most impacted. Next, I would focus on Afirma. Afirma is about 70% hospital and about 30% community-based. And so the community base tends not to be impacted that much at all unless specific regions or locations go into a kind of broader lockdown, like we saw last year. But in the hospital setting, to the extent, a centralized decision is made to no longer carry out procedures, that affects every discipline, including our Afirma business as well. And we've seen examples of that. There are examples of that particularly on the -- in the Southeast region and elsewhere in the US where that does happen. And then the part of our business that is not impacted much at all is very resilient to this is our urology business, whether small urology or large urology practices, it's a different system. They tend to be very focused on continuing these activities and they're not tied to the hospital centralized decision so much, they're separated from that. And so, we're continuing to see resilience there. I didn't mention our breast portfolio, that fits somewhere in between kind of pulmonology and urology, but it's also more geographically diversified for us as well.

Got it. And so just coming back to the other part of my question around just sequential trends there, is that still consistent with the assumptions that you had baked into the guide on the second quarter call? Or do you think things have gotten a little bit worse?

Yes. I mean if you look generally at the environment here in the US, there's no question that Delta in the month of August got worse, right? And if you look at the hospitals in the US and then the number of hospitals have talked about not doing certain procedures, clearly, that's worse in August than it was in July. So that would affect that -- the parts of our business that are impacted by that. On the other hand, we're managing the portfolio. And that's one of the benefits of having a portfolio of products is you have multiple products that are impacted in very different ways, as I just described.

Got it. On the lung side of the business, I mean, the expansion of the lung cancer screening guidelines were an important sort of long-term positive for the business. Adherence has always sort of historically been dismally low to lung cancer screening. Why do you think -- what's the hurdle in terms of getting physicians and patients onboard with lung cancer screening despite its demonstrated benefit? Is it just low awareness? And is there anything that you guys can do along with some of your other peers who play in this market to increase that?

Yes, I think it's a great question. With the recent changes in the USPSTF guidelines, 15 million people are now eligible for screening. And that's largely at high-risk, as people who are smokers or former smokers as well as might be those with history here, but it's 15 million people. Only a small fraction, call it, 1 million or so are actually being screened on a regular basis. In fact, more lung nodules are found incidentally than by screening. I think there are a number of reasons for that. I think one of the key reasons is many lung modules are benign, but getting to knowing that and going through the procedure, including potentially a bronchoscopy or even a surgical bronchoscopy, it's a very difficult set of decisions. And it's a lot of anxiety while you kind of work through that as a patient. I think one of the things we can do is, our nasal swab is positioned really well to help with this exact situation, because using a very simple non-invasive swap of the airway, we're able to get a sample and run it through our lab that can help classify those patients as low, intermediate, high risk, and very quickly get from, you found a suspicious nodule to you have a classification, and then that helps guide the next step. So fewer people get bronchoscopes that don't need it. And people who need a bronchoscopy get it much sooner than they otherwise would.

Got it. Going back to an earlier point you just made about more incidental detection versus screening-based detection for lung cancer, do you ever sort of envision that mix switching?

Well, it would if you had all 15 million people who were eligible for annual screening, if they were screened, then you could see that balance shift for sure, and you would expect it to. Again, it's getting those people through the door and having them screened as part of an annual program, that is the challenge. And I do think products like our nasal swab will help really drive that. That's what we're really excited about with this product, because it is very non-invasive. It does fit well into the pulmonologist workflow. And so, it's great for the US. Another point is this is a product that we can also launch on the nCounter platform outside the US. And there's as many -- there's a lot of people outside the US who smoke or have smoked who should be screened also. And so this should help drive those screening modalities internationally as well.

Got it. A couple of questions on the nasal swab. When can we expect to see additional data on the test in terms of some of the sub cohorts, if you will, size and smoking history and so on? And second, given that the test will be used for smokers, what proportion of the overall lung cancer incident population is smokers today? Do you know?

Yes. I think answering the last question first, it's something in the order of 80% to 90% is coming from smokers, in particular. And so, our testing focused on that population is really key. In terms of the data, our nasal swab, we already launched the data recently, and what that showed was we're able to identify more than 40% of people who are benign, has low risk, and we're able to identify about 60% of the high-risk as malignant. And so that's really meaningful for those who on the low side with very high sensitivity on the high side with very good specificity. And so the test is really good at classifying almost half of the patients with suspicious nodules in one of those 2 categories. Whoever's intermediate goes through the standard-of-care, which is very well practiced today. In terms of subtype data, we're going to continue to work on analyzing and improving even further the performance of the test. So we'll launch that data at the appropriate medical conferences at the appropriate time. Meanwhile, we're focused very much on the launch of the product in the market, which means gathering the clinical utility data and driving reimbursement.

Got it. Which is a perfect segue into my next question, Marc. I mean, just in terms of an update where things stand with the Early Access Program heading into the fourth quarter? I believe you talked to sort of 50 to 100 sites or so by the end of the year. So if you can just give us an update on that?

Yes. We're very focused on launching with a small number of sites. It may not be as much as 50 to 100, maybe something a little less than that. But we really want to focus on key sites that can help build the evidence that we need to drive reimbursement. And so that work is already starting. We're looking to enroll the sites very soon, then we'll have the first patients tested and results returned, and then over time, we'll build that clinical data. Our expectation is that we can drive reimbursement on this product in the 12 to 24 month time frame.

Got it. Any early discussions with payors before you enroll those sites? Or is it just too soon and there's really nothing to talk about at this stage?

Yes. I mean, it's a little too soon. I mean, of course, we can have some early conversations around the data that we recently launched and also with physicians as well. There's a lot of interest in -- coming in as one of those sites from -- provided from physician offices. So that's really where the focus is right now. We'll -- over the next 3 to 4 months, we'll certainly make a lot more progress on that.

Got it. And, Marc, I mean, coming from a company like Illumina, I'm sure you appreciate the advent of liquid biopsies. And one of the questions that comes up in the context of NasaRISK is blood draw based approaches. You've got Biodesix. And eventually, I mean, there's a possibility that medium term, some of these larger liquid biopsy companies could work on lung cancer early detection. So in that sort of competitive landscape, say, 3 years down the road, where do you see NasaRISK fitting in?

Yes. I think the way to think about any test that is being used in this way to classify patients' needs to be very high sensitivity at the low end and high specificity on the high-risk side. And so it needs to be very focused and targeted. It's geared towards those high-risk people who need to be tested or screened on a regular basis, like the 15 million we talked about here in the US. So this is the perfect test for that kind of market. It can be done in the pulmonologist office, and it's a simple nasal swap, no blood draw, which currently doesn't happen in that setting in general. So it fits really well with that specific indication in that specific location. In terms of these multi cancer tests that could be done using liquid biopsy, I think the key there is sensitivity and specificity, especially for very, very early stage. And clearly, we're focused on that on early-stage cancers with our nasal swab. But that could also feed the funnel. I mean, that could feed the funnel of people who then need to go and have a very specific test for, say, lung cancer. And so that's one way to think about that, I think, in the 3 to 5 year timeframe.

Got it. On Envisia, can you just provide us an overview of the treatment landscape for IPF? Does most of the diagnosis there happen in specialized institutions, or is it more in the community setting? And on a related note, how much of a gating factor to sort of broader Envisia adoption is the fact that antifibrotics on the market today aren't particularly great?

Yes. I think it's -- well, it is both community and hospital specialized settings. This is a very specialized disease, very heterogeneous disease, with hundreds of potential causes and incarnations. And it's very difficult to diagnose. And so, one of the things that we've done with the Envisia test is provide, like the nasal swab, an additional toolkit for the pulmonologists to be able to diagnose their patients more effectively. There are treatments and using the treatments when they're not appropriate can be very challenging, and not using treatments when you should, as you would expect. So getting to an accurate diagnosis to help guide treatment decisions is very, very important. So I think our test is very good at that. It's very early on. The market penetration is very low. And COVID clearly hit that franchise as much as any of our lung products have been hit. So what I'm looking forward to is when we get out of the woods on COVID, really helping to drive the adoption of that product across all of the pulmonologists that should be using it and would like to use it.

Got it. Shifting gears to urology and bladder. There's a number of prostate cancer sort of test available, there's Prolaris from Myriad, the Oncotype by Exact. How do you see Decipher solution as differentiated? And what features do physicians point to more soften when choosing to go with Decipher?

Yes. It's -- so Decipher is a really good test. I think that's first and foremost, what you need is a test where the performance is strong and physicians are confident in the results. And so, that's the first part. The second part is you need a test that's easy to use and a company that's easy to work with and a report and a result that is delivered in a way that makes the physicians life easier. You also need reimbursement, with roughly 140 million covered lives, and growing, for Decipher and that certainly helps take their reimbursement challenges out of the physician's office where they don't really want to be. I think the other thing is we run an entire whole-transcriptome with our Decipher test. And so that gives us additional data, and this is an important point. A lot of our physicians, actually a surprisingly large number of our physicians, do like to receive that additional data, and that's our GRID product that enables them to really analyze on a patient-by-patient level what's going on with a very personalized medicine approach. And so that's really helping to drive our Decipher product.

Got it. And on bladder, you got the final LCD in place now. Will you speak to the commercialization plans there? I think you've mentioned sort of leveraging the existing urology sales force. But what's the size that you need? And do you have any plans to expand that sales force?

Yes. We have a really good sales force, and we've got all the territories covered that we need to. There's roughly 35 or so of our sales team working on this right now and growing -- we're growing that on a regular basis. The -- to your point, it is the same call point, it's urologist office, and our same sales team can sell bladder to those same physicians. It is a very staged rollout for us, as you would expect with any new product introduction, especially where you have momentum in an existing product, you don't want to get too distracted. We've got to train the sales team. We got to do a lot of things within behind the scenes within our company to be ready for the actual full commercial launch. And so it's very measured and very tactical. And so, we're looking to really drive that in the early part of next year.

Got it. What do you think is a reasonable steady-state growth rate for Decipher when some of these payor decisions anniversary out? That's a question that comes up fairly often, because they achieved a lot of progress right ahead of the deal close, if you will, and obviously now on bladder as well.

Well, there's very little -- I'd say, the market penetration so far is in the mid-teens for these tests for prostate in general. And so there's plenty of opportunity for the Company to grow. We acquired Decipher when we did because we saw the company at an inflection point. Some key reimbursement decisions had been received at that time. The sales team had been built. The product was ready to launch in fully. And I think the performance has demonstrated that we were right and that's what's happening. So continuing to grow the market penetration and share for our product is really where we're focused right now.

Got it. Switching to nCounter, I mean, before we get into the weeds, what's your take, Marc, on customer appetite for a kit-based solution? We've seen sort of many companies in the diagnostic space try to go there, especially OUS, and then after scale back or even abandon their plans in favor of tech transfer, standing up your own lab or what have you. Why do you think this time will be different?

Well, I think people have tried to operate both a US CLIA lab-based model where samples come here to the US, and building the CLIA lab model and replicating that outside the US, and both have proven to be very challenging. The model that we know works is the platform based model with a distributed kit. And that's why we acquired the rights that we did to the NanoString platform, and that's why we're building menu. Now menu is important. You're not going to place a lot of instruments with a single test. So our existing breast cancer test Prosigna is available on the platform already. We've demonstrated clinical validity for our Envisia test. We will be working on the prostate test, and we'll be working on the nasal swab test. Now we can go broader than that, but those are the first 4 indications that we want to be able to launch with -- as our menu for Europe. So we're currently working on the time frame and the product plan for building out those products on the platform, and then the full commercial launch.

Got it. And, Marc, I think it was in the last earnings call where you spoke about sort of revisiting nCounter launch priorities. Can you just elaborate on that? Was that comment sort of related to the sequence in which you're going to roll this out, or the time lines for certain products?

Yes, it is. It's really the time lines and the order in which we launch those 4 products, the extent to which we parallel process that versus going serial, they're all the different stages. But another important dimension to that is the manufacturing transition, transitioning the manufacturing of kits to our facility in Marseille. We have 15 years of experience in doing exactly that. So we're working on that right now. Bonnie is actually leading that activity and driving that program. And so what we're doing is revisiting all of that in order to optimize launching the test where we can gain the greatest penetration fastest, soonest.

Got it. Are there any sort of -- in this -- as you look at the menu, I mean, do you view anything as a killer [ app ], I mean, for the platform?

Well, I do think nasal swap. I mean, if you think about the long-term growth of Veracyte, both in the US and outside the US, so 3 years and beyond to 5 to 10 years, I think nasal swab is a really exciting product that you should get broad penetration over that time frame. I'm also really excited about our existing products. Prostate, like I said, is very under-penetrated here in the US, and we launched that product outside the US, then you add to that, the rest of the urologic platform, bladder and renal as well. And then, of course, I'm still very excited about our thyroid products. And then finally, just our lung portfolio in general, clearly, as I said, impacted by COVID, but once we're out of the woods, I'm excited to see how that entire portfolio, which is our broadest portfolio with test in cancer and other lung diseases and tests for diagnosis and prognosis. I'm excited to see how that performs in a more normal mode of operation.

And do you view the nasal swap as the killer app even for the nCounter strategy, Marc?

One of them, yes, I do. I mean, we will be able to launch that product on the nCounter. And I do think it's going to be one of the apps drives adoption. But again, I still think it's menu, right? It's breadth of menu as well as -- that one test on its own wouldn't be enough, it's putting multiple tests, and we won't stop before putting multiple tests on the platform.

Got it. Over what time frame do you see gross margin starting to see benefit from HalioDx?

Rebecca, do you want to take that?

Yes, I'm happy to take that. Tejas, it effectively will be highly dependent on volume and will be closed manufacturing transfers. So if you assume 18 to 24 months for manufacturing transfer and then a period of time just to get volume ramp afterwards, that's effectively what you can expect it. So later in the 3 to 5-year time frame.

Got it. And when do you expect to start putting in some commercial firepower behind the nCounter rollout, Marc? I mean, is that something which you're going to wait for a couple of years and then have the menu sort of more fully built out, or could it come sooner?

Well, we do have commercial firepower and big commercial firepower behind our breast cancer test Prosigna today. We got reimbursement in Germany, and there's other countries to follow suit. And so we are spending time driving that. But really, where we'll inflect that is when we have the menu. So once we have the menu, we want to drive placements and reimbursement, that is when we'll obviously build a greater sales presence.

Got it. Rebecca, I want to go back to you on that sort of $204 million guide that you had laid out on the earnings call. One of the things you talked about was you were not baking in a significant surge from the Delta variant, but you were baking in sort of a slower recovery on the lung cancer side or the lung -- the pulmonology side of the portfolio. And you were also excluding HalioDx as well as the Decipher Bladder launch. A lot of moving pieces there. But where does it all net out today as things stand?

Yes. I would love to answer that. We're not in the habit of updating guidance intra-quarter. So I'm not going to start today. Just one correction, though. We did include bladder, we just don't expect revenue -- material revenue from bladder.

Got it.

So just one clarification. But we'll be happy to update you in early November on our earnings call when we give our Q3 results and our Q4 guide.

Got it. Fair enough. Marc, maybe just to wrap it up here, what part of the Veracyte story do you feel is least appreciated by investors today?

Yes. I don't know if it's least appreciated. I think investors quite rightly look at the complexity of the business relative to where it was, and that's a very real thing. But we have a very strong team, an existing team and a new team that comprises new hires as well as people from the acquisitions, talent from the acquisitions, which we've been able to retain. And so I look at it, I see we have a team that is very capable of dealing with the complexity that we have relative to where we were. Relative to other companies, our complexity is not that different. So I think try not to over rotate on that. We know what we've got to do. We know it's complex. We know -- but it's execution, and that's what we're very good at. Even if you go back to the beginning of Veracyte and the execution of Afirma, that one test, the Company has some very strong muscles around execution of launching diagnostic test. And then just look at how strategy has played out and how every one of those steps was both planned and then thoughtfully executed over a long period of time to achieve a global strategy. And that's Bonnie and the team that has done that. And now, Rebecca and I, and others, including the team that are already here, get the opportunity to go execute that and make it a reality, and make it happen even beyond what was already achieved.

Got it. That was a great overview. We covered a lot of ground in 30 minutes, guys. So thanks so much for joining us this afternoon. We appreciate it. And hope you have a productive rest of the conference.

Thanks. Thanks for having us here.

Thank you, everyone.