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

Hello, everyone. Good afternoon. My name is Tejas Savant. I cover life science tools and diagnostics here at Morgan Stanley. It's my pleasure to host Veracyte this afternoon, and representing the company, we have Marc and Rebecca, CEO and CFO. It's great to have you both. Before we dig into questions, quickly the research disclosures. Please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep.

Right. So Marc, maybe just to start, you've been about a year in the hot seat now. What do you view as Veracyte's key accomplishments over the last 12 months? And what are you most excited about heading into '23?

Thanks, Tejas. Thanks for having us here today as well. Appreciate it. Before I dig into answers, just a reminder of our safe harbor statement, which can be found on our website at www.veracyte.com in our corporate presentation. And to the extent we make any forward-looking statements, they are intended to be covered by the safe harbor. So thanks for your question. Yes, it has been a year and a quarter now that I've been here at Veracyte working with Rebecca and the rest of the team. And the accomplishments are many and varied. I mean if you think about over that time, we've put together 3 individual companies very successfully, created a leadership team. There was a combination of leaders from each of those companies, plus new leaders that we've hired into the organization. We've continued to drive our existing products, Afirma, Decipher and really make them successful in the marketplace -- continue to make them successful in the marketplace. And we've been working really hard on our IVD strategy outside the U.S. and have announced in that time that we're going to launch 3 – or met 3 products for approval in Europe in '23, '24 and '25. We continue to validate our Percepta Nasal Swab test and produce more data on that test. And we've kicked off the significant clinical utility trial for that as well. We put together 3 biopharma businesses into a single business with a single leadership. And anything I'm forgetting. I think those are -- we've already commenced our manufacturing transition to Marseille with the first wave of that already completed. So many things accomplished in that time by our team, and it's impressive, and I'm proud of the work that they've all done.

And do you want to address looking into '23?

Sure. Would you?

Yes, I'm happy to. So looking into '23, obviously, we have Decipher is a very nice growth strategy. And so obviously, it is in the earlier stages of penetration compared to our Afirma test. And with around 25% penetration for Decipher as well as the broad urology market, we're excited to continue to see very nice growth of that. In the future, we think we're still early enough in the penetration curve that there's ample room for continued growth there. We also are very excited about our biopharma portfolio of products that Marc mentioned as well as continued growth of the Afirma franchise of mid to high single-digit growth next year. So when we look into '23, I would say those are the revenue drivers. From a catalyst driver, the nasal swab clinical utility trial being enrolled by the end of next year as well as the submission of Envisia for the first IVD product would be the qualitative catalyst that I would point to.

Got it. That's actually helpful. And we can dig into each of those products, guys. Maybe starting with Afirma, a couple of questions there. Rebecca, you just mentioned mid to high single-digit growth in '23. Is there any -- what would drive the difference between, let's say, sort of mid-single-digit growth versus growing at the high end of the range? And is there anything you can do to sort of, I guess, drive a second leg of growth there, either from a sort of incremental innovation standpoint or perhaps a commercial infrastructure standpoint?

Yes. Maybe I'll start by talking a little bit about Afirma in a broader sense, and then Rebecca, you can dig into the growth potential there. But if I think about Afirma, remember, it is the first test that we launched at Veracyte. And it addresses a very clear clinical unmet need of patients with potential thyroid cancer and being treated surgically. And through the use of Afirma, we know we've been able to avoid surgery and surgical treatment for well over 100,000 patients, which is really important. So it started us on that path of addressing the clinical unmet need, fitting in with the physician's workflow, gathering the evidence to support that test, getting it reimbursed. I mean it's over 93% covered. The market is over 50% penetrated for these types of tests of which we believe Afirma has the leading market share. So the product is continuing to grow, as Rebecca already mentioned, the growth rate for next year. And then I'm especially proud of that Afirma team because this last quarter, we were thrown in a curveball being a supplier challenge that our team was able to significantly mitigate so that most importantly, our patients were able to continue to get the Afirma test when they needed it.

Got it.

And to address the comment on growth, I think one of the things we've highlighted impacting Afirma growth in 2022, not only the supplier impact that Marc mentioned is the ASP with regard to the code change. And so when we look to next year, both of those impacts shall abate and we can go into why, if you want to go there or offline. But -- so we obviously have the benefit of the ASP impact abating. We also have continued volume growth. Where you end up in the mid to high single digits, I think there's more goodness and badness, right. So I don't think there's necessarily one bespoke item that pushes you one way or the other. We are obviously always continuously investing in our products, whether that be Afirma, Decipher, the earlier-stage products. This will manifest itself through new product enhancements for Afirma over the next couple of years as well as new customer experience or beneficial customer experience that will be rolled out over the next few years as well. So I think that's -- when we look at how are we going to continue to penetrate this very penetrated market, those are the types of investments that we're making to ensure we're getting that long tail of physicians to use the test.

Could you guys help contextualize that 50% number? Because it's sort of like on the one hand, yes, it's highly -- its glass half full or its glass half empty, right, because half the market is still to be penetrated. So maybe from an industry standpoint, Marc, if you can share some sort of context around 50%?

Yes, and it's really -- because Afirma has kind of set the stage here, right, and it's been on the market for a long time and it's still growing. So when you look at it, you're never going to get to 100% penetration. There's always going to be that long tail of physicians who never will use a molecular diagnostic or it's not frequent enough in a particular year to really make sense for them or for us. And so it's hard to say where it is. My personal opinion, and this isn't a guide because I really don't know. But I think it wouldn't be unreasonable to assume these tests could get to something like 70% penetration. That should certainly be a goal that we should be thinking about. And so that means continuing to get -- to enhance the product in the way Rebecca said, make it easier for physicians. I think we're where we need to be on evidence development and reimbursement on this product. So it's really just continued steady growth in that long tail of the market.

Got it. And can you walk us through what you're seeing in the hospital and physician setting for Afirma today? I mean -- and what exactly the split is? Have things sort of largely normalized in terms of access?

Yes. And I mean it really varied across our portfolio for us. As we talked about, we saw very little impact in urology because of the way those businesses or those systems and hospitals and so on and lot of this was setup. We saw the greatest impact in pulmonology, as you would expect. That shouldn't surprise anybody. And then Afirma was somewhere in between. I'd say this is largely behind us now. The trailing impact of COVID and everything that it caused is more in the second order effects, more around resources, not having sufficient resources at the large hospitals to be able to do procedures at the pace that they used to be done, for example, or to support the test in those procedures. So I think that's more the effect. But even that is much less than it ever was. Well, so I'd say the resourcing issue is less than the access issues were during the height of COVID.

And it's been like this for a couple of quarters for us. Obviously in any given quarter, you'll have periods where there are challenges. But if you look at Afirma specifically, over the last 3 to 4 quarters, we feel like we're in a relatively normalized environment. Same with Decipher, obviously pulmonology is a different conversation.

Got it. And so that was actually a nice segue into pulmonology. What's the feedback, Marc, on the early rollout here? And how are you thinking about timelines for reimbursement for the nasal swab?

Yes. So, let's -- maybe if I can just take a step back and talk a little bit about nasal swab in general and how the market looks for that. And really, the best way to do that is to start with the patient workflow and how that's going to play out, and then we can talk about the trial as part of that study that we're doing. But if you think about the patient workflow, there are really today 2 ways that a patient comes into the workflow for our nasal swab and that could be 3 ways in the future, and I'll get to that in a moment. The 2 ways today are incidental findings. So a patient is identified with an incidental lung nodule through some incidental pathway that they didn't go in for screening or testing for that. And that's about 1.6 million patients in the U.S. today. The second is screening. So there are 15 million people eligible for lung cancer screening on an annual basis, only about 1 million of those getting screened regularly, a subset of whom will have a lung nodule that needs further workup. So those are the 2 pathways today. In the event that there's multi-cancer early detection of a paradigm, and that's the question. But if there is in the future, then that might actually enable patients to come into this workflow who are in the healthy population. So not the high risk 15, but the other couple hundred million of people in United States for example, if they get a multi-cancer early detection test, and it shows our potential risk of lung cancer, we believe the first thing that will happen is they will go and get a low dose CT because that's needed for further workup. And so if you think about it, that's a potential third way for patients to come into the workflow and they'd be treated very much like a screening or incidental finding at that point. We believe that once those patients have been identified with a lung nodule, whichever pathway they come in, the nasal swab in the majority of cases will be the appropriate test to use as part of the workup for that patient alongside the low-dose CT. Low dose CT has shown through the NLST trial over 50,000 patients in 10 years, a mortality benefit. So you've already got that benefit demonstrated from that test. It's highly sensitive, but not as specific and so nasal swab really helps the physicians to classify their patients as low risk and being able to avoid further procedures and high risk and accelerated path.

Got it. So 2 follow-ups there, Marc. One, I mean, do you envision a world in which both the nasal swab and the genomic classifier can coexist as part of the patient journey. And then second, as we think about some of the data at ESMO basically from PATHFINDER, which came out where folks after the blood positive got imaging and then imaging positives essentially had an invasive procedure. I think the number was something like 80% of the true positives went down that route. Is there a physician education sort of component to this in terms of where you fit into this new paradigm?

There's always a physician education component. I think it really answers both of your questions. I think there is a world where these things can coexist. The way we look at it is the nasal swab is important as a tool at the same time as that imaging is done. It's not a confirmatory thing. It's not do the imaging and then use nasal swab. It's use nasal swab as part of the workup paradigm for those patients and always there's physician education. In terms of the pulmonology example that these physicians tend not to use molecular diagnostics today, what's great about a nasal swab is it fits in their workflow. They can do it in their office at the same time as looking at the imaging results. And so it just fits perfectly and you don't have to introduce a whole new paradigm in the workflow for those physicians. So we'll continue to educate. The Nightingale trial that I'm happy to talk about is a part of that. And then that helps drive KOL support as we publish clinical utility data.

And to the first portion of your question with regard to Percepta GSC, that's what you're referring to, correct? And whether Percepta GSC and nasal swabs can exist together.

Yes.

So I think it's a very fair question, and we over the last, call it year, year and a quarter, have been going through an entire portfolio analysis, you've seen the impact of some of those decisions, whether it be immuno score or the commercialization approach with Percepta Genomic Atlas. The final step and the third step in that portfolio analysis has -- is around Percepta GSC. So over the last few days, we have made the decision to effectively lean out the sales force to be focused only on Envisia. So we've moved the sales force to be around 20 people focused on Envisia. Envisia is mentioned in guidelines and it also is very critical, both for patients of what is effectively a rare disease as well as for our U.S. and OUS product strategy. And so for both the company and a patient perspective, it is a very critical test. So those 20-odd folks will be focused on Envisia as well as the nasal swab activities. The investment that we were making in the Percepta GSC sales force is going to then be funneled into the cost of the clinical utility study and other things in support of nasal swab given that is the real huge opportunity ahead of us. And so could they exist absolutely together, there is -- but the portion of patients that were appropriate for Percepta GSC was already so finite. It wasn't necessarily -- and we'll continue to have it available. We just won't be proactively selling it. So hopefully, that addresses it a couple of kind of PSAs are tied to that. We had contemplated this decision and our guidance that was made or given in early August and the amount of revenue that Percepta GSC currently is around 1%. So it's not a huge headwind to next year, but it is something to be cognizant of.

And I think -- yes, and thanks, Rebecca. And I think important to point out, I mean, as far as our portfolio work, which we've been doing for a number of quarters is concerned, this is the final step. And the other products that we have, we have a broad and deep portfolio of products at that early stage of development that will help fuel the coming -- the future, including the things we've talked about like nasal swab and also our 3 IVDs that we're developing on the nCounter platform as well as Prosigna and as Rebecca mentioned, Envisia and Decipher Bladder and so on. So it's -- this is that final step. I think to maybe spend some time on the Nightingale study because as Rebecca said, this enables us to really focus our investment on that, which is the most important thing we can be doing right now for our nasal swab product. We're enrolling patients over the course of the next 18 months with our goal being to enroll the final patient by the end of next year. There will then be some follow-up on those patients to follow up to the clinical outcome. Guidelines suggest that the standard care -- standard approach there is 2 years. We're going to take some interim looks at the data along the way here that are structured and measured and preplanned, and the expectation or hope that, that enables us to be able to publish clinical utility data sooner than that. And then obviously, it's down to MolDX and the response there. But our goal is to put out clinical utility data through the Nightingale study at the earliest possible opportunity and use that to drive reimbursement.

Got it. Makes sense.

On the clinical linchpin to commercialization.

Right. On Envisia, Marc, you recently had data at the European Respiratory Society. And can you just walk us through how that data supports Envisia utilization, and how do you think about the opportunity over the medium term given the relatively limited sort of therapeutic options available to IPF patients?

Yes. A couple of things on Envisia. Remember, Envisia is for those, as you said, those -- it's actually for interstitial lung disease patients, and it helps identify IPF based on the UIP pattern. And so it's a really important product for a kind of a rare disease group of patients, if you think about it like that. And we're continuing the formula of evidence development. We got some really good discussion around Envisia in recent guidelines that we believe were very favorable in the U.S. The product will launch outside the U.S. We're going to submit it in '23 for coverage outside the off -- IVD outside the U.S. And so it's really important to get it in the hands of physicians around the world, and then we would expect to see even greater guideline inclusion. Now specific to the ESMO -- the ERS data, I'm sorry, the -- that data actually helped to demonstrate that Envisia could be used even more broadly than for just IPF. So it can help really look at the prognosis and ultimately drive treatment, whether you put these patients on a specific course of treatment that may or may not be harmful for them for a broader group of patients. So it's just, again, a continuation of the formula that we've established, and we're very good at of generating evidence using that to broaden indication.

And just one thing to add, and given the patient size in the U.S. of around 100,000, this is a critical product for the reasons that Marc stated, but isn't necessarily going to be a meaningful growth driver on the top line given where we are from a revenue basis on a total company average. So absolutely critical product. But as we think about -- it's additive to the growth rate, but it's not going to move the needle.

Got it. Fair enough. On Decipher, Rebecca, I think you mentioned about 25% to 30% penetration for the market as a whole. Do you think Decipher is now a shared sort of leader in that 25% to 30%?

Yes. And we had given 30% on our last earnings call. That was before the Exact news of the sale of the Oncotype. Once we had that number, we had overestimated that number in the 30%, which is how you get to the update of 25%. Market information is always helpful in doing these things. It was 27 minutes before our earnings call, so we couldn't update it in time. But nonetheless, we absolutely believe Decipher is in the steep part of the curve, if you will, in terms of penetration. And we are -- I think it's by -- very confident that we are leading that market, especially with the information provided by one of our competitors. So we don't have perfect information with 2 out of 3, but we are very confident that we're leading that market.

Got it. And how are you thinking about the growth in terms of share gains versus just increased penetration?

Both. I mean, both are important. And we believe we're getting both. I mean we have to the market 25% penetrated. I refer you back to our earlier Afirma discussion I mean we -- clearly, this product should get to Afirma levels and beyond because it's demonstrated so much clinical utility for men with prostate cancer. And so really, this product should be used. It's going to be submitted on the nCounter in 2024. So again, it's going to be available to our patients and our physicians outside the U.S. where we believe there's a pent-up demand. We're also continuing, again, similar to the Envisia discussion to had indications. We just recently had some great data come out at ESMO that really showed the utility of Decipher Prostate for those high-risk localized patients or patients who are metastatic.

That's the STAMPEDE study?

Yes, exactly. And the metastatic patients are the ones, the 7% that's not covered in the 93% that we have today. So again, just broadening that test and demonstrating utility for every patient.

Got it. And then Rebecca one for you on just comps for Decipher. I mean it's -- are there any particularly meaningful payer decisions to keep in mind as we think about growth next year? Was there a sudden bolus for a particular payer coming through at some point this year?

Yes. It's hard to parse out specifically. I would say over the last 4 to 5 quarters, not only payer decisions but also added addition to guidelines have been beneficial. So I think when I think about Decipher, not necessarily commenting on the growth rate being stagnate, but again, the slope of the curve being in that steep section, I think the goal is -- and what we're doing is just building the momentum behind the product with whether it's through payers, whether it's through data, whether it's through incremental outreach. And so yes, in any given period, you might have a challenging comp, but you can't pinpoint it to one of those 3 things.

Got it. Fair enough. Marc, going back to your comments on biopharma and walk us through how you're thinking about the Atlas product that you showed at AACR earlier in the year. Just an overview of the platform and how you envision this plugging into drug development for your customers?

Yes. I'm really excited about the biopharma portfolio, which, as I mentioned earlier, is the result of putting together our 3 individual biopharma businesses. A large portion of that is based on our immuno-oncology expertise, but also we can leverage our whole transcriptome capabilities and the data that we've generated over 350,000 data points over many years of real-world data. So it's really exciting to see what we've been able to do over the years, including in the companies we've acquired, is build these assays that can be used off the shelf, they're proprietary, but we've created them by our biopharma customers or customized, extensively customized for our biopharma customers. So whether it be our Immunosign assays of which we have a couple of Brightplex assay, our Immunoscore IC, which we talked a lot about at ASCO, that assay, Immunoscore CR, which is our research product, we can -- or any other custom assays. We can put these together and answer specific questions that our biopharma partners are looking to answer. The Atlas is a way of getting all that genomic and immuno information together with clinical information and either creating, as we've done many times before, a proprietary assets for our customer or as we're now doing, launching one that can be used by multiple biopharmas by subscribing to that. An example of how this might be used is if you look at the recent publication in nature with Kai and how we were able to use our assays to demonstrate a benefit of biomarkers to CAR T-cell therapy.

And could that, at some point, come with meaningful milestones, Rebecca?

It absolutely comes with meaningful revenue. I wouldn't necessarily call them there will be a portion that will be milestones, but the majority of it will be ongoing running of sample revenue, which is what you're seeing in the biopharma and other line. That line is actually -- that revenue line is made up of 2 components of our business, biopharma, obviously, and then contract IVD and manufacturing. And so that is less about milestones these days and much more about actually running samples or manufacturing samples.

Got it.

And just to round it out, I mean, I'm excited about the growth opportunity for biopharma. I think we're doing very well there, but there's opportunity that's greater than it's untapped. And I know there's a lot of people competing in that space, but we've got some very unique differentiated assets.

Got it. Turning to the nCounter opportunity, Marc. How are you thinking about the pace of the commercial build-out there as you, I guess, in tandem with the menu expansion effort?

Yes. And this is a very unique part of Veracyte's strategy to have our own platform, the nCounter diagnostic that we're going to be able to launch test on. We already have the Prosigna breast cancer test on that platform. And that actually helps answer your question around the commercial build-out. We have the commercial teams, including sales and market access and country managers in the key countries where Prosigna is currently being run. And so U.K., France, Germany, Sweden, et cetera. And so as we add menu, then that drives greater placement and most importantly, utilization of kits. So as I mentioned before, we're adding Envisia -- we're submitting Envisia in '23, we're submitting Decipher in 20 -- for prostate in '24. We're submitting nasal swab in '25. So at that point, we'll have 4 very important tests on that platform. And so you can kind of see the potential for how that opens up many doors for conversations with labs all around the world to adopt our platform and our tests outside the U.S.

Got it. A quick snapshot of the installed base in Europe today. And as you look at the mix of customer sites, reference labs versus hospitals that run Prosigna, what does that look like?

Yes. And we don't really even think about it in terms of the current installed base or the customer mix because remember, it's just Prosigna. So really, it's about building that menu, making that available, increasing the installed base, but mostly increasing the pull-through. But going country by country, getting reimbursement and getting the test in a number of labs in those countries, and then they will run that tests for their patients.

Got it. One of the other things I wanted to get into was the value proposition of nCounter, particularly in the context of sequencing prices, including from your former employer coming down significantly or set to come down significantly here. How has the dialogue changed, if at all, with some of these clinical labs who want to capture the diagnostic revenue piece?

Yes. I mean, remember, our strategy is we run our tests in CLIA Lab in the U.S. and then we use the platform outside the U.S. As far as within the U.S. is concerned, we will use -- we use whatever platform makes the most sense for our tests. And today, that's clearly Illumina. And I think that's -- they've spent a lot of time working on the clinical robustness, and that's important to us. And so -- but I think it's important to remain flexible there as anybody would in our space. Outside the U.S. with the nCounter, that's clearly where we're putting our investment. That instrument is ideal for the tests that we launch in our CLIA Lab, the process of taking them and porting them to the nCounter and then kitting that and making that available. Because of the work we've already done in the U.S., scientific work and evidence development, that's why we, which is very unusual, are able to launch 8 new tests per year over the course of 3 years.

And just in the interest of time, I think it's important for us to touch on profitability and our unique differentiation for profitability. So I wanted to squeeze that in. I think when we look at our peers, obviously, this is a very early stage growth industry, and we're no different in the ability to grow revenue quite nicely. The uniqueness of Veracyte is that we also are not burning an immense amount of cash. And so when we think about our business, we're really working on balancing the scale between highly profitable products like Afirma and Decipher and investing that into the earlier stage growth. So we have $164 million of cash on hand. We absolutely have enough cash ex M&A to go to profitability, and we will be working on balancing that, so that the burn here is quite minimal.

Got it. And that's actually a perfect segue into my last, last question on M&A.

I know that was.

Marc, just curious as to your thoughts on potentially expanding with something on the kit side versus other risk stratification assets that you could plug into the platform? Do you have any preferences or is there [indiscernible] direction, which would make more sense for you guys?

I think, in general, we're driving a strategy that's very clear and very differentiating for us, and that's launch more tests that answer very specific questions in the U.S., and our investment in nasal swab is a perfect example of that. Then launching our tests on the nCounter and making them available to patients all around the world and the 3 kits we talked about, the 3 tests we talked about are great examples of that. If you look at some inorganic opportunities, I think the bar is very high. I mean we've got a lot of products in our pipeline, as I mentioned earlier, that are at the early stage of launch, evidence development, market development, et cetera. And then we've got 2 products that are very, very profitable. And then we've got our biopharma business and our IVD services business in between. I think for something to really make sense to us, we would have to really make benefit our current cash flow model and the outline that Rebecca talked about there, so...

Great. This is a great overview. So thanks so much for spending the time, guys.

Great. Thank you.

Thank you.

Appreciate it.