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

So in our next session, we have Veracyte, Marc Stapley, CEO; Rebecca Chambers, CFO. Thank you both for joining us. I'm Dan Leonard, the diagnostics analyst at Credit Suisse and happy to kick things off and learn more about Veracyte. Marc, I think you wanted to start with the safe harbor statement?

Yes. Thanks, Dan, and thanks for having us here today. It's a real pleasure to be here at this conference. And yes, I would like to refer investors to our safe harbor statement that can be found on our corporate website, in our corporate presentation, www.veracyte.com, to the extent we make forward-looking statements that are intended to be covered by the safe harbor statement.

Look forward to that. So before we get off and start talking about forward-looking statements, Marc, can you give us a brief overview of Veracyte for folks who aren't familiar?

Yes, I'm happy to. Veracyte's a company that is focused on transforming cancer care for patients all over the world and that's an important point, which I'll come back to very shortly. Our core diagnostic business, which represents about 85% of our revenue is based on -- it's our Afirma test for endocrinology and our Decipher test for prostate, which together account for that revenue stream and that growth. And they're based on a formula that we've applied for many years that we understand very well that works very well and that we have a tremendous experience in, in our team and that is we identify the clinical unmet needs and develop great tests that address those needs and then we develop the evidence and the KOL support and the guidelines behind that test. We have an exceptional commercial team that drives reimbursement and then adoption in the marketplace, and that helps us get to significant levels of penetration. If you just look at the Afirma test, for example, and the level of penetration that we've achieved with that test over the course of, call it, 11 years or so where the market in molecular diagnostics in thyroid cancer is over 50% penetrated and Afirma represents the market leading share. And you're now seeing us do the same -- repeat that same formula with Decipher Prostate. So that's our core diagnostic business. We also have a very rich pipeline behind that of new tests that we're developing and some really interesting long-term drivers for the business. Coming back to my point around patients all over the world, one of our core long-term growth strategies is to take these tests that we've developed for the U.S. Market in a clear environment and launch them as IVDs all around the world, starting in Europe on the nCounter diagnostic platform to which we have the global diagnostic rights. So we're able to make our tests accessible for patients in other countries in a distributed care model, and we'll be manufacturing those kits ourselves. And then one other key long-term growth driver, which I really should mention is in lung cancer, which is a market that we've gained a fair bit of experience in over the years. We are launching a nasal swab test, a truly noninvasive diagnostic test that will help physicians who are dealing with patients who have a lung nodule, determine the right path of treatment and approach for those patients, something which is very much a clinical unmet need. So a couple of really interesting long-term growth drivers.

Plenty to work with there. Marc, I want to circle back to something you said at the very start. Afirma has been on the market for 11 years, 50% penetrated, but you're still driving growth from that product, and I think you flagged it as a source of upside in Q3. How are you achieving growth on a product that would otherwise strike folks as relatively mature?

Yes. So great question. And the market itself for that test for thyroid testing, in general, is over 50% penetrated and as I said, Afirma is the leading share, we believe, in that penetration curve. And one of the reasons that it's continuing to drive growth. And in fact, Afirma just had its best quarter ever in a quarter where traditionally we see seasonality. One of the reasons we're still seeing growth is because there are still half the patients who are facing a thyroid cancer diagnosis who could benefit from a molecular diagnostic test and the evidence that's behind Afirma is significant and support utilizing that test. We've already saved over 100,000 patients from having unnecessary surgery. And so it's a continuous activity of working -- our incredible sales team working with physicians to move both, those that are not using molecular diagnostics at all to start using Afirma and those that don't use Afirma in all their cases to expand that as well. And of course, there's always the opportunity to take share in that market as well. So just continuous doing the same formula and pushing that and as a consequence, we're expecting Afirma to grow in the mid to high single digits next year.

I have a similar question on Decipher. Decipher hasn't been around quite as long, but it has been around for some time, and that category has certainly been around for a long time. So same question. You're driving growth in that product line. You flagged double-digit growth quarter-on-quarter in Q3. How are you accomplishing that?

Yes. And as you said, I mean, in the prostate cancer testing market, molecular diagnostics actually have been used for quite some time. The formula -- again, back to -- I hate to repeat myself, but back to the formula that works, the level of evidence that has been generated on our test, not just by us, but by others using our test and the constant drumbeat of that evidence development is really what's fueling greater adoption. It also fuels greater guidelines. We were really excited to announce very recently in our earnings call that we are the only gene expression test in prostate cancer to have NCCN Level 1 guidance, right? So just another example of just continuing to build upon the great evidence and support for the test. And so again, with over 25% of the market penetrated, there's a significant amount of room for incremental growth in the future, and that's what we're really excited about for Decipher.

Repetitive formulas, you're both ex Illumina, so that -- if it works, it works. How do we think about the incremental impact of NCCN Level 1 guidelines for prostate and what's the incremental lift that could deliver?

Yes we get asked that a lot and it's not just the NCCN Level 1 guidelines. I mean we've had other guidelines for our test, which covers more than 90% of indications in prostate cancer. And so we've got extensive guidelines. And I always say, I don't view one specific guideline as being something that drives an incremental either step function or exponential growth in a diagnostic test. It is the routine drumbeat that I talked about. It's just adding more and more evidence and more and more guidelines that helps drive that. So I don't think it necessarily causes an inflection, but it certainly would cause physicians who are thinking about using a test like that and may be sitting on the fence to go to the other side and start using the decipher test. Of course, it also helps competitively as well. I mean to have the only level 1 guided test. And I think when physicians are thinking about what diagnostic to use, that certainly is helpful.

And one of the other benefits we have seen is incremental payer coverage as well over the last couple of quarters. We're up to $195 million covered lives and that just augments the dynamic that Marc was referring to because you effectively have the benefit of more coverage in addition to more guidelines in addition to incremental publications, and that's just the flywheel of -- that's driving the growth for the Decipher product. And it's a rent-and-repeat type equation that, to your earlier point, we did with the Afirma, we're now doing with the Decipher and we'll obviously, hopefully, do in the future with other products.

And have you messaged what a reasonable 2023 growth assumption is for Decipher?

We have not at this point in time.

Okay. How are you thinking about the influence of COVID on the business and whether the headwinds that created in patient volumes have lapsed and whether you're [indiscernible]?

Yes, it's a great question. And I think one of the things that we all think about is not just the first order effects of COVID, but the second and third order effects, things like supply chain challenges. And to your point, is there a bolus of patients who weren't treated during those 2 years that are now coming through. And it's hard to pass all these things apart. But what I would say is on the first order effects of COVID, which in our case, and this didn't affect all of our business, but only portions of our business based on kind of the setting in which these tests are carried out. But the first order effects of patient -- physician access and patient access to the care system, that's large. It's completely, I think, largely behind us at this point. The second order effect of resource constraints in some of the larger customers, in particular, which really more affects pulmonology, more so than it does, for example, urology. That is still happening. I think that's going to be with our -- with the industry, the health care industry for a number of years. But that's clearly, as you saw from the third quarter, that's not having a huge effect on our business, and we're writing that pretty well. Then the effect of a bolus of patients coming through, there's anecdotal evidence around that, certainly in some of the indications like prostate. But I think -- I don't think that's what's driving our business, quite frankly, at the moment. I think what's driving our business is everything that we just talked about rather than that. But again, I think it reinforces the need for us to cover every indication and make our molecular diagnostics available to more and more patients.

Do you have any sense in prostate, how much of your growth is coming from share gain versus market expansion?

No. I mean it's hard to get some of the numbers, and we were recently treated to some numbers that we were able to pass apart, which actually ended up being a little lower than we anticipated, which meant that our share was actually a little higher than we thought it was. So I would say at this point, from the limited data that's available to us, we're confident in our belief that we've got the leading market share there, but it's hard to pass it apart.

And if I recall correctly, there must be half a dozen indications for your prostate cancer test. I'm sure each one of them have different levels of market penetration. Is there any one specific use case for decipher prostate, which you think has the most incremental opportunity to drive growth.

I think the opportunity really is across the board. But to your point, I think you're right at the individual indications whether you're talking obviously intermediate low, high RP biopsy, et cetera, there are different penetration levels. But as I think about -- I actually don't think about our growth opportunity in specific areas there versus others. Across the board, there's plenty of opportunity for Decipher to grow, even in the -- like the intermediate market where the penetration has been -- the market opportunity has been there for longer and the penetration you would think anecdotally would be higher.

Okay. Should we talk about bladder cancer?

Sure.

So remind us, you launched that indication or not, has the same brand name, but it's an entirely different product. So you launched that product relatively more recently, where are you in building adoption, clinical acceptance, the different Domino's that need to fall to generate revenue from that?

Yes, yes. You're absolutely right. We launched the Decipher Bladder as a test in a very limited way, very intentionally. Our Decipher prostate test is our primary focus. And as you can see, our traction is so strong. Certainly, we don't want to do anything that limits that. We also want to continue to build our capabilities in Bladder, make sure we cover the -- all the important indications, muscle invasive and non-muscle invasive and build a level of evidence that we were able to build for our prostate test and then use that to penetrate the market. So I think of the Bladder as more of a medium to long-term product versus a near term to medium term. And we're going to continue to do the necessary work around that, again, following the same formula. The Bladder market is significantly smaller than the prostate cancer market at about 80,000 in the U.S. incidences per year compared to roughly 260,000, 270,000 again in the U.S. So you can see the difference there.

Sure. Well, with that, let's talk about your Percepta Nasal swab strategy. Where are you in clinical development of that product, what's your early clinician feedback? And when would you expect -- I think you have a large clinical trial underway. That's a 2023 event. Can you just frame for us timing, anticipated outcomes, what do you think that does for the Market?

Yes. So taking a step back a little bit into -- again, I touched on this product at the beginning of my opening remarks, but to expand on that a little bit further. So again, it's a noninvasive nasal swab test that's used for patients who have a lung module. And there's a multitude of ways really 2 today, maybe 3 in the future, the patients are identified with a lung module. But I'll come back to that in a moment. This test will help patient -- help the physician determine whether to continue to watch the patient because they're low risk and no immediate concerns or very quickly accelerate those patients to treatment, which is the unmet need. So the way that the patients come into that funnel is actually ironically today, most patients with lung nodules are found incidentally compared to patients who were found by screening. 15 million patients a year should be screened for lung cancer in the U.S. alone. And it's a fraction of that, call it, 6% or so, maybe a little higher that are getting screened today. So once that patient has been identified with a lung module, very simple nasal swab, we run that test in our CLIA Lab in the U.S. and then provide result to the physician. To your point about the trial, we have -- actually, I'll take another little step back, where the test is today, it's fully clinically validated and the performance is very strong, and we've shared that data previously. The trial that we're doing right now is to achieve the clinical utility evidence that we need to get that test reimbursed and that is our Nightingale trial. It's going reasonably well at this stage. It's early days yet, but the idea is to enroll the final patient by the end of next year. And so we've got a tremendous amount of focus on that within the company right now. And the goal is to get that done. And then we'll publish -- we'll look at the data to our various predetermined interim stages and publish accordingly and then follow the steps that you go through to get publication and then reimbursement after that, which -- there's large error bars on how long those things potentially take based on previous experience.

And how would you expect the product would coexist with various liquid biopsy efforts to screen for lung cancer.

Yes, it's a great question. In fact, I alluded to, there's potentially 3 ways that patients can come into the funnel beyond just incidental findings and standard low-dose CT screening. And the third way that could happen in the future is with a multi-cancer early detection test, that finds a patient potentially positive for lung cancer. The first thing that's going to happen to a patient that might be positive for lung cancer through that methodology is they're going to have a low dose CT. I mean the image is going to be required. And at that point, that potentially feeds the funnel for a test like nasal swap because even when you've got the image, you still might need the classification that our test provides. So I certainly don't see that as detracting from the market opportunity that already exists and maybe even potentially build upon that.

Moving on, can we talk a bit more about your international strategy? We've historically noticed emerging growth diagnostic companies are mostly U.S. focused. Most of their revenue comes from the United States efforts to expand globally from the peer set, haven't always been successful. So what is Veracyte doing that's different?

Yes, we noticed the same thing. And so had a really smart strategy here of launching our tests outside the U.S. on our own platform, which is the nCounter Diagnostic platform to which we acquired the global rights that I mentioned earlier. And so we are in the -- we already have one test on that platform, which is the Prosigna Breast Cancer test, and we're selling that actively outside the U.S., in Europe, in particular. We are submitting a test every year starting in 2023 for regulatory approval in Europe as IVDs. So we're starting with our Envisia test that will be submitted first in '23, our Decipher prostate in '24, our nasal swab in '25. And we won't stop there. We can continue to grow the menu. But we believe by adding those tests to the existing Prosigna test, we create a very significant menu opportunity for our customers in Europe, in particular, initially to work with us on a distributed care basis. We'll be making those kits, as I mentioned earlier, in our manufacturing facility in France in Marseille and distributing those to our patients who will then run the test closer to our customers who will then run the test closer to the patient in every country.

And the -- I think it's IVDR is the acronym?

That's right. The new regulatory standard, yes.

So you wouldn't pursue FDA approval for the products?

No. So FDA approval would be for the U.S. Market in particular, and Prosigna already has that. And our strategy for the U.S. is to continue with the centralized CLIA Lab model. But the great thing about this strategy is we also have optionality if we need it. If it makes more sense to launch these tests as IVDs in the U.S. as well. But no, the standard for Europe is the new IVDR, and we've got a lot of experience in our team over 15 years of working on regulatory approval in Europe. IVDR is new to our entire industry, relatively speaking. But our team actually has some experience in that over a number of years as well.

I only asked about FDA not for anticipating a U.S. entry, but I had companies tell me in the past sometimes FDA approval is an imprimatur for adoption globally?

Yes, it can be.

But it doesn't sound like…

But that's not necessary for our strategy. We're going straight to IVDR, which we view as the fastest path.

Sure. And bring me up to speed on what you're doing with your biopharma partnering business?

Yes. So our biopharma business is really a combination of the 3 biopharma businesses we had in the 3 companies that we've put together here, and it's largely focused on immuno-oncology, but also using our whole transcriptome data. For example, for Decipher, we've been running whole transcript terms as we have for a firm of the years, and that's given us extensive data that's also attractive to biopharma. And so it's -- that business is now run as a single global business by one General Manager, and it's very focused on working with biopharma partners in maybe 3 primary ways. One is identifying clinically relevant biomarkers, so the very early-stage pipeline. 2 is clinical trial work and helping to stratify patients. And 3, which I think is more longer term is clinical companion diagnostics, which is, as you can imagine, very well into our business. Maybe, Rebecca, you want to talk a little bit about where that fits in our…

Yes. I was thinking just exactly that, Marc. So I think a couple of things in addition to the wonderful growth drivers that Marc talked about with regard to the biopharma business, it is important to note in the overall macro environment where we currently stand. This is probably the area of greatest risk that we have across the P&L. And I think really the way to think about this is biopharma and other is roughly 50% of the biopharma business Marc described. The other 50% is IVD contract development and manufacturing. And that IVD contract development and manufacturing is not necessarily a growth driver for the organization because those are the same resources that we're using to actually do the R&D work on our own IVD development. So I would think about that 50-ish percent as effectively being the offset for our own development cycles. And so in some years, it may grow, some years it may shrink. It's not necessarily neither here nor there because it's in the greater good of the overall strategy. And then the biopharma and other piece -- I'm sorry, the biopharma piece should absolutely be growing on an annualized basis, given it is a nice growth driver for the organization with the abstracts of the overall macro environment and the uncertainty tied to it.

The comments on the macro environment, do those reflect that the customer base for your biopharma services tends to SKU capital Market dependent, smaller biotech or?

Not necessarily. I mean, it spans the size of the bio and pharma market, I just think that we're -- I think that it's not necessarily capital market dependent. Everyone is seeing the impact of inflation and other macro trends and biasing those potentially into their budget.

You wouldn't have seen and probably wouldn't notice, if there's been any knock-on impacts from the Inflation Reduction Act on biotech appetite, that sort of thing.

No.

That's not developed in that comment? Okay.

But I appreciate the second derivative impact.

Should we talk about Envisia?

Sure.

Interstitial lung disease is not a market opportunity that a lot of folks are familiar with. So maybe the way to approach this would be to offer a quick interstitial lung disease 101 and how you're approaching better helping the patient care pathway?

Yes and it's a rare but terrible condition. There are -- it's very heterogeneous. There's a lot of different causes and effects within Interstitial lung disease, in general. And some of those causes you can figure out by looking at all the clinical factors and environmental exposures and so on and oftentimes you can't. Pathology can get you so far. And sometimes you can't even get an answer with pathology. What's happening here with these patients is there's a lot of fibrosis on the lungs, causing significant difficulty in breathing, a lot of coughing and other symptoms. And one of the most devastating and progressive diseases within the category is idiopathic pulmonary fibrosis. And getting to that diagnosis, I mean, that's why it is -- it's called what it is, getting that diagnosis is difficult. Our Envisia test uses molecular diagnostics, again, to help their physician determine whether or not they have an IPF diagnosis. And that is really important because depending on that outcome can help determine the treatment for the patient to stem the tide of further fibrosis and deterioration and progression of that patient's condition. So getting to a diagnosis is one of the most important things you can do versus not having one. We've actually also had some recent good data published, some abstracts that came out recently that demonstrated that the use of Envisia could even go beyond IPF and looking at the other causes of the conditions and the symptoms beyond necessarily IPF as well. So there's lots of opportunity, and that's more focused on progression of the disease. There's lots of opportunity here for this potential product, but again, it's a small market because it's a rare condition. It is, as I mentioned earlier, the test that we're submitting first outside the U.S., again, a small market outside the U.S., but very important that these patients have access to a test like this.

Understood. Rebecca, circling back to your comments on macro, somewhat related even if weekly. In this current macro environment, the number of companies in your peer set are trying to reduce their burn rates. Can you catch us up to speed on Veracyte's philosophy on cash usage and burn and cash generation?

Yes, I'd be happy to. I think it's an area where we're decently differentiated, if not meaningfully differentiated. And the reason for that is we have an Afirma and Decipher, 2 products that at scale -- are at scale and definitely generating a great deal of cash, which then we generate, we funnel into our investment opportunities that Marc cited, whether that be the nasal swab, our IBD portfolio, et cetera. And so from an overall perspective, our philosophy is effectively take that cash generation and balance the investment to it. Some quarters were a little bit better than that, if you will, and last quarter was one where we actually generated $7 million of cash in the quarter. Some quarters, we burn a little bit of cash. And so, I think, obviously, on a full year basis, the goal would be to balance both the generation and the investment profile as closely as possible. We do have a couple of contingent considerations associated with the prior deals that will come off in next year. But outside of those and noncash items, we would effectively expect to be cash neutral. So again, very differentiated. We could very well be immensely profitable. We have chosen to take the philosophy of investing for long-term revenue growth, but we have done so in a very differentiated way of, again, not burning significant amount of cash and even here or there, generating cash.

And remind me, no debt on the balance sheet or do you still have that $1?

We do not have the $1 anymore. It went away on October 4. So no debt on the balance sheet.

Understood. Clean balance sheet.

Clean balance sheet. Thanks for the reminder on that.

How do you think about then across the industry as you're building the company using the cash on your balance sheet, using your equity to build an even bigger company? What was your philosophical thinking on that?

Yes. I mean our primary focus is, our core business on these really important growth drivers we've talked about, and that's where we're spending most of our time and energy and resources right now. Having said that, we're -- and this -- our view on this, our philosophy on this hasn't changed. We'll always be opportunistic as well. We're not going to ignore opportunities that exist out there that might help us to continue to build the company, but the bar is high. We've done so much work in getting our portfolio where we need it. And getting our balance sheet where it is and our profitability and our path to positive cash flow generation that Rebecca talked about. But for me, the bar for something significant, I'm not talking about small tuck-in stuff, but the bar for something significant would be a clear inflection to a commercial opportunity and a path to positive cash flow.

I think the other thing that we've done very nicely historically is the Decipher acquisition, for example, and that's been in a meaningful -- meaningfully accretive driver to the entirety of the P&L for the organization. And the model that Marc highlighted earlier on with regard to the -- identifying the clinical unmet need, generating the clinical evidence, getting reimbursement, et cetera, et cetera, guidelines, that really is something that we can't just rinse and repeat over time. So if you think over many, many years, definitely nothing imminent, 100% agree with Marc's comments. We have a model here that we can deploy at the appropriate -- if and when the appropriate opportunistic times come available.

And of course, we have a lot of experience in our team as well as dealing with acquisitions and integrations, and we've done that very well.

And the common thread between Decipher and Afirma, Envisia, your other products, it seems to be that it's a gene expression algorithm-based product. Is that a coincidence or are you signaling a preference for that sort of product in the building of the company?

It's certainly a sweet spot for us, but it doesn't mean that's not all we do, and we have extensive experience in DNA-based tests as well as well as immuno-oncology. So we have quite a breadth of experience in scientifically and a lot of capabilities. So it wouldn't necessarily be a limiting factor, but it's certainly our sweet spot.

Yes, I think more about very efficient call points. I mean, both Afirma and Decipher have -- Afirma is currently in the low 50s, Decipher is in the low 40s that I think more about the efficiency of the call point and how it would work with the overall company structure.

Yes. And of course, and our opportunity to make our tests available to patients all around the world as well on the nCounter platform and that certainly matters.

Which is a gene expression?

Yes.

Makes sense. Well, with that, we're out of time. Marc, Rebecca, thank you both for joining us today.

Thanks Dan.

Thank you Dan.

Thanks for your time.

Thank you. Thanks, everyone.