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

So thank you for joining us today. My name is Lu Li, and I'm part of the life science team at UBS. So we are very pleased to welcome the team from Veracyte today. On the stage is Marc Stapley, CEO; and then we have Tristan Ribar from the finance team as well. Well, Marc, Tristan, welcome.

Thank you. Thanks for having us.

Great. So I just said before we get to more the business aspect, maybe just like give us a little bit the hot key highlights from the Q3 earnings last week.

Yes. Thank you. And before I get into that, maybe I should just remind everybody about our safe harbor statement. To the extent we're making forward-looking statements, they are intended to be covered by that statement, which is available on our website, www.veracyte.com. So yes, thanks for having us, and thanks for bringing up Q3. Q3 was another fantastic quarter for Veracyte. We talked a lot about our -- the growth of our core business which is driven by really two tests, our Decipher prostate test and our Afirma thyroid test, both of which grew fantastically in the quarter, and we delivered strong testing revenue growth. In addition, one of the things I'd also like to highlight is that the -- we delivered an adjusted EBITDA margin of 24% in the quarter, which really did exceed our expectations. I think many investors will know a while ago -- not that long ago, I talked about a company of our type in our industry should be able to get to a 25% adjusted EBITDA sustainably we're clearly heading towards that, not that [ 24 ] sets the new jumping off point. So I'm very, very proud of what our team has done to deliver that performance in the quarter and I couldn't be happier with the outcome. Happy to dive into those core products and also talk a little bit today about some of our long-term growth drivers. The way we articulate that is those core products are Afirma and Decipher really driving the growth for the foreseeable future, up to and beyond the S curves of those long-term growth drivers coming in and also participating.

Yes, yes. Definitely. Before we talk to you like Decipher and Afirma, so you recently decided to write down Envisia. So wondering if the whole portfolio realignment largely completely right now, and then you can like basically allocating the resources to the high-growth areas that you mentioned.

Yes, it's a great question. And one of the philosophies that we've always had in the time that we've been here at Veracyte is to really focus the company on the things that are really going to drive the business and move the needle. And so we talk about five strategic initiatives that we're focused on, which I know we'll discuss today. As part of getting to those five core focus areas, and by the way, it's not just a financial driver to get there. Of course, that matters. But just employee resources management time, focus really matters. And I'd like to execute those five things really well than try and do a dozen different things and not do so well. So focus matters. So we've looked at the portfolio, we've gradually over time, addressed areas where we didn't see the ROI coming or there was too much investment required in order to get to larger penetration and/or reimbursement. And so Envisia was another step in that activity. Envisia is a great product. It's a terrible disease, interstitial lung disease. It does help, but it's very low volume. And requires quite a lot of investment to get to a future growth. And so what we've decided to do is pause that. I would never say we're done. There's always things that we're looking at that we need to continue to revisit some parts of our business, while I said the core business, which is 90%, 95% of our revenue is going really well are some parts of our business are not going as well. And so we always have to look at those and make the appropriate investment decisions. But we've certainly done a lot so far, and I'm very proud of what our team has been able to accomplish in the portfolio.

Got it. So switching to Afirma. So the product is relatively more mature at this point, 60% market penetration. And -- but you expect that product to grow at high single digit in 2025. So maybe can you just unpack a little bit the assumptions behind it, like how much coming from volume, how much coming from pricing? And it sounds like the right rate that we should think about it for like a long-term perspective?

Yes. Afirma, as you mentioned, it has been on the market for quite a while, over a dozen years. And, yes, it clearly addresses a very important unmet need. In fact, about 60% of patients who've had the Afirma test avoided unnecessary surgery based on our analysis of that over that time. And it's really exceeded our expectations over the last 2, 3 years, delivering double-digit growth. And we wanted to make sure that as you think about going forward into 2025, people don't start to think that Afirma has actually hit that top of its growth curve because there is still growth to come, and that's why we said high single digit. The drivers of that growth are multifactorial. One is -- we have done a lot to invest in Afirma. We launched the TERT promoter gene. We invested in the customer experience with the portal and the test requisition and test report. We've invested in the GRID research use only platform, which is enabled by the fact that we sequence a whole transcriptome for every Afirma test. And then just a lot of good performance and effectiveness from our sales team. And then in addition, we recently got an LCD for Bethesda V. So now even more patients with suspicious thyroid modules can benefit from the utility of the Afirma test. So when you put all those things together, they continue to provide a good tailwind for Afirma going into next year and beyond.

Okay. And talking about Bethesda V, how should I think about the contribution in '25? I believe it's mostly coming from ASP, but can you just talk a little bit about when are we going to see that because it takes some time to get there. Yes.

Yes, absolutely. Bethesda V it's an important indication, but it's about 30,000 patients that would benefit from that. And it's -- think about it 1/3 of that is about is Medicare, so call it about 10,000. And so while on the commercial side, we've been able to here and there, utilize that test now we have the ability to use it for Medicare population, so that remaining 10,000. So think of it as a small uplift on the ASP side, but not a significant driver.

Okay. And I guess I am switching back a little bit to more the long-term growth outgrowth. So we have high single digit in 2025. But beyond that, how do you think about the contribution coming out from like market share and then offer the wallet share gain and then also what from competitor? Like how should we think about the more sustainable rate?

Yes, great question. Coming into this year, we do the math about once a year when we look at the market penetration because the numbers aren't easily available. Coming into this year, we had, as you mentioned earlier, Afirma around 60% -- or not -- sorry, not Afirma, that market for molecular diagnostics and endocrinology around 60% penetrated and we believe Afirma has the majority of that share. As we look to where this could eventually go, we have set a goal out there for both our tests actually have about 80% penetration for the total market. we could go higher than that, but we think 80% is a reasonable goal, and that's based on relatively few analogs in the marketplace. And so when you look at Afirma, there's clearly some new market opportunity to get from just over 60% to 80% market penetration in diagnostics and in endocrinology. And then so if you think about, firstly, that market penetration, Afirma being able to take more than its current share of that given all the investments we've made in the product and the evidence behind the test. And then as we think about market gains and market share gains, that's entirely possible to for the same reason. We -- like I said earlier, we have an incredible sales team. They have connections to everywhere from the large academic centers to the community setting, and they're doing an amazing job of going out there spending time with physicians and talking about not just why molecular diagnostics in general because there are still, believe it or not, even after all these years, physicians who don't use them in the setting, but in particular, why Afirma.

Got it. I guess switching to Decipher. You mentioned pretty impressive growth year-to-date or [ 30% ]. But how should we think about the number for the next 12 to 18 months, right? So you didn't mention in the call, so I thought I ask about that.

Yes, and I appreciate you asking it. We were very deliberate in giving that guide for Afirma because, as I said earlier, I didn't want people to think that Afirma had hit that growth plateau and wasn't going to continue to grow. Especially, remember for Afirma, Q4 is a particularly difficult comp this year, given that Q4 was so strong last year. And so I also don't want people to overreact to that. Remember, quarterly fluctuations in our business really doesn't tell you very much at all. You really need to think about the annual growth trajectory. But yes, on the Decipher side, we haven't given that yet. We're actually in the middle of our budgeting process right now. And so we're wrapping that up towards the end of this year, as we always do, which is typical. And at that point, we'll be in a better position to give both our company and our perspectives, maybe some more commentary on where Decipher is going. But I would say the following. The Decipher tailwinds are significant. Number one, NCCN Level 1 guidelines to Decipher the only expression test that has that level of NCCN guideline and support. 85 clinical publications and over 120 additional studies involving Decipher driven by, again, the utilization of the test and the whole transcriptome approach and including our GRID research product in that 120. The addition now of the metastatic population that will come in 2025 towards the back end of the year. That adds 30,000. So we can now address with Decipher, the whole 300,000 annual incidents in the U.S., which is also unfortunately, a slightly growing population with incidence rates growing in single digits. And so when you think about all of those factors, those are the tailwinds that are really going to drive Decipher's continued growth for many, many years, not just in 2025.

Wanted to focus on the NCCN guidelines. I mean you have that level 1B evidence level for like probably 2 years now. Like how much more incremental impact that we can get from that especially in '25?

Yes. And to clarify, we had NCCN Level 1 guidelines last year -- those were enhanced this year to include a very specific table that listed in the event of a patient being NCCN low, intermediate and high given the Decipher score, what treatment or what pathway for the patient to follow. And so those guidelines are very clear and very specific, which is extremely helpful. In fact, we did a survey just after those guidelines came out, and we surveyed physicians. And I'll get the numbers roughly right. But something like over 80% of physicians said they were aware of those guidelines and over 70% said they would utilize those guidelines. And so that, to me, is a very positive signal. It's higher than I would have expected in terms of the utilization because they are guidelines. And so I think that, that's super helpful in driving continued growth. So I do think these NCCN guidelines put us into a new growth ramp, and I think we're seeing that now, and that's why Q3 was particularly strong for Decipher on top of existing strong start to the year. So, yes, I don't see much of anything kind of a headwind to that growth driven by NCCN. Remember, again, similar story on the market penetration, the market is about 35% penetrated coming into this year. And again, the same 80% target, you can see how much market penetration and growth opportunity there is before you even start talking about share.

Okay. Got it. And while sticking with 1B evidence level, I mean, there was another competitor, which is more in the imaging base, have the same level. So we got off some questions about that. Like do you avoid about that? And then how do you really think about the market evolving? Like is one replacing the order or maybe both technology can find their own space in the market?

Yes. We certainly don't see the substitution angle there at all. In fact, on the contrary. What we hear from our KOLs and our customers is there's really no substitution for the resolution that you get with the molecular diagnostic like Decipher, you really can't get to a lower resolution in the molecular resolution. The imaging can certainly potentially be complementary and could help certainly helped the pathologist in many respects. But you -- when you look at the level of evidence and I mentioned at 85 clinical studies and 120 other studies as well based on research. Yes, there is no substitution for that. And remember, those clinical studies and research activities, many of them were started many, many years ago. We talked to ESMO in Barcelona about STAMPEDE that came out of the U.K. which is a really important study for the metastatic and high-risk setting. Those patients were followed for 14 years. So that was initiated more than a dozen years ago and it's just reading out now. And so -- that's the kind of evidence that you have behind Decipher in particular.

Got it. That's actually a good time to switch to metastatic indication. So I think previously, you mentioned it's going to be more the second half of '25, more gradual ramp. But historically, I think physicians tend to don't really order genetic testing at a very high risk level. So how do you really like change the physician behaviors, and what kind of like efforts you're doing right now to kind of like how to brand the indication?

Yes. So starting from the perspective of the recent LCD, which now call says that this test should be reimbursed in the metastatic setting. And also, bear in mind that whereas Decipher is normally around, call it, 60% to 2/3 Medicare. In the metastatic setting is even higher, closer to 70%, maybe even a little bit more in metastatic. And so now you have a really important payer who is saying that this test has clinical utility in that setting, and they base that on evidence, right? They cite the evidence. And then you have important studies like STAMPEDE and others that talk about the utility of the test in a metastatic setting. There's utility in prognostics. There's also a STAMPEDE demonstrated some utility in prediction as well. And so before you even get into guidelines, remember, Decipher was growing very nicely even before we had NCCN Level 1 guidelines. So we expect to see a similar thing happen in the metastatic setting long before guidelines, and I'm sure there'll be guidelines at some point there. The test is able to penetrate and grow. And it's a case of going out and talking to physicians, demonstrating the evidence, the same evidence is used to justify reimbursement, and showing those physicians that even for those patients that are in the high risk and metastatic setting, there is a utility in Decipher. Adn so -- the great news is a channel we already addressed, and it's a formula that we've been doing very well for many years. I talked about the Afirma sales team, the Decipher sales team is also incredibly effective. And you only have around 50 sales reps supporting Decipher. It's not a huge number. It's an incredibly efficient team. And I know they're excited to start talking about metastatic once we've gotten through the tech assessment and our own internal processes to launch it. And as you say, we're expecting to see a ramp start in the second half 2025.

So more of the impact will come in like '26 time frame hopefully.

Yes. And then you'll start to see the kind of growth we saw in the localized setting, or something like that in -- from '26 onwards. Bear in mind, again, slow ramp, one of the things I think that's really important is -- we don't want to -- obviously, we never want to disrupt the fantastic momentum that we have in the localized setting. The last thing I want is to have all 50 sales reps flip their entire focus to the metastatic, it's an end, not at all. And it's important that we keep that momentum that we've gained so well.

Perfect. So I guess, we talk about the two important products, but now we kind of like need to think about some of the new growth drivers, right? So first on the MRD part. Maybe can you just give us a quick update in terms of the time line, the product going to be -- well expected to be launched in the first half '26. Should we expect like MolDX submission in '25, like maybe potentially some like news announcement on that. So maybe just a quick update.

Yes, happy to. And just a reminder for everybody that the -- our MRD asset, which is a whole genome approach to MRD, and that means whole genome in the initial tissue and blood setting and also a whole genome in the surveillance setting, very deliberate attempt by us to follow the same formula that's worked so well for us in whole transcriptome to take a whole genome approach for so many reasons. And the value of that data just cannot be underestimated. We've seen that with Decipher. And so we acquired that company, C2i in January. We've been working on the first test in a -- what is actually a platform of future indications, which is our first test is muscle invasive bladder cancer. A relatively small market, about 18,000. The reason we're launching in muscle invasive bladder cancer first is because we already have that channel largely. It's largely the same channel that we have in urology. And there's a very clear path to reimbursement. So to your question on the timing, our next steps are to submit the tech assessment, do all the stuff we need to do internally in order to stand the test up in our lab or the stuff you would expect us to do for a new test with a new report, get through the tech assessment get the reimbursement and launch that test in the first half of 2026. And so those are the activities that you'd see us complete. No detail around the time line of each of those activities at this point. But as we knock down certain of the milestones, yes, we will probably share that. Just a reminder that, as I said, it is a platform. And one thing I said on the last earnings call recently was -- you would expect us to launch next in other indications in which we already have a presence. And so if you think about where we currently play, breast and lung are very, very important markets, too. And so that's one possible indication or two possible indications for MRD for us in the future. And we could go beyond our current indications. But, yes, I think channel really matters. And so we'll stay very focused where we have existing activities, at least initially.

Got it. You mentioned channel is very important, and you can kind of leverage your urology channel to launch the MRD product. But do you need to make extra investment or changes to the sales channel you have broader product as wall. Is that fit into some of the strategy as well?

Not for the bladder, the muscle invasive bladder that was why we picked that. So we don't really see a significant need to invest more in the channel. In fact, if you look at that 50 sales reps I mentioned in urology, we added a handful in the last year. So you can see the effectiveness of our team and the leverage that we get in the specialty diagnostics. So we expect to be able to launch our MRD test into that same channel without significant sales and marketing investment. I think once you start to get into, for example, the median channel and then the incremental investment would be needed. But at that point, it's a menu question, you need to have more than one test, which is why other indications and a platform matters. And I think the other important point is you don't need to invest ahead too much. Sales reps become effective in about 6 months. You can invest in the sales reps when you start to see the opportunity ahead of you, once you clearly have reimbursement or line of sight to reimbursement, and then you can build that as you see the growth coming. And that's what you saw us do on the Decipher side. It's not like you have to go out and hire 100 sales reps before you have any volume. It tends not to work that way.

Got it. The next one that you talked about will be the IVD approach growing international business. There is some point change issue at this point. So maybe just like give us a little bit update in terms of like how that goes. And then I believe we Rebecca will talk about like it's going to be muted in '25 as well. So maybe any update would be great.

Yes. Thanks for asking. Yes. So now we're talking about the fourth of our five strategic initiatives, which is IVD, and it's driven by a need, frankly, to get our tests into the international market. A perfect example, Decipher, 300,000 instances in the U.S. could be as high as 500,000 in Europe alone. And those patients need a test like Decipher to determine the appropriate next step in management of their disease. And it really pains us that patients outside the U.S. don't have access to tests like that, and they should. And we believe that we have the formula to be able to do that effectively outside the U.S. with an IVD based approach. And so -- we're currently working on three tests, Decipher for prostate, Prosigna on NGS is already on nCounter, that's for breast cancer, and ultimately, nasal swab on NGS as well, and launch those into the OUS market. Right now, as I mentioned, Prosigna is on the market, that's where we talk about the muted expectations for 2025. And we are dealing with some supply chain challenges. This is an encounter-based product. So we're working through those challenges. And so we want to be conservative about next year and so talk about next year as a transition year for our product business. It is the year we're managing through the supply chain challenge for Prosigna and developing and launching -- developing three tests and launching two potentially and getting our certification for our under IVDR for Prosigna and nCounter. And so that's what we're going to be focused on in 2025. Once we get through that, then we can really put the foot down on the growth, in particular, for Prosigna and Decipher. And I'm excited about Decipher as well because a lot of KOLs in those studies I've mentioned the 85 and the 120 or outside the U.S. are very familiar with Decipher have worked with it in these studies and can't wait to get their hands on it as well.

Perfect. The next part will be more the reimbursement dynamic. There were a lot of news in the past 2 weeks. I know these are different products. But I wanted to get a view from you in terms of supply, how do you really see the current environment at this point, like both CMS and then commercial. Is it stable, getting better or getting worse?

Yes. I think this goes back to the Veracyte diagnostics platform that I talked about at the beginning of this year, and that is more data leads to more insights, which leads to more evidence and more adoption. And sustainable and durable adoption, which is the important point. I think where the industry can sometimes miss step is by launching a test early before that reimbursement pathway is clear or before the evidence has been generated to support reimbursement, not just initially, but on an ongoing basis and make it durable. And so at Veracyte, we think about that a lot, and we derisk for investors that reimbursement step, whereas if companies don't launch their test in that way or launch too soon to drive volume then investors are also taking on that reimbursement risk, initial and sustainable and durable. And so when you look at where we are with both of our tests, the level of evidence and KOL support and real-world data I mentioned earlier, 60% of Afirma patients who have avoided surgery, that type of real-world data really supports ongoing reimbursement, not just Medicare but also commercial. And so we're seeing the opposite of what some -- and I think it's very few here and there where our industry is seeing some challenges. We're seeing the opposite where we have more commercial payers contracting with us. We're growing the commercial coverage in both Afirma and Decipher, particularly to Decipher. We added a significant pair at the beginning of this year with 30 million covered lives. These are all, I think, supporting evidence of the ongoing strength of, again, evidence and proof that we have with our test.

Is that going to be like more kind of like a headwind going to '25, ASP has been increased roughly like 6% in Q3. Do you still expect similar level of ASP in '25? Or is that going to be a little bit more to happen?

Well, I don't see ASP necessarily a headwind. I do think some of the issues we've resolved with Afirma over the last couple of years and then some of the coverage decisions that help drive a little bit of a tailwind from a growth -- ASP growth rate perspective, I think we've seen something like 5% CAGR over the last few years, and that's continued. And so we'll continue to create increased coverage. You've got Bethesda V coming, which helps Afirma a little bit. You've got the metastatic. So in the normal scheme of things, I don't necessarily see ASP itself as an absolute reference as a headwind at all. And the year for us, it's continued growth -- continued volume growth at a sustainable or even potentially growing ASP where we can make that happen and justify that.

Okay. Got it. Well, switching to more of the forward-looking. I know there was no 2025 guide, but any puts and takes that we should be thinking about when doing the outline.

I'm sorry. Any what?

Any puts and takes.

Oh puts and takes. No, I think -- I mean, Tristan, just jump in as well here, if I miss any, but we've talked about the tailwinds that I see for Decipher and Afirma or our core business. that -- and I don't -- the biggest headwinds I see are the law of large numbers. The denominator, of course, is higher going into next year than it was this year. I think we've talked about our product business in next five being a transition year in muted growth. And then I think on our biopharma and other line, which is the other portion of our -- small portion of our revenue continues to be a headwind. We're not seeing any growth there. And unfortunately, and so we continue to focus on that side of the business and what makes sense and how we can best take care of that. And so those are the key puts and takes. But again, I'd say, from a top line perspective. And then anything you want to mention on gross margin and spending?

Yes, I'll add one more on the top line, too. We actually kicked off talking about Envisia. And that's about a $6 million headwind on our testing number for going into next year as we discontinue in the lab starting in January. As we look at the rest of the P&L, we see stable margins on our testing business. with a slight headwind as Envisia is a gross margin contributor for us as that revenue declines next year will be a small headwind, but not something to move the numbers. We haven't provided guidance, obviously, below that at this point in time, but coming out of the year where we have approximately 700 basis points of adjusted EBITDA margin that will probably not double down, but we are looking at continuing to expand margins. And as Marc mentioned, we're in the middle of the budgeting process now, and we're balancing out the adjusted EBITDA margin expansion and the investments into our long-term growth drivers. And so we will obviously provide more insight to that as we get through the process.

I wanted to unpack a little bit about that, like what kind of specific drivers that you mentioned? And then at the same time, like 24% is not a jumping off point, for sure. Maybe just talk a little bit more about like the actual staff that can get to the market expansion target.

Yes. So I talked about the quarterly fluctuations in the top line and volumes and that plays even more so to margins. And so some quarters, the spending profile is very different from other quarters, especially when you're doing clinical trials and things like that, for example, and so we guided this year to just over 20% EBITDA, and that should be the jumping off point for next year, right? And so the question is -- and Tristan mentioned, the kind of leverage we've seen this year is very extraordinary as we've entered into a new phase of financial performance. Ultimately, we do want to get to that goal. We haven't put a time frame around it of 25%. There are certain levers we can continue to pull. But the most important one is top line growth. And given the efficiency of the specialty diagnostics model that we have, that flows very, very nicely. And then we'll continue to think about R&D spend. Yes, right now, with Nightingale going on for Percepta nasal swab and with three IVD development projects going on, and with our MRD development going on, not to mention all the internal projects we have. R&D is actually -- we've got a lot going on. And the three strategic drivers cover more than half of our R&D spend, a run rate of about $60 million in total. And so I see some opportunities there in R&D for leverage as the top line grows. I see opportunities for leverage -- continued leverage in sales and marketing as we've talked about at length today, and I see opportunities in G&A. I always talk about we're in about the third year of a 5-year significant investment in building the infrastructure of our company to be able to absorb significant growth, including the 3x growth we've seen in the last 3 years in volume, and we're going to continue to do that. And a lot of that finds its way into the G&A line.

Okay. Got it. So the R&D -- well, the MRD launch, kind of like the spending related to that is already embedded into your thinking in terms of...

Current years. But remember, it's a platform and as we launch new indications, new menus, of course, that will require incremental R&D. Now at the same time, the NIGHTINGALE trial finishes at some point as well, and that is a big study. And so there's various puts and takes in R&D. We try and manage our overall R&D spend. To Tristan's point, if we feel like there's a good opportunity to spend more money in a particular R&D area because we think that drives future growth, we have the capacity to be able to do that. At the same time, we have the capacity to dial that back. And so our financial profile is something in our bottom line adjusted EBITDA is something we feel very strongly about. and continuing to drive opportunity there is very much our philosophy.

Got it. So with the last minute here, maybe can you share a little bit more any catalysts that we should be watching out in the next 12 to 18 months?

I think the catalysts are Decipher and Afirma. And then those bridges as I opened up the call today, those bridges very nicely, not just two, but also beyond the launch of our IVD, MRD and then longer term, our nasal swab product. And so you think about those five key growth drivers, that's where we're focused today. We also have a lot of other things we're looking at and dealing with and going through as well that there could be potential growth drivers of the future. We're a very progressive company in the way we think about cancer diagnostics. And we want to continue to create new growth opportunities. So lots going on. I'm excited about what we're doing. -- in the company, and I'm very happy that we're focused as we are.

Great. Well, final thing on nasal swab. Any update on that? So I mean the child is a little bit delayed, but what's the latest?

We're a long way through the patient enrollment, and we're heading towards, hopefully, the finish line at some point. I'm not giving a time frame on that now because it's a little unpredictable, especially in the lung space. But with close to 100 sites enrolling. It's exciting to see so many patients. And I'm excited to launch this test when we're ready to launch it. And this goes back to the diagnostics platform, clear path to reimbursement, ability to get the test adopted paid for supported by evidence and that's really what NIGHTINGALE is about.

Great. Awesome. That concludes our section. Well, thank you so much for joining us today.

Thank you.

Thank you.

Thank you.