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

Okay. I think we'll kick things off here. My name is Jacob Dodd. I work with Calin Techar, here in the life science tools and diagnostics team at Morgan Stanley. Thank you all for joining us here this morning. Where I'm pleased to be joined on stage by Veracyte's CEO, Mark Stapley and CFO, Rebecca Chambers for a fireside chat. Before we jump in, I just want to quickly note that for all relevant disclosures, please see morganstanley.com/researchdisclosures.

And with that out of the way, yesterday afternoon, Veracyte announced the acquisition of Convergent Genomics. Mark, to start us off here. Could you tell us a bit about the deal and why is the right asset at the right time for Veracyte .

Yes, happy to. Before I get into that, maybe I should just remind everybody about our safe harbor statement to the extent we make forward-looking statements. You can find that in fall on our website at www.veracytes.com. So yes, Convergent. Great acquisition for us. Obviously, we've talked for many years about a strategy of ex care continuum in the indications in which we play, adding new indications, like, for example, you saw us do that with breast in the U.S. and then expanding across the geographies as well. . So where Convergent fits in is perfectly into that strategy of expanding across the care continuum in an indication in which we currently have 2 tests already and that is bladder cancer. Bladder cancer is a kind of large and important disease that is being studied a lot more these days and the standard of care needs some diagnostic assistance. And that's where we come in with biomarkers, including the Euro Am that we acquired from Convergent, which importantly is a urine-based biomarker. So now Veracyte has urine tissue and blood-based testing in bladder cancer. We can serve the entire care continuum of bladder cancer from that early-stage patient with, for example, TA disease non-muscle invasive, all the way up to muscle invasive bladder cancer with true MRD. And that being able to serve the patient in multiple time points and longitudinally follow that patient with our data-driven strategy is why this makes sense for us. Now why this time, this is a perfect time because that team over 10 years, has done an incredible job studying that analyze and solving a very difficult problem of the signal to noise in that -- in urine-based testing. And they're very close to the point of commercial launch. We're going to launch the first test in late 2028, and they've done all the clinical work, 9 publications, 40 abstracts and so on. So a perfect time for us to come along with our channel, and this is an important 1 because it's a channel synergy in neurology as well and drive that commercialization.

The other added benefit of the timing right now is we have seen more and more data coming out of the bladder classifier or for the bladder classifier, which is upfront of this test and our efforts on the bladder classifier in terms of commercialization will ramp up over the next couple of years. And so that will effectively, we want to own the tissue from the get-go, and that will effectively allow us to do so and then play nicely into either nonmuscle or muscle-invasive pathways that Mark described. .

I heard you mention a couple Veracyte products with some similarity in indication to the euro AMP MRD specifically had some superficial similarities in that it's MRD with an indication of bladder cancer. What are you seeing from the clinical data or from where the market is going, that makes the multi-sample approach the right way forward versus, for example, investing more in the true MRD platform alone.

Yes. There are multiple clinical questions that you need to answer for a patient with bladder cancer like I said, from that early stage. And as Rebecca mentioned, you do the TURBT procedure. You've got tissue. It's looking at the subtype and what does that tell you about the prognostic outcomes for that patient to giving them BCG or other IBT treatment? And is that treatment actually working. So monitoring that treatment as you're providing that treatment over the first or multiple cycles to when you finish that treatment, has that treatment actually resulted in elimination of the tumor or is the residual disease to either other treatment or surgery cystectomy, for example, monitoring for residual disease in that state as well, which is much more of a blood-based solution. So if you think about it now, and these tests really don't overlap. You've got -- in the non-muscle invasive, urine is the best analyze in muscle invasive, clearly, blood is the best analyze and then you need tissue for the subtyping, as I mentioned.

Okay. Makes sense. Maybe 1 for you, Rebecca. I believe the press release pointed to convergence OpEx being absorbed with no impact to Veracyte's '26 EBITDA guidance. How should we think about the level of investment required over the next couple of years to bring that test to market? And maybe what kind of cost or revenue synergies do you foresee with this platform, whether quantitatively or qualitatively with the rest of the business?

Yes. So on a revenue basis, obviously, Mark cited the channel synergies, which are important as are the back office operational synergies, whether that be the customer service billing or laboratory. So we'll be moving the laboratory into our San Francisco facility, and so there'll be nice synergies there, obviously, incredibly qualitative because this isn't a synergy play. This is a revenue growth play. And this is absolutely something that we're investing in for the long-term potential for the benefit of patients and shareholders. So we're excited about that piece. And when it comes down to the guidance statement, obviously, we're in the late stages of diligence when we did the earnings call. So we effectively were able to take into account investment, the investment is, call it, 20-ish people. And so it's not a material investment. They've already done their clinical utility study that needs to be effectively submitted for publication and for the tech assessment process. So I would say this is an incredibly reasonable investment in addition to obviously the M&A purchase price to allow us to really go after an incredibly large market here. We're calling it roughly around $400 million for the nonmuscle invasive portion of disease that Euronav could potentially address. And there's a ton of optionality that's even larger than that, and we'll get into it, I'm sure, across hematuria, prostate, kidney UTUC and other various diseases. So we're pretty excited about this one. I'm not going to lie. And I think the return on the investment will prove out to be quite attractive.

Helpful color. Maybe stepping back, I think it's fair to say 2026 has been notable for Veracyte in terms of clinical data and new product introductions overall. Hopefully, we'll have a chance to get into more of the specifics as we go here, of course. But at a high level, what is underway at Veracyte that you're most excited about right now?

I mean 2026 has been an incredible year for us. And it really caps off at this point, 5 years of transforming the company from a single product company to a real portfolio of cancer tests in now 4 indications with the addition of convergence. So obviously, prostate, thyroid, breast and bladder cancer. Two product launches so far this year, breast and TMID and an acquisition now, it's very clear that we're extending and expanding our strategy and playing it out the way we talked about 5 years ago when we really sat down and thought about what could the future of Verastem. And we're not done. We're continuing to develop new tests, new indications always looking at M&A. And with the financial profile that we have as a company that we've also created in the last 5 years, we've got the wherewithal to do what we need to do to continue to grow and scale the business. So -- and the whole thing is, as I always say, I think investors are used to hearing me say this, fueling by incredible evidence development, which is really what drives our business, researching around increasing the understanding of these different disease states, and we always believe in that, the more you understand the disease state, the more you figure out, let the science lead you and figure out where diagnostics has a role to play. And then we're there already poised to launch the test for that particular indication, get into guidelines and drive adoption.

Q2 was a solid print overall for Veracyte. Maybe there were some nuances or puts and takes on to cipher volumes. Could you maybe walk us through again, what went well and what if anything, differed from your expectations in the quarter? And how have things been trending in the business, more importantly, now a couple of months into Q3 maybe?

Yes. Q2 was very strong for us with about 20% growth in decipher n '17, '18 in Afirma. And just those businesses from a revenue growth standpoint are doing great and even from a volume growth standpoint, are doing great. Everything that came out of the business in the quarter fell strong with the 1 exception where we took a small 1,000 test reduction in our expectations for the year in decipher low-risk disease. So high risk and intermediate are continuing to grow approximately 20% in volume. And then low risk, we took our expectations down to single-digit growth for that. Previously, we've been seeing double-digit growth as in the last couple of years, low-risk expanded nicely. The NCCN guidelines adjusted back in the late part of 2025 and I think we're now starting to see the effect of that on some physicians deciding not to expand low risk as much as they were before or as much as they are in the median high. To be very clear, we are still seeing growth in low risk, as I said, single digit, and we're seeing new physicians adopting low risk as well. So the growth is driven by new physician adoption here, which is an encouraging sign. As I said before, you need evidence to drive these tests, and we see some important evidence coming out in 2027 and 2028 that were started decades ago or so in active surveillance. And that's the kind of evidence that's going to be needed to drive guideline inclusion for low risk and reverse that last guideline update.

Maybe continuing on the decipher front. I think around 1/3 of U.S. prostate cancer patients today are currently being reached. Could you remind us of Veracyte's market share today and in terms of decomposing the remaining opportunity, how much growth from here comes from incremental utilization from existing physicians versus new versus maybe layering on new decision points that the test can address.

Yes. And you had a really important point then. I think this is worth really punctuating for everybody. The decipher today, at least coming into this year was about 1/3 penetrated in the market. We see the potential to penetrate these markets up to even as far as 80%, maybe even more. And so we have a lot of opportunity to grow in Decipher and it's going to come from penetrating more intermediate, which is the most penetrated today and represents the largest share of our market. High is really high-end RP is really doing nicely, driven by some evidence around metastatic and high-risk disease. And then as we just talked about, low as well, which is roughly 20%. And -- and so that's where the growth is going to come from. It's going to come from both new physician ads. We're consistently seeing new physicians coming into the fold, increasing the frequency of ordering from existing physicians, sometimes they order then they don't for a couple of quarters, it's getting them back. And then it's increasing the order rate per physician. Again, each 1 of those is going to come from evidence development and ultimately, guideline inclusion. And that's -- you're going to need guideline inclusion in metastatic and low risk in order to drive that 80% I talked about previously.

Speaking of evidence, we saw at ASCO this year, of course, the ENZAMET trial readout Level 1 evidence for metastatic patients who may benefit from triplet therapy. How important was that data for expanding to Cipher's reach specifically? And maybe if you could just dive a little deeper on what specifically we should be on the lookout for from the evidence pipeline into 2027?

Yes. I mean starting with the patient perspective, it's very important in that it helps predict whether patients will benefit from chemotherapy in addition to doublet therapy. And that sort of evidence is really important for so many reasons. I'm happy to get into but probably don't need to. And then where it's also important, as you mentioned, it's level 1 evidence. So it's a kind of evidence that's needed to drive guideline inclusion for metastatic, which is something we don't know when that's going to come, but it's something that we hope will come and then we think that will drive increased adoption, but it's exactly like studies like enzyme and, of course, Stampede as well that we need for that. As we think about nearer term, we've got ASTRO coming up, and we expect some decent publications at Astro, including important ones in intermediate risk of the NRGRTOG00815 in particular. And then as I mentioned, we've probably got at least 3, if not more shots on goal in the next couple of years in active surveillance. So lots more evidence to come in the future for Decipher because we've been driving that research with the decipher test and the grid. And so our strategy is working.

I believe we saw record orders per physician on to Decipher in Q2. Could you maybe speak to how your most engaged physicians are using the Decipher today in their practice? And what is the path for distributing those best practices across the broader physician base?

Are you most engaged physicians are the ones who are ordering decipher for every patient, including metastatlow-risk opto metastatic. A remarkable number of our patients back to the low risk point, a remarkable number of our patients actually more physicians actually more than half are ordering low risk anyway. And then you've got a decent number of physicians who are ordering the test in every indication. And then you've got those who order it more occasionally, right? And so -- the way to drive that is we have this very skilled, knowledgeable effective sales team that are out talking to the physicians, making sure that those KOLs are also out there, making sure that we're doing the right studies as well to drive -- our medical team is making sure we're doing the right studies to drive guideline inclusion. And it's ultimately that, that we'll get what we believe should happen, which is Decipher should be ordered for every patient ultimately over time, right, with guideline inclusion. And that's roughly 330,000 patients a year in the U.S. alone. And then, of course, you add international to that.

We had an uptick in discussions after Q2 around AI and digital pathology, potentially competing more with molecular testing. Could you speak to where you see these modalities as complementary versus competitive today? And what's an example of how you see an optimal clinical workflow looking longer term as both technologies continue to improve?

Yes. I mean there's been a lot of work done on this over the last few years, and we're letting as we always do the science leaders and guide us. And the science has demonstrated that these 2 tests are measuring different elements of biology from the molecular is actually measuring in our case, the expression to the digital pathology AI that is measuring or looking at the phenotype of the underlying biology in a microscopic slide. And those are measuring different things. The science has demonstrated that, and therefore, they are complementary. I think what's really important is that if they're discordant then the physician is going to rely on the gold standard and the test that's covered in guidelines and has the most evidence and that's the cyphone. So that's what we've consistently seen. So I think -- there's a place for digital pathology. We're enabling the research around it, having scanned hundreds of thousands of patient slides, making that data available through grid, including the entire transcriptome. So we'll let the researchers do the work and figure out where that test should fit into the workflow. And then that will guide us accordingly. And as I said before, we'll be poised and ready to do whatever it is we need to do to launch a product.

Before we move on to discuss some of your other products, maybe 1 for you, Rebecca. CMS is, of course, contemplating CLFS rate reductions of up to 15% in 2027. And for some tests since for the first time since 2020. Based on the private payer data that you would have submitted earlier this year, could you speak to what the air bounds might be in terms of effect, if any, on rate reductions for Decipher or Afirma in the next 3 years. And maybe as part of that, could you speak to your level of overall Medicare versus commercial exposure?

Yes, happy to do so. So by test, Decipher effectively is 2/3 Medicare, Medicare Advantage and commercial and then affirm is the inverse. And so it's relatively easy nonemember that way. But when it comes down to PAMA, we -- every year, we've looked at the distribution of our payment received by test and effectively, if we were to have to submit to PAMA, what that would be. Obviously, we did just submit to PAMA -- or to CMS for PAMA in the last couple of weeks. And when it comes down to it, all of our calculations are that we do not expect a material change in rates for either test. . A reminder, Afirma is 3,600 to Cypher 3800. And to date, the data, we've been pretty proactive in managing our payer contracts accordingly and making sure for anything we contract is out of relatively reasonable rate for Medicare. And so both for the prostate test and the Afirma test we have a -- we don't expect a meaningful change. The 1 place we do expect to change just because the testing volume has been quite low, is on the bladder test because we haven't necessarily gone through the same process and so that might be reflected, but the volume at this point in time is so low. And as we move forward, we'll work on that contracting as volume increases. And so that probably will or that situation will effectively resolve itself over time as we apply the same practices and standards that we have on the prostate and Afirma test to the bladder test. And I'm talking to cipher bladder and we're going to have to start clarifying.