Go ahead and get started here. Thanks, everyone, for joining us. I'm Mason Carrico. I'm the diagnostic and genomics analyst here at Stephens. Today we have Rebecca Chambers, CFO, and Tristan Ribar, VP of FP&A of Veracyte with us. If at any point anyone wants to hop in with questions, feel free. So to kick it off here, Veracyte has undergone a transformation since 2021, when Decipher was acquired and, and you and Mark joined the company. So what ultimately attracted you to Veracyte? What do you think differentiates Veracyte from the other diagnostic names that, that play in the oncology space?
Yeah. Thanks, Mason, for having us, and thank you everyone for being here. Before I answer Mason's question, I just want to refer you to our safe harbor statement, which is available on our website, Veracyte.com. As always, anything we say in this setting should be covered by those safe harbors. So apologies for the informational, but always better to be prudent on these types of things. So, please refer to the safe harbor to protect our statements today. So absolutely, we have really over the last, over the last couple of years, Veracyte is a very different company than it was if you rewind the clock four to five years. Marc joined in June of 2021. I joined a couple of weeks afterwards.
What attracted me to the company at that point in time, what actually is very true still today, and even is a little bit more acutely true today than it was back then, and it's really four things. One, personally, I feel very strongly, as does the entirety of the management team, to really work with a patient-first culture. And the culture that Veracyte has had historically and the culture that we're continuing to foster is one that absolutely is patient first, that is global in nature, right? So we're not just serving patients in the U.S., we're very focused on serving patients worldwide, and also with a portfolio of products to do so, versus just a single product-type opportunity. That absolutely is critical and was very attractive to me.
The second thing that was very attractive to me was really, you know, we were at the stage of bringing three companies into one and really building a new leadership and broader team. And doing so with Marc, who, you know, I think, I think incredibly highly of, and partnering to build kind of the dream team, if you will, sorry for the corny statement, was something that was very, very interesting to me. And, and I can only say that my expectations of, of the team, and who we thought we could bring to bear have only been even more surpassed, right? Whether it be, who we've brought onto the finance team, Tristan and, and our CEO, whether it be bringing Phillip Febbo in more recently, but John Leite.
I mean, we've built a really fabulous team, and I feel incredibly lucky to work alongside of all of them. The third thing, and I kind of mentioned this with one, but we have a portfolio of products, and obviously back then, there were a number of products that we were excited about over the last couple of years. You know, the duration of Decipher growth has become incredibly clear. That is only even stronger than it was when I was joining, but the excitement around Decipher and continuing. Then, obviously, in my seat, finances matter. So, the financial profile of the organization back then was quite attractive. Over the last couple of years, it's only become more so.
Whether it be, you know, the gross margin, ASP profile with gross margin, whether it be the efficiency of the sales channels, whether it be the ability to generate cash on a sustained basis, all of which I feel like today we're in very good stead across doing. So, you know, I'm as excited today to be part of Veracyte as I was joining in July of 2021. We do a lot of great work for patients. We have a lot of fun while we do it, and so there's nowhere better to be.
That's great. We'll start off with Afirma here in the thyroid market. I think you guys have said recently, maybe it's over 50% penetrated. Afirma holds the majority share.
It's your most mature offering. But it seems like, you know, you guys have had a lot of success reinvigorating growth
Mm-hmm
recently. So there were some one-time benefits this year, maybe a one-time benefit from a comp standpoint last year. But what do you think are some of the more fundamental things that you guys have put in place that have driven that continued adoption of Decipher or of Afirma? Sorry.
We'll get there. So, you know, I don't, I don't think you can really boil it down to just one thing. What, you know, what, what we have is an incredibly talented sales force who, who goes out and, and takes through the steady drumbeat of, of different exciting things that we're doing, right? So, so obviously, we've focused on the efficiency and the effectiveness of the sales force. Kind of, you know, get out of bed type stuff. We've also reinvested in the product itself, and so we have brought to bear customer enhancements through our online portaling system. We've launched the TERT Promoter Mutation portion of the assay. We've most recently or in the next, you know, this quarter, we're launching Grid, which we, we should touch on. All of those things drive growth.
You can't really bifurcate it, one versus the other. And I think when it comes down to it, it is effectively our framework of how we commercialize. We do the, you know, something incredibly similar on the Decipher side. Both of those things lead to differentiation, both of those things lead to incredible penetration, and we do so quite, you know, at quite an attractive financial profile. And so I think when it comes down to it, that framework is really. You can't take one little bit of it, you really have to take it all together.
Yep, that makes sense. On the Grid offering for Afirma, could you talk about what that is exactly?
Yep.
What's the incremental information or value
Yeah
that you're providing there?
Yeah, and I think we can talk about GRID more holistically. So we have a Decipher GRID, which has been on the market now for a long time. We have Afirma GRID, which is being launched this quarter. One of the underappreciated components of the story. So all of our testing is being done on a whole transcriptome basis. Many other clinical diagnostics are, you know, 10 of genes, five genes, 50 genes, or whatever the case may be. We actually interrogate the entire transcriptome, and then we have a machine learning overlay, which reports out, you know, effectively the answer to the question you're seeking.
Because we're, we're interrogating the whole transcriptome, there's a wealth of information that we don't report out for Afirma, and we don't report out on for Decipher. We package that up in what we call the GRID, and that is offered on an RUO basis. Why that matters is because the KOL community, the academic community, and even some, you know, more community-based physicians, really enjoy and find helpful the incremental information that's provided on a whole transcriptome basis. They all want to engage. Specifically, this has been the case on Decipher, given that has been the product that's been out there for the longest. They want to engage with that data, publish reports, drive clinical evidence, and it becomes, you know, this flywheel of information in clinical evidence out there.
And so that is the differentiation, more so than, you know, ABC attribute. It's really how to drive clinical evidence, drive penetration, get on guidelines, you know, get reimbursed. Now, obviously, with an RUO component, it doesn't directly impact some portions of that, but effectively, the mind share that we get through the whole transcriptome is, again, what I think the differentiation is. So taking it back to Afirma, you know, I do think it'll help engage the academic community, I'm sorry, the academic setting
Mm-hmm.
more so than the community setting. That is an area which I do think we have some ability to take some market share. So we're excited about that. One day, perhaps we'll get to 50% of docs ordering Afirma like we are on Decipher. That's a journey. I don't. I view this as something else for the sales force to go out and talk about, more so than a purchasing decision .
Mm-hmm. And thinking about Decipher GRID, I think that you guys called out, it's ordered close to 50% of the time. I mean, I know we're very early here, but what do you expect from, you know, an order rate in terms of Afirma GRID in the thyroid market?
Yeah. So TBD. I don't think it's necessarily 50%. We were not at 50% two years ago, for example, right?
Mm-hmm.
So over time, as the value of information and the interest in the level of information increases, I think you get closer to that. You know, we haven't put out a figure. Again, I don't think it's actually that critical to even have it be 10%. It's more about the ability to talk about it and engage certain pockets of the different stakeholder, physician stakeholders in the academic setting, KOLs, generate the evidence, et cetera. And then the second derivative benefit of that is eventually it is ordered by more and more physicians.
Mm-hmm.
It'll take time, but we'll get somewhere similar over a multi-year period.
That makes sense. So Afirma, this year, is now expected, I think, to grow 18%.
Yep.
There, so there were some cash collections in the first half and Q3
Yep
that benefited this year. There was the vendor disruption last year in Q2
Yep
making that comp easier. So a few non-recurring items have played out that have helped growth this year.
Yeah.
If we back them out, maybe growth is around 13%. Given the growth you've seen this year, you know, how are you thinking about the growth rate of Afirma going forward? I think maybe historically, you had called out, like, a mid- to high-single-digit growers.
Mm-hmm.
Is that still the right way to think about it?
We'll see. I think really what, what we're very focused on is, is continuing to drive the penetration and, of the market, so that will help growth. I think the other thing we're focused on is broadening the market, right? So we most recently had the draft LCDs around the Bethesda 5 Category. Kinda get a little bit in the weeds. Apologies in advance. Right now, the market is serving primarily Bethesda 3 and 4, which is around 120,000 patients every year. Bethesda 5 would broaden the market for an extra 15,000. And so, you know, we're working on penetration, market expansion, and competitive wins, right? And so when I layer those three things in, recognizing the hard comp, both from a volume and from a, a revenue perspective, we're confident in Afirma.
We have room to grow Afirma for many years to come. I obviously don't want to comment on a quantitative figure to that end, but I think we believe we can get this 70% to maybe even 80% penetrated. And from here to there, given and with a growing market, we're very excited about Afirma on a go-forward basis.
Got it. On the draft LCD, so yeah, if finalized as proposed, maybe it expands the patient testing opportunity by, like, 15,000
Yep
patients annually. So are you testing some of these patients today? And if so, does the share within Bethesda 5, does a Veracyte share, is it pretty similar to your overall share in the thyroid market?
Yeah, I think theoretically it is. I think, or it will be. There are different things, but different competitors offer today that, you know, without having Some competitors are reimbursed today for Bethesda 5, well, we aren't.
Mm-hmm.
I think share will naturally follow suit. I wouldn't say it does today, for that, for that reason. But I think we think Bethesda 5 is there's, you know, our body of clinical evidence is as strong as everything else, and so I think we are very excited about the opportunity to capture those 15,000 patients. I think the other thing to take into account is the Medicare population, which was what the draft LCD would go after, is a little different than the broader Medicare population. So Bethesda 3 and 4 are more around the 35% mark, where Bethesda 5 is closer to 25%. Just one, I mean, small nuance.
We're talking small, small patient numbers here, but, you know, I think out of the gate, if we are to get the draft LCD, we'll access that first quarter, and then we'll work over the coming weeks, months, quarters to get the remaining commercial payer categories in that commercial payer patients in that remaining 75%.
Got it. And then once it is in place, is the testing opportunity really only for newly diagnosed patients with a Bethesda 5 nodule, or is there an opportunity to test patients, for example, who, like last year, were diagnosed and were categorized as that?
I would love that to be the case, but unfortunately, they don't have a thyroid anymore.
Gotcha.
So you can't test it.
No way to go back to, like, a tumor block or anything like that?
No.
No? Okay. All right, well, then, moving to Decipher, obviously been a great growth driver for you guys. You've called out a number of reasons, you know, why it's been so strong: level one guidelines-
Yep.
GRID, obviously
Yep
clinical evidence, your sales team, all have played a critical role. But is there any one that you can point to that maybe has played a more material role than the others?
Maybe a little bit easier than Afirma. Same question, only because it's top of mind. But no, I think when you take it back over multiple years, it is that equation that we talk about in terms of our framework. You know, having a clear need from a clinical utility standpoint, developing the test, getting the evidence, getting reimbursement, getting guidelines. That latter, NCCN Level 1 guidelines, effectively came to bear for Decipher in September of last year. We were first able to tell the physicians about it through NCCN-approved marketing materials in Q1 of this year. You effectively saw close to a full-year of growth in the second quarter of this year. So top of mind, in 2023
Mm-hmm
I think NCCN Level 1 would have to rise to the top. Overall, over the life of Decipher, again, I think it really is Veracyte's, you know, framework of how we go about commercializing specialty molecular diagnostics. And, you know, I think when it comes down to it, the body of evidence around Decipher is like nothing I've ever seen before.
Mm-hmm.
You know, obviously, we're going to work very actively to continue that on. We've done a ton in metastatic. That's kind of the next market expansion opportunity we have. I'm sure we'll talk about OUS. There's lots of continued growth levers for Decipher, and only 30% penetrated. There's a lot more room to go to get to that same 70% or 80%.
Got it. And on the the draft LCD for Decipher, 290,000 prostate cancer patients a year, I think 10% are diagnosed with metastatic.
Yep.
So assuming the LCD's finalized as written, it opens up another 29,000 patients for testing. Could you walk through the timeline of when you think you could begin generating revenue for these patients, given that you need to submit a Tech Assessment?
Yeah
... once it's finalized?
Absolutely, and I would, I would also tie it to when these patients can start getting critical information that they need around the you know, the prognosis of their prostate cancer. And, you know, given the metastatic component of this, that's obviously quite important. So the draft LCDs were published in September. MolDX has up to 12 months to finalize those. So at the most latest point, it would be September of 2024, and then most likely we'll have to do a Tech Assessment, which tends to be around three, four months. So, you know, I think the longest pole in the tent would be early 2025.
Mm-hmm.
We could start providing that information, the critical information to patients, and obviously would work through the reimbursement thereafter. What we would gain with the finalized LCD and Tech Assessment would be access to the roughly 45% of the metastatic population that is Medicare or Medicare Advantage-based. And then from there, we would have to go through the process of updating policies for the remaining 65%, I'm sorry, 55%
commercial. Bless you. And then
Threw that in there.
No, nice. Nice. Could you update us on the competitive landscape within the prostate market? I mean, there are other gene expression, Are there, are there other gene expression tests out there that-
Of course
you know, from a, from a growth standpoint, that you guys are obviously keeping track of, but more, more specifically, what are your early thoughts on Artera AI?
Yeah. So, so just to give a little bit of background: so right now there are three main players in the genetic expression prostate space. Ourselves, we have the leading market share with our Decipher test. Myriad has a test as well called Prolaris, and then MDxHealth bought the test from the Oncotype test from Exact that was acquired from old Genomic Health. Our share is in that order, so, so Decipher has leading share, then Myriad, then MDxHealth, to our knowledge, based on reported figures. Out of those three tests, NCCN Level 1 evidence has been generated only by Decipher, so that is a meaningful competitive differentiation for us.
Both Myriad and MDxHealth have level three guidelines, and to my knowledge, you know, maybe something is going on that I'm unaware of, they aren't working on clinical trials that would give them that level one evidence generation. So that's where we're at. Now, Artera AI is a startup company that is focused on effectively digital pathology and giving a similar answer to the prognostic and potentially predictive questions based on an H&E slide, clinical factors with an AI overlay. Apples and oranges is kind of the way I think about it, right? So there's a ton, especially given we're doing the whole transcriptome, there's a ton of information that we offer on a genetic basis, very well could be different than the information provided by-
Mm-hmm
Artera AI. So I think there's room for both in the market. I think they potentially could serve different purposes. Early days for Artera, obviously, so we're excited to see what they can do. And, you know, I think when it comes down to it, you know, the more information to the physician, the better.
Mm-hmm. That makes sense. And then from a commercial team standpoint, how are you thinking about repetitions to your urology team next year? And I mean, just given the level of coverage that you guys have
Yeah.
How quickly do those reps pay for themselves?
It's actually pretty quick. It's pretty efficient. So to take the second half before I move to the first half, on average, around six months in, the reps are paying for themselves, if not, maybe a little bit faster than that, but I think six months is a good rule of thumb. I kind of touched on it in the first answer to the first question Mason asked, but we're very differentiated with our specialty channel approach. So with Afirma and with Decipher, we have, you know, call it 50, 55 reps. We have added a handful or so over the last couple of years to Decipher. We'll probably add another handful next year. But the efficiency on calling on those physicians is immense, right? And so the leverage the sales and marketing channel provides is immense.
So we'll add a handful, but we don't expect to see meaningful leverage through the sales and marketing channel, as we don't need hundreds of sales reps-
Mm-hmm.
to serve. We're not going after PCPs, we're not going after med-oncs. And so when it comes down to it, we're we have a world-class team. They do great things. They gain access, they get coverage into the broad-based community, and you know, we take it from there. You also have to think not only about adding the sales team, but also the support functions, right? And so, you know, we have to make sure our lab is ready to scale. We have to make sure client services and billing are ready to scale. And so those all those things, that's actually a bit of a governor on how quickly you can add headcount, because you don't want to add 10 heads and then not be able to support.
Mm-hmm.
That actually is the worst case, because one bad customer experience, and you've lost that doc for a long time.
Mm-hmm.
So we're very balanced in how we go about, you know, adding across the board.
We've talked a little bit about the thyroid market, but the prostate market's about 30% penetrated. Where do you see penetration peaking?
Yeah
for Decipher, and how long do you think, you know, your growth runway is ahead of Decipher, and what does it take to get to peak penetration?
Great question. So, you know, across all of our tests, we think that 70%-80%% level is roughly right. Using Oncotype Breast, they, I mean, peaked out 78%, 80%%, so that's the predicate that we're basing that statement on. What do we have to do to get there? Keep going. So, you know, I think gaining access to the metastatic population, because obviously, it's hard to penetrate something you can't access, is critically important. Broadening awareness, continuing down the clinical evidence, podium presentations, medical conferences, et cetera, and broadening coverage. And, you know, I, I'm sick of myself saying the word framework, but keep on going back to that framework, right?
Mm-hmm.
So really kind of going through those four or five different things, and doing so, to broaden awareness is really what will get us there. So, I mean, the good news is we know what works, and we've done it to get to 30% in a very short period of time. I think that 30% will propel us to 70%, or 80%. And between Afirma and Decipher, we're really confident that we can deliver outsized revenue growth over the coming years with a differentiated financial profile-
Mm-hmm
and an approving financial profile.
And then before we move on to the R&D pipeline and some of your longer-term drivers, for both Afirma and Decipher, how far do you have pricing visibility for these tests?
Yep.
When's the next PAMA reset date?
So the next PAMA reset date isn't until 2028. So we have pricing visibility for... I mean, knock on wood, obviously, there's always a risk, but, we have pricing visibility vis-à-vis PAMA all the way through 2028. We also have more on the Decipher than the Afirma side, a number of payers to continue to go after, right? We're roughly around 200 million covered lives, with the contracted numbers slightly, you know, below that. And so we still have some wood to chop there to really kind of hopefully improve ASP over time. So I think we have very good visibility. There's still work to do. Our managed care team is immensely talented, and they work really hard to, you know, get the Afirma number up closer to 300 and get the Decipher number up, too.
So, 2028, the PAMA date, but outside of that, you know, given we are in the MolDX jurisdiction, given we have Level 1 evidence for Decipher, given we, you know, are effectively part of the clinical workflow over the last 10, 12 years for Afirma, I feel like we're in a, Again, I've touch wood while I say this, but I feel like we're in a very, you know, we're in a very stable environment from a reimbursement perspective on a relative basis.
Perfect. Moving to the IVD strategy
Yep
For a number of recent announcements, but you've decided to move towards a multi-platform strategy instead of focusing only on the nCounter. So could you give us some insight into what drove the shift in strategy?
Yeah. I mean, optionality is your friend, right? And so when you think about when the company originally made the nCounter decision, a lot of things have changed dramatically, right? With COVID, the number of qPCR instruments that have been installed dramatically changed. With NovaSeq being launched and the taking down the cost of next-generation sequencing over the last four or five years, the economics around going into NGS have dramatically changed. Also, the company didn't have at that time the Decipher asset, right? And Decipher is a 22-gene assay, which on qPCR is immensely cheaper than it would be on nCounter. And so I think over the last four or five years, a lot has changed, and one of the things that I really, and I should have mentioned this in the beginning, I really enjoy about our our-...
The way we run this company is every year we take a look at our strategic plan and what's changed, what hasn't changed, are these still all the right decisions? Through that process this year, you know, we said, "Let's explore these other things and give ourselves the option." The benefit of it is multifactorial. One, you're benefiting from the installed bases, which effectively allow you to hopefully penetrate more quickly, 'cause you're not trying to also place a capital sale and/or train a new team on how to use an instrument they may or may not have familiarity with. And then on the cost side, the cost of qPCR and NGS is more attractive, both from a COGS perspective as well as a development perspective.
And then on a future go-forward path, you know, there, if we were to double down on nCounter over the next five to 10 years, you can think about many lifecycle management things that we would probably want to do, and that would include adding hardware and software resources to the organization that, you know, that are required to sustain a platform. And, you know, for all of those reasons, we really chose to go down this path of having optionality and looking at the best platform for the test. Very well may be qPCR, very well may be nCounter, but giving ourselves that option is really. We're excited about that path forward.
Got it. When we think about the structure of the agreement-
Yeah
with Illumina, could you break that down for us a little bit? And how could that differ from the economics of a qPCR partnership?
Yeah. So the structure, for good or bad, everything about Illumina's agreements are out-- is out there right now-
Mm-hmm
in the open market, given the, the Grail open offer, right? So, you know, our agreement isn't any different, materially. So, you know, there are small tweaks, one, one place here or another place here, but I think for all intents and purposes, I would just encourage you to go look at that. qPCR, you know, it very well may be materially different, right? You aren't necessarily, They're much more used to having the, the breadth of, of assays on their platforms, and so, you know, perhaps there might be a tech assessment access fee. Sorry, couldn't get that one out. But I think when it comes down to it, it's, it's much more plug and play, if you will-
Mm-hmm
than some big structured agreement. We don't necessarily believe, at this point in time, we need to be signing something similar on the qPCR front.
Got it. On the initiative to bring manufacturing in-house, you've decided to stand up manufacturing faster
Yep
than originally anticipated, given some supply chain disruptions. When do you expect to have that transition complete? And then any color on the potential margin improvement that this could bring to the product segment longer term?
Yeah. So, longer term, I think about the product segment margin profile really being driven by volume absorption, as well as the difference in what an nCounter costs to produce, an nCounter kit costs to produce versus a qPCR and NGS kit. So this manufacturing transition is critical for the company, but I think about it more from a controlling your own supply chain and destiny perspective than I do from a benefit to the financials in the near term.
Mm-hmm.
That being said, you know, we expect to have this done this quarter. It's been going on for a period of time. You know, the team, both in Marseille and the U.S., is working immensely hard to ensure that is the case. And, you know, while we're managing some supplier disruptions in the near term, we believe, you know, hopefully very shortly into 2024, we'll be through the woods and going forward.
Got it. I've got two more, but I'll pause here for anything. All right. So Veracyte is fairly unique in diagnostics. I mean, operating at ± cash flow breakeven today, top-line growth is great. You're self-funding your R&D pipeline. As we look ahead, how do you think about, you know, balancing that R&D investments to continue to drive growth versus cash generation? And is there any, you know, opportunity at some point to see an inflection in, in cash generation?
I think you've seen it in 2023. So all jokes aside, I mean, this year, we've generated cash in four of the last five quarters. We have given cash ending cash balance guidance, where we'll, you know, we ended last year at $180 million. We're saying we're gonna end this year more than $200 million, so by definition, we're gonna generate pretty nice cash flow this year. And as we look forward, the attributes that allow us to do so are only continuing, right? And so one of the things, you know, the entire management team is very dedicated to, is an improving financial profile. So we think we can absolutely fund our long-term growth drivers. We do not need to sacrifice revenue growth to have an improving P&L and technology, and that's something we're super excited to do.
And so I think the differentiation is only going to become even more acute.
Mm-hmm. Lastly here, reimbursement risk has obviously come back into focus with the Novitas
We should switch those. We should have done that.
Yeah, it's true, the Novi situation and obviously what's happened in the transplant market.
Yep.
But now we've also got uncertainties around the FDA and regulation of
Yeah
LDTs. So in the context of those factors, I mean, how do you see Veracyte's position versus the average?
Yeah. No, absolutely. We kinda covered the reimbursement piece earlier, but just to reiterate, I think given the Level One guidelines for Decipher, as well as, you know, Afirma's clinical utility and duration on the market and how it's embedded right now in practice, I don't necessarily feel from a reimbursement perspective, there is meaningful risk. We're already being held to the high bar that is MolDX, and, you know, for those reasons, we feel relatively confident in the stability of our reimbursement profile. FDA is not a dissimilar story. Obviously, you know, we will do our best to partner with the FDA if they do decide to bring regulation to bear.
We are already holding ourselves to the New York State standard, and the New York State standard is the highest standard out there. So, you know, depending on how the final rule would look one way or the other, you know, we're obviously already operating at incredibly high quality levels, you know, with the quality management system and all the associated requirements. And we're very confident in our ability to, you know, wherever the bar lands, to be able to meet that bar in a reasonable amount of time with, you know, a reasonable amount of spend. That doesn't change our financial profile. So I think all in all, you know, we're working with our industry peers. We're working,
You know, we're commenting, obviously, to the FDA, and I think we feel very well suited to meet whatever level of scrutiny they decide to apply to the industry, given both how long we have operated, how at what quality levels we have operated, and, you know, the effective use of our technology more broadly. So, you know, it's a risk. It's been out there for a long time, right? So I think we first started talking about this 10+ years ago. This time feels a little different, admittedly, but we'll see. And, you know, I think Veracyte is absolutely well suited for that environment if we need to be. We know how to make IVDs, we know how to operate at high-quality standards, and we'll be just fine. So.
Perfect. I think we'll wrap there. Thank you, guys.
Thank you, guys. Thank you for the interest as well. If you have any follow-ups, please just reach out.