All right. Okay, great. Welcome, everyone. I'm Puneet Souda, I cover Life Science Tools and Diagnostics, and my pleasure to be hosting the team Veracyte. Joining us is, CFO, Rebecca Chambers, and CEO. Sorry, CCO, John Leite. Welcome to our conference.
Thank you.
Thank you.
Thanks for having us.
Great! So maybe, Rebecca, just to start with, you know, take us through a little bit of the core of the Veracyte business. You have a very strong Decipher franchise in the market.
Yep.
A maturing Afirma business and potential for more maybe clinical readouts, longer term on nasal swab. So tell us, where do you feel confident on continuous, you know, strong, continued growth, and where there's more room to be, you know, room for work to be done in the portfolio?
Yeah. Thanks, thanks, Puneet, and thanks for having us, first and foremost. And before we get to dive into the question, I just want to remind everyone of our Safe Harbor event. Nope, our Safe Harbor that can be found on our website, veracyte.com, in the shareholder investor section. And any comments that we make today obviously should be considered covered under that. With that aside, so you're absolutely correct. We have a really great portfolio today that is driving a good deal of growth. So Afirma and Decipher account for more than 85% of our revenue today. And we believe that they're at early enough stages in their respective life cycles, that that can continue to—they can continue to be good drivers of growth for the foreseeable future.
On the Afirma side, we grew 14% in the first quarter. And so while the product, the test has been on the market for quite a long period of time, we are really seeing, over the last few years, a resurgence of growth. That growth has really come from reinvigorating the product itself through offering Afirma GRID, offering TERT as an offering for the test, as well as really focusing on customer experience. And so, for all of those reasons, you know, while Afirma may be a lot later in its life cycle than the Decipher offering, we do believe it will continue to demonstrate that growth for the foreseeable future. And not necessarily tying that specifically to a rate, just more that it'll be a good growth driver. On the Decipher side, we've had a fabulous couple of years.
Last year, volume grew 39%, which, you know, for a test that's been on the market now since, you know, 2015, 2016, is a quite strong rate. And really, that was catalyzed by receiving NCCN Level 1 guidelines in September 2022. So there are three competitive tests on the market. Decipher, by far, is the leading of those tests, and has the leading guideline recommendation for that test. So that really was what catalyzed last year's volume numbers.
But when we look at this year, I think it's relevant to share, and John can go into this further. We most recently had an update to those NCCN guidelines that was incrementally meaningful and differentiating as well. Now there is a table that effectively, you know, helps guide the physician for the appropriate clinical treatment based on a number of different variables, as well as the Decipher score. And so we view that to be, you know, as you think about the rest of this year and next year in terms of a growth driver, we view that to be quite exciting, and something that will help us continue to demonstrate really solid growth, to that end.
If you think about the longer term growth drivers that you cited, you know, there's really three, and I'm sure we're going to get into them, but the three that we're investing heavily in are effectively the minimal residual disease portfolio, our outside the U.S. strategy tied to offering IVD tests, as well as our nasal swab clinical utility study, and the associated commercial launch. And so, you know, we're obviously quite excited about those three things. They won't necessarily bear out in the second half, per se but will bear out over the coming years.
As we look to the second half, per that portion of your question, really, I think the most kind of the most exciting things for us are seeing how these guidelines play out for Decipher, as well as the draft LCDs, which will be finalized for Decipher, Afirma, and Percepta in the third quarter, if not in the fourth quarter, 'cause those will open up incremental indications for both our Afirma and Decipher tests, and for nasal swab, could offer pathways to reimbursement.
Interesting. Okay, that's great. Yeah, I want to come back to the draft LCDs and both for Decipher and Afirma in a bit. But maybe just can you remind us where the penetration is for these tests today? And then just following up on that, what you talked about with Afirma, TERT, GRID, these things are driving growth for the product, but is that, just help us, you know, understand from a day-to-day, from a frontline perspective, from a customer perspective, from a physician perspective, why, you know, what's making them take on this test? Is it more of the features, or is it GRID, or is it? M aybe just walk us through that.
Yeah, sure. I'll hit the penetration, and then do you want to do the second half? On the penetration front, the market penetration for genomic classifiers for Decipher, for prostate, is around 35%, with, we believe we have the majority share at a minimum. And on the thyroid side is more than 60%, and we believe we again have the majority share, and our growth is coming both from penetration and share gains.
On the Afirma side, it's probably the most extensively validated test among its peer group. With the addition of TERT, the addition of the GRID, RUO report, we're making it a far more attractive offering, especially among physicians who have an inclination to want to reinvestigate how their patients are faring. Be able to use and apply some of those signatures in the GRID to understand new insights into the biology and evolution of the disease, so that they can publish. So it's much more attractive now on the KOL side, and it's having a reinvigoration then from how you track demand, right? Which starts with the KOLs. They go and take on pulpit time, present results coming from Afirma, and then you see that adoption trickle down into the community.
Then overall, we've just made the test more attractive and more, I'd say, seamless and more user-friendly. The addition of the physician portal and simplifying the ordering and reporting process. On the Decipher side, it's the strength of the evidence associated with the test. There are now, literally, I think, close to 100 publications on Decipher. Overall, we've secured a very enviable position in the NCCN guidelines with Level 1B evidence. It's the only genetic test that has that level of evidence rated by the NCCN.
As Rebecca mentioned, it's got a table specifically dedicated to not just what's the level of evidence associated with the test, but also how do you manage a patient that presents with an NCCN risk, and then the associated Decipher risk score pointing to various interventions, and those interventions themselves are backed by levels of evidence by the guideline setters as well.
Got it. Yeah, no, indeed. Rightfully said, I mean, there's very strong clinical evidence for Decipher. It's continued to gain market share. You know, but, you know, these are numbers that are getting larger, so maybe just help us understand when, you know, sort of how should we think about the, you know, long-term growth of the Decipher product itself? And within that context, what are some of the, what are some of the things that we ought to be looking for, maybe this second half this year . And into 2025, that could move the needle in terms of NCCN, LCDs? Maybe walk us through that.
Sure. So, there's still work to do on overall penetration, so that, that will go on. And N CCN guidelines are helping us to flip physicians who would be reserved from using the test. Secondarily, we have an additional LCD, as you rightfully point out, that's currently in draft form. There's a statutory obligation to flip that then to a final version by end of this year. We are eager in anticipation of that LCD, which covers the metastatic setting for Decipher. That would bring on then more patients and more clinical utility and value around the test.
Is it largely coverage, or is there, would there be a pricing benefit?
It's mostly coverage.
Okay.
Mostly coverage.
And- [crosstalk]
We would have to follow up with the tech assessments to-
Yeah
Demonstrate that our test performs in that indication . But yes.
What would be the size of the population expansion?
We've communicated an estimated 30,000 patients incremental.
Okay.
It will be paid with the same code, so it's the draft LCD is to expand the indication into metastatic . The LCD, the metastatic use of it will be paid under the same code, so ASP would be in line with current Medicare rate carriers.
Got it. Okay, excellent. When you think about further indication expansion, now, there's a long list of indication expansion for.
Yeah.
Decipher over the years, but, you know, maybe tell us what lies ahead beyond metastatic, and what are some of the areas that you're exploring?
Well, what we've outwardly communicated is a bladder test and a non-muscle invasive bladder. We continue to develop evidence and support of that test to drive adoption. And then recently, we've announced the acquisition of our C2i company. In the minimal residual disease space, we will have a test for muscle-invasive bladder cancer.
Yeah, so that's, that's a good pivot. I want talk a little bit about the MRD technology that you have. When you, you know, when you think about the MRD sort of landscape, muscle-invasive bladder cancer seems to be. I mean, that's your first indication, I believe, and then potential indication expansion from that.
Absolutely.
Beyond that, s o maybe just talk to us about sort of what brought you to sort of this asset. It did look like a bit of a COGS-intensive asset because of the number of genomes that you have to do. So maybe also talk about the gross margin there.
Maybe I'll start with the platform and you'll deal with COGS?
Yeah.
So we were attracted to the platform, right from the very beginning, in a sense that it's consistent with our overall philosophy of, I would say, strategic philosophy of running more genetic content than necessarily is needed for the test and the indication at hand. But the value of the aggregation of that data, data over time, combined with the patient outcomes, becomes a valuable tool that we can leverage, both for developments of evidence, collaborations with key opinion leaders, who ultimately drive new insights, publish on those insights. Some of those make their way to improve the test, but ultimately, that evidence is what's driving more demand in this continuous virtual cycle that we call the Veracyte development platform.
It's very much in keeping with that. So as you know well, current MRD solutions on market tend to use a broad panel to characterize the tissue to start, identify key mutations that you can fingerprint a patient on, but you're following that patient with a very narrow set of genetic markers that over time, the data aggregation is minimally valuable. Look at that in stark opposition to what we're providing through C2i. We start the patient with a whole genome of their tissue, followed by a whole genome of their blood, and we follow that throughout time. There's no telling what we'll learn about taking multiple snapshots of how that patient's cancer evolves as a response to therapy, as a response to intervention.
The research applications alone will foster a great deal of collaboration, will create a gravitational pull of key opinion leaders, of anyone who's really interested, who's going to be influential in this space, to want to be on this platform, to drive their samples through this platform, to develop the insights that then they can publish on, again, feeding the Veracyte development platform and creating a virtual cycle of demand around this test as well.
You know, if we look at the indications for muscle-invasive bladder cancer, you know, a part of the question is, when you look at the overall landscape of the, the MRD test today, it's an appropriate indication to go into, but sort of, do you expect this to be, you know, a space that is going to continue to get competitive or, and I mean, the market is large, $20 billion size overall for MRD, but, you know, as you penetrate this market, do you expect to have any sort of revenue? I believe you're launching in the first half 2026 with the Assay.
Correct.
Do you think that you would have any revenue before that in LDT for this? And then do you think, y ou know, sort of talk to us about the market positioning of this Assay, if in case other leading competitors already get to muscle-invasive before you.
Absolutely.
You want to start with financials?
Yeah, sure. So we have not baked any revenue into our guide for this year, and obviously haven't commented on our guide for next. But I think what you could assume is, you know, we do think this is an asset which we will engage pharma companies with. And y ou know, we obviously have a biopharma business, but that's a very different business than this one, right? And so, you know, definitely not the core reason, and our focus engaging pharma will be less on the revenue side and more on effectively generating the evidence for clinical utility and the body of evidence in general, right?
And so I would focus those where John and team are focusing those efforts primarily on the clinical evidence, more so than revenue, but it doesn't mean that we couldn't have revenue over that same period of time. In 2026, you know, we believe that that timeline is tied to getting reimbursement for you know, the muscle-invasive bladder test, and so from an LDT perspective, we wouldn't necessarily have revenue ahead of that, right? Because, you know, just by the way, the nature of payers, Medicare is first, and then commercial comes subsequent. So, you know, I think it really, it really does boil down to meaningful revenue in 2026. Going back to your COGS question.
I think it's a fair one, and obviously something we studied quite intimately before we moved on the acquisition. You know, for the reasons John articulated, we feel very comfortable in the overall cost structure of the C2i offering, or the Veracyte offering today. So while the COGS themselves may be a little bit higher than some of the bespoke panels that are out there, you know, we do think that it will be an attractive margin profile and one that will be able to support a profitable franchise for MRD. And so, you know, over time, depending, you know, they can fluctuate a little bit depending on kind of your mix of different tests and types of tests.
In any given period, b ut we do, we do expect that to, you know, get to some level that's not fully at the corporate gross margin level, but, but attractive enough that it's pretty darn, you know, pretty close. So, we feel, we feel good about our estimates there. We have not taken into account meaningful reduction in sequencing costs to come to those estimates either. And so I do think there are, you know, different levers that we can pull, as time goes on to, to make this even more attractive.
But, you know, I think what we learned from Decipher is we can be second to market or even third to market, as the case may have been, and we can still have a, based on this Veracyte diagnostic platform approach, really have a differentiated view, and that, you know, lends itself to less R&D and sales and marketing spend, too. And so when you think about it on an operating level, you know, I do think we'll have a more attractive offering to that end.
Okay. You know, that's what I was gonna continue with, is sort of what, you know, as you think about the sales process for this product. What can you leverage, and where do you think you'll need to hire more in order to sort of serve the market?
Yeah.
Because obviously, it's a, you know, it's a broader oncologist market in some sense, but then you have sort of urologist and a urologist oncologist market.
Yep. You're absolutely right, and it's no secret we plan on drafting behind Decipher, where we've already built and established a strong channel. We have the trust of those physicians and those relationships. It is a complex sales environment with multiple stakeholders, not just the urologist, but also a radiologist, interventional radiologist, the pathologist, and more so now with the LCD and metastatic oncologists as well. So metastatic will really be our first opportunity to develop further relationships with oncologists who manage urology patients, and these are either physicians that reside within the LUGPA right away or just in a referral relationship with those partners.
That is primarily how we'll introduce muscle-invasive bladder cancer. On the others, it's very much a lather, rinse, repeat. It's start with the GRID, offer an attractive offering for KOLs to want to jump on. And then drive the message and the demand downward into the community. So as such, there's not really a requirement for a large oncology-focused sales force, though it is our plan to build that organically and as gross margins allow.
Is there any consideration? Sometimes we get this question from investors, that if a patient is already on a test, it's obviously it's hard for them to switch in an MRD setting, and if a physician is already prescribing that, it is harder for them to switch. How do you think about that sort of from a competitive positioning?
Switching is challenging in a sense that the way that the bundled pricing is done through Medicare, or a t least for Medicare patients. M ost of the tests are pre-sold as a bundled set. We can compete quite well in a sense that Veracyte, as a diagnostic firm, is primarily focused on early cancer diagnosis. So really, we are probably the first test that a cancer patient would encounter to decide whether this is going to be a prognostically high-risk cancer or a low-risk cancer. In that episode of care, and in following that patient throughout the episode of care, we're in prime position to capture that patient versus the incumbents.
Okay. Just switching gears, wanted to get your view, Rebecca, on after C2i, how are you thinking about overall M&A? There's, you know, there's assets in the space that are not profitable, that have run into some sort of challenges and whatnot. You do have a decent cash position, so maybe just talk about M&A. How are you thinking about it? Is it more of the targeted fit, or is there something, the bigger strategy there?
Yeah, happy to do so. And you're right, you know, our cash position and our fiscal responsibility is something that we're quite proud of. And I think one thing to note is over the last three years, since you know this management team has been at Veracyte, we've done a lot on the portfolio pruning, right? We have really focused on ensuring, you know, the incremental dollar of investment is going to something with the highest ROI. That strategic planning approach gets looked at every year. And so, you know, I think when it comes down to these types of questions on M&A, you know, we've already gotten, we've already shut down a number of projects that could be put in the high-opportunity, high-burn category.
And therefore, you know, we aren't necessarily interested in investing in something that isn't going to fit our financial profile in the near term. C2i is a good example, right? Because we're effectively, we were able to absorb the investment in the MRD space and not change the fact that we're going to generate a good amount of cash this year, right? And so, this 2024 will be the third year in a row that, you know, we're in a cash-generating profile, and we don't want to change that, and we don't have any plans to change that. And so, you know, I think when it comes down to M&A, obviously, there are a ton of assets out there in the space.
A ton of them have really challenging financial profiles, and that's not something we're interested in taking on. You know, we are being reactive at this point in time to looking at things to the extent it makes strategic sense, but we are not out there. Y ou know, we, we feel like we have both the breadth of the continuum of care, as well as the depth of the bag that we feel like we need to be really successful here. So, you know, never say never, but it is not a strategic priority for us at this point in time. And, you know, from a cash generation perspective, we're really committed to, you know, just increasing that balance year- after- year.
Got it. Okay. Want to touch on the nasal swab, NIGHTINGALE study there had some delays. Can you talk about what drove that? And, you know, when do you, does that change the launch timeline for that asset?
Sure, so I can touch on that.
Mm-hmm.
So the development of a clinical trial that's robust and it's optimized for maximizing the likelihood of a successful outcome is a double-edged sword in the sense that you then develop enrollment criteria that are fairly stringent and that ultimately have an impact on your enrollment efficiency and timelines. We underestimated just how stringent those requirements were and the impact that it would have on our enrollment success. This is not to say that there's not demand for the product. In fact, many of the patients that would otherwise, in a commercial setting, be eligible for the nasal swab test, we had to turn away for a variety of different reasons.
Some examples that I can give you are, there is a very tight window with which a nodule gets identified to how quickly then a nasal swab has to get done. That's part of our inclusion criteria. A physician using an additional intervention or a diagnostic to try and get more information about that patient before the nasal swab would disqualify them from the enrollment, like the use of a PET-CT prior to nasal swab testing. So these are things that are done to maximize the likelihood that if a physician changed their practice pattern and how they were going to intervene or accelerate to more aggressive intervention versus a de-escalation of the intervention, that it is strictly a result of the nasal swab test and nothing else.
I see. Okay. Okay, got it. Interesting. Just staying in on sort of products, on the product side, from the biopharma side, biopharma has, you know, the business from the time, you know, again, going back two to three years, it has declined steadily. Just maybe give us your high-level thoughts on how do you see that business? Do you expect, you know, recovery in that segment as well, or is there another strategy for that business?
Yeah, happy-
Yeah.
Happy to do so. I think, to baseline us. O ur biopharma business over the last two to three years has been primarily, the old biopharma business that we acquired with HalioDx. If you recall, the purpose of the HalioDx acquisition was really to gain a foothold on the IVD development and manufacturing side. This has always kind of been non-core for us for a number of years. It was generating a good deal of revenue and therefore, you know, all was well. But I think as we've gone through this macroeconomic cycle, this asset really plays much earlier in the clinical R&D portfolio, if you will.
So much more on the discovery side of our biopharma customers, and therefore, you know, I think has been, was hit earliest, in terms of the different factors of the space. We really started to see the impact in the back half of 2022 while I think most other businesses really saw it more in 2023. And so I go through this history to say that we've actually, you know, we've managed these costs as well as we can over the last couple of years, bringing down the size of that team quite dramatically, and we're continuing to do so now. We're currently undertaking a voluntary plan of reduction in force in France, where these employees are based.
And so, you know, as you look towards the second half of the year, we absolutely are doing our best to right-size that cost structure. As you look forward, we agree, obviously, the biopharma space is something that we will expect to see a rebound here, hopefully in the near to medium term. But when we think about really kind of our highest value proposition to that customer, and it's not, it's much more focused on ensuring the Decipher test is being played or used appropriately to, you know, for those types of biopharma customers, as well as on the MRD front.
And so while we'll always, you know, we expect this biopharma portion of our business to be earlier stage and smaller, I think we've absorbed a lot of that, a lot of that decline over the last couple of years. We're rightsizing the cost structure and we're looking forward to more opportunistic, you know, engagement with pharma across the CLIA portion of the business, if you will.
Yeah. So, fair to say, I mean, clinical will still continue to remain the focus, but as biopharma opportunities arise for the existing portfolios, then you'll capitalize on those?
Correct.
Okay. Okay, got it. You know, when you, you know, look at the sort of current gross margin that you have, I think you're guided to gross margins flat in 2024. You know, C2i is sort of coming in later, but so I, I'm not sure if that's what's impacting. But maybe just talk to us sort of the puts and takes on the gross margin side, and what can you know eventually you know push that higher?
Yeah, no, I think you know, gross margin, if you look at our testing business, which is 90%+, you know, around 90% of our total revenue. Gross margin for that business over 2023 and in the first half of 2024 has been in 71%-73%-ish, r ight? I think we've done a really great job driving the efficiency of the lab and really ensuring that we're seeing the benefit of that efficiency. We're not done. We have a very robust roadmap of COGS improvements that we'll demonstrate over the next three years, three to five years for our CLIA operations business, which we're very excited about. That strength in the testing portfolio has allowed us to really kind of absorb some of these headwinds that I was just referring to, with regard to kind of the cost structure of the biopharma business, if you will.
And so when you think about flat, you know, when you think about flat year- over- year, you're effectively seeing really great testing growth, and margin absorb, you know, some of the challenges on the biopharma side, where you can't move as fast as you would like on that cost structure. And so, you know, I think to me, that's a win. And obviously, we'll always do our best to beat guidance. But you know, I think when it comes down to it, you know, over a three to five-year period, that will be, that'll be a margin expansion story. The other thing that we've done, you know, and I can't—this is, this has been John and his team. We've had a number of payer wins.
O ver the last couple of years, a lot of out-of-period collections that have resolved from, from prior, you know, prior engagements with payers that were more challenging. And, you know, obviously, the most recent Decipher contract that we were able to sign here in the first quarter, you know, I do think that obviously does help margin and bolster margin as we continue to move down that path of incremental coverage and contracting for both Afirma and Decipher.
And while that's a longer tail, you know, of payers with smaller chunks versus the one we announced in the first quarter call, it obviously is something that will continue to help bolster the margin profile of the business. You know, to the extent we have labor price increases or supplier increases, which obviously, that's just part of life, you know, do our best to offset those. So we have two different vectors to pull on, from a gross margin for the testing business.
Got it.
All good news stories.
Just in the time we have left here, you pointed to three drivers: MRD, OUS, and, you know, the pipeline opportunities. But internationally, can you just describe what's the strategy going forward if, you know, you're rightsizing the business in France and things like that?
Yeah, that's a very narrow piece of it and not necessarily tied to the IVD growth driver. We're absolutely investing in that portion of it. S o do you want to take that piece?
Yeah. So our goal ultimately is to ensure that tests that we develop as part of our LDT offering if they have an opportunity and the business case merits it, then we have a path to bring them internationally through our OUS channel.
I see. Okay, got it. Got it. Okay.
Oh, yeah.
Yeah.
We're out of time.
Please, yeah.
But the first one of that will be obviously Decipher in the back half of next year, Prosigna NGS in the back half of next year, and then nasal swab commercially available in the following year.
Do you expect pricing to be international to be lower compared to U.S.? Is that-
Well, it's a different model, right?
Yeah.
So we're effectively sharing the margin with the lab, but we-
It's country by country.
It's country by country. But we think it could be a very attractive margin profile on qPCR and next-generation sequencing, so.
Okay. All right, that was-
We're thinking about it more on the margin, the profit line than the revenue line that way.
Okay. Got it. Awesome. Well, that's all the time we have. Thank you.
Thank you so much, Puneet.
Thanks for-
Thank you.
... being here. Okay, thanks.