Hi. Hi, everyone. Good afternoon, thanks for joining us today, wrapping up the first long day of the Growth Stock Conference at William Blair here. This afternoon, we're pleased to welcome the team from Veracyte here. Joining us, we have the CEO, Marc Stapley, CFO, Rebecca Chambers, and then from Investor Relations, Shayla Gorman in the audience. Just two quick pieces of housekeeping. This is the last presentation of the day, so we'll just stay in here for the breakout. We'll cut the webcast a little bit after you're done with the presentation, and we'll get a couple of questions in, and then we'll open it up to Q&A. And then separately, for a list of research disclosures, please visit williamblair.com. So with that out of the way, Marc, I'll turn it to you.
Thank you, and appreciate it. And it's, it's an absolute pleasure to be here again. Really good to see everybody, and thanks for your time. So before I get into, you know, the, presentation main, obviously going to give you, a quick look at our, safe harbor statement here, which can be found in its full text on our website at www.veracyte.com. So let's get into the business and, update you on, on what's been happening in our company, which is very exciting. A reminder to everybody of our, our vision, which is to transform cancer care for patients all over the world. At the center of everything we do is the patient who has been diagnosed with cancer or is at risk of having cancer.
And I think we all recognize this is an emotionally devastating time, and we're dedicated to bringing clarity and confidence so that every patient can have a personalized plan to optimize outcomes. From our single product focus in endocrinology more than 15 years ago, we have come a very long way with a portfolio in thyroid, prostate, breast, and lung cancer. We've served over 450,000 patients worldwide, with tests offered in more than 35 countries, and our tests are currently being used in 35 clinical trials and are featured in over 500 publications. For all of our tests, we have a fundamental belief at Veracyte that more data, genomic and clinical, leads to better outcomes. We've always run a whole transcriptome for our Afirma and Decipher tests, and we'll run a whole genome for our recently acquired MRD tests in the future.
With our deep bioinformatic and AI capabilities, our scientific team develops broad insights for each of our tests, and our experienced clinical and medical teams drive repeated cycles of evidence development with both prospective and retrospective studies over time. We focus on evidence that allows us to answer key clinical questions and drive adoption and guidelines. And then with our years of experience in market access and reimbursement, we work very closely with payers to leverage the evidence that we've generated, and to meet their requirements of demonstrating the clinical utility of our tests. And then once we feel that we've de-risked reimbursement, we'll launch the test, deploying our commercial team with the evidence to drive adoption, and then this adoption leads to more data, which leads to more insights, to more evidence, and more utility, and again, more adoption.
This is what we refer to as the Veracyte diagnostics platform, and it's an ever-expanding flywheel fueled by that underlying belief that more data is better. If you think about our current core testing products, Afirma and Decipher, both of these tests, so Afirma for thyroid and Decipher for prostate cancer, are the leading tests in their respective markets, largely driven by this diagnostics platform. We were first to market with Afirma, but we were not first to market with Decipher, yet that using this approach has led to broad adoption for both tests and market leadership in both cases. We can also use the same platform to serve more of the cancer care continuum around a specific indication and also to fuel our growth across indications to drive more clarity for more patients. Getting into that next.
For example, take Percepta Nasal Swab, which I'll explain a little bit more in a moment. But with that test, we will move upstream in the care continuum to provide a non-invasive test for patients with lung nodules. Decipher, in prostate cancer, has expanded beyond prognosis into prediction of therapy response to treatment selection and avoidance of radical prostatectomy where applicable, and soon to metastatic advanced prostate cancer. And with the addition of MRD testing to our portfolio, we can now expand downstream, into monitoring therapy response and testing for recurrence. And all of this is driven by that same approach. So now getting into our strategic growth drivers, and think of these as the catalyst for growth in both the near term, medium term, and also the long term. And I'm going to take each one of these in turn in a moment.
But we've aligned around really these four key strategic growth drivers that you can see on the chart here. So firstly, gaining share in both our core Decipher and Afirma tests. For our global IVD strategy, we will launch three new tests in Europe over the next three years. Percepta Nasal Swab will be launched, our test for lung cancer, will be launched to solve new cancer channels challenges. And with our recent C2i acquisition, we've added an important growth driver, our MRD test, to serve more of the patient care journey, as I just described. So getting into Decipher, first of all. Decipher has more than 100 publications on clinical validity and utility, and an additional 73 discovery publications leveraging Decipher GRID.
Just recently, in February, updated NCCN guidelines were published, with Decipher Prostate receiving a level 1B evidence rating, the highest rating of all gene expression tests for prostate cancer. Additionally, because of this classification, the Decipher Prostate test is the only gene expression test for which the guidelines now include a separate table that summarizes treatment implications for patients based on both their NCCN risk classification and their Decipher score, which is a great outcome for Decipher. Q1 was a great quarter for Decipher. We delivered 16,500 test results, approximately 30% growth in volume compared to last year. But there's still plenty of opportunity to help more patients and drive penetration to what we think should be 80% of approximately 300,000 patients per year. The current market is around 30%-35% penetration.
To do that, we're focused on three key drivers. Number one, deepening penetration of the Decipher Prostate test in our existing and new customers. Growing the market through coverage expansion and adding the metastatic indication, and then continuing to utilize the Decipher GRID for research use and other efforts to further the flywheel of data generation and claims expansion. Now moving to Afirma. Since 2011, our Afirma test has been used by physicians to help hundreds of thousands of people with thyroid nodules. And I'm really proud, on behalf of everyone at Veracyte, to say that more than 175,000 patients, approximately 60% of those tested, have avoided an unnecessary surgery when facing an uncertain cancer diagnosis. Before Afirma, this wasn't happening and surgeries were taking place.
As a result of continued cycles of evidence generation and growing data, we, as well as others using the data, have meaningfully furthered the clinical evidence since that time. Today, more than 140 studies have been published on Afirma, including, importantly, a key meta-analysis of 13 studies in 2022 that demonstrated the performance of the test is even stronger than the original publication in the New England Journal of Medicine in 2012 suggested. In fact, we recently heard that meta-analysis in JCEM was one of the top 5% most quoted publications in all of 2023, demonstrating the reliance and importance of that study. And like Decipher, Afirma also had a great start to the year, where we delivered approximately 14,000 test results with revenue growth of 14% in the quarter.
Despite that strong performance, we do expect to deliver Afirma growth for the foreseeable future into a market that we now believe can grow to at least 80% penetration, relative to the roughly 60% market penetration that we think we see today. And this will be achieved through three key drivers as well. Continued execution to further drive penetration into both existing and new physician accounts, including accounts that might use other tests and, you know, driving Afirma there. Engaging with MolDX on their draft LCD to cover Bethesda five patients, who can also benefit from insights provided by Afirma. And then three, enhancing test functionality empowered by Grid and the customer experience to ensure that we maintain and grow our community of physicians. So that's the Afirma and Decipher growth.
Now moving to one of our longer-term growth drivers, let's talk about the IVD roadmap. We're executing on a multi-platform IVD approach, where we believe the quality of our diagnostics, the level of evidence supporting them, differentiates us. We've completed the transfer of manufacturing of our Prosigna assay to our Marseille, France, location, and it's already having a positive impact. We're focused on key product and market development activities that will help drive a steady cadence of IVD test IVD test kit launches over the coming years. First, we'll soon submit our existing Prosigna test for approval under the IVDR framework, and that is a key step that provides a foundation for the launches of our future IVDs IVD tests in oncology. Next, we will expect to Decipher Prostate to launch in mid- to late 2025 on PCR.
We also plan to launch an updated Prosigna test around the same time on next-gen sequencing, and we expect to have Percepta Nasal Swab ready for launch in 2026, also on next-gen sequencing. Moving to Percepta Nasal Swab. So let me explain a little bit more about that test. It's a novel, non-invasive genomic test for those patients with identified lung nodules, either through screening or through incidental findings, who have a smoking history. Last November, we published the clinical validation data for this test in the CHEST journal. As that data shows, this test improves risk assessment, which will help avoid unnecessary diagnostic procedures, time, and stress for low-risk patients, and support timely diagnosis and treatment for those who are high risk. The next critical step to launching this product is finalizing our clinical utility study, Nightingale, which we will use to support reimbursement.
Now moving to MRD. So as I mentioned, we acquired C2i Genomics in the first quarter, which is a company or was a company with novel whole genome sequencing capability in MRD. We picked that technology due to the whole genome approach and the talented team, and it ties in perfectly to what I was describing before as our Veracyte diagnostics platform. Remember, more data is better.... MRD is a large emerging market. I think everybody understands that, and it's one that's been estimated at around $20 billion. Our entry into this market will enable us to expand our role across the cancer care continuum, building from our strong position in early diagnosis and risk assessment to treatment monitoring and disease recurrence testing, making sure that we can continue to take care of that patient after they've been treated, as well, or after they've had surgery.
We'll focus on markets where we have a strong commercial channel and relationships with a clear path to reimbursement and expand from there to drive further success. So our approach of whole genome sequencing offers a number of benefits that together make this a differentiated assay, a differentiated offering in a very crowded market. Our assay requires less than 4 ml of blood, which is much lower than many competing tests. The rapid generation of patient-specific signatures available almost immediately after the whole genome assay is performed, compared to bespoke panels that take weeks to develop, gives us a time advantage, which is important when treating patients. And our approach takes the widest possible view of the tumor genetic landscape to deliver sensitivity that we believe enables earlier detection versus imaging and other molecular tests. And ultimately, we believe this leads to better outcomes.
By identifying the effectiveness of a treatment almost real-time, the physician can rapidly tailor the care plan for the patient. So let's talk about the start of 2024. I already provided some updates on the Decipher and Afirma performance in the first quarter, and our testing business led to a very strong start to the year, where we delivered first quarter revenue of $96.8 million, growing 17% compared to the prior year period. This strength, as I mentioned, was driven by our core testing business, which represents about 90% of our total revenue, and that business grew 25%, which was meaningfully above our expectations. We grew total volume to approximately 33,500 tests, and non-GAAP gross margin was 68%, again, driven by our testing business.
We ended the quarter, importantly, with $209 million of cash on hand. Veracyte is one of, one of the few diagnostic companies that is generating positive cash flow. So let me talk about that as I get into our guidance. So on our Q1 earnings call, we raised our total revenue guidance to $402 million-$410 million from our prior guidance of $394 million-$402 million. So this reflects an improved outlook for our testing business, with revenue growth guided now of 15%-18% for that business, which is a meaningful increase as compared to the prior guidance, which was 13%-15%.
Importantly, we also raised cash guidance and expect to end 2024 with between $236 million and $240 million in cash in hand - cash on hand, up significantly from the $209 million that we ended with in Q1. Just to wrap up the presentation, not only are we executing financially, as I think you can see, we're also extremely proud of our commitment to our ESG initiatives and the recognition of our dedication to date, as reflected in our inaugural ESG report. We'll continue to hold operating responsibility - operating responsibly as a core component of our strategy. So again, thank you for your time. Appreciate it, and I'll wrap the presentation. We'll move to Q&A.
All right. Thanks, Marc. So we'll take a couple questions before we cut the webcast and formally re-begin the breakout session here. But Mark, I think you laid out well a lot of the growth opportunity that exists in your current portfolio today, be that Decipher or Afirma. Maybe if you... I guess just to start on Decipher here, it seems like there's still a lot of runway left, right? So can you talk about the durability of the growth drivers there and what gives you the confidence that to say that you'll continue to drive market penetration moving forward?
Yeah, there is a lot of runway, and I, you know, for me, everything we do is based on, you know, what's best for the patient. And if you actually look at the math, with the market being around 35% penetrated, 2/3 out of every, you know, patient with prostate cancer is not getting a molecular diagnostic today. And if you think about the catalysts that we have for Decipher, based on the NCCN level one guidelines in that table I was referencing, that really call out, no matter what your NCCN risk classification is, how the physician should treat you. For example, I mean, that is a key catalyst, and we surveyed a lot of our physicians and found interestingly that 75% would follow that table.
You know, so that tells us that, you know, even for those extreme ends, the low and the high risk, physicians can now use Decipher to differentiate how they're going to treat the patient, and so that is a key catalyst driving growth in Decipher. Also metastatic, you know, metastatic indication, about 30,000 of new patients new indications every year or new instances every year in metastatic. And once that LCD gets finalized, hopefully towards the end of this year, maybe early next, we're able to launch, you know, or start billing for metastatic indication, and that the test will start being used for that patient population as well.
Then obviously, you know, back to the Veracyte diagnostics platform, just more of the use of GRID and more studies and evidence that supports Decipher. Then I'd say commercial payers. We added a payer last quarter. We mentioned a significant payer, added with 30 million covered lives. Some of that was already included in our numbers because it's Medicare Advantage, but a lot of it was not. And so now that provides a nice tailwind for growth in the future. We're not done with adding commercial payers. In fact, we're not even done in Afirma, which is, you know, as I said, about 13 years on the market in signing up commercial payers. There's always a long tail, but we're certainly done in the biggest ones. So exciting opportunities.
Yes. And I guess as you sort of think about that market in particular, I think you probably have the highest share among your competitors here.
Yeah.
But I guess from a penetration standpoint, can you just remind us where you think we are today and where you think the future might be?
Yeah. So as I said, yeah, the market itself is about 35% penetration. As you said, we are the we have the majority of that share. You know, from all indications, everything I've seen, we, we are growing faster, which means to me, not only, you know, as we go from this 35% to 80% penetration, should we be able to take the majority share of that, if not more, we, we can also continue to take share in the existing market as penetrated. And that's driven by the NCCN guidelines and the strong evidence that's behind Decipher. Remember, we're, we're the only test that is the whole transcriptome, and therefore, that continued, you know, cycle of evidence generation, it continues to be enabled on Decipher.
So you're looking forward to gaining share in both, you know, market penetration and our share of that market.
And given effectively where we are from a penetration standpoint, we believe both the combination of Afirma and Decipher can bridge us to the long-term growth drivers within a reasonably, very attractive growth rate. So I think, you know, the reasons Marc cited for the durability of Decipher growth are absolutely the case, and that's really where the confidence does come from for us to make that statement.
Definitely. So I guess maybe then to talk about Afirma, just, just really quickly, right? I mean, that, that's a test that's been on the market for well over a decade now, continues to grow nicely, surprisingly, I think, to some folks. But can you maybe sort of talk about the levers there for that product, what you're seeing in terms of some expansions via tools that you've launched, and how that's assisted in the growth rate?
Yeah, we've continued to invest in Afirma over time. We added the TERT indication, which we thought was a very important component of that test. So we launched with that. We also launched GRID on Afirma, and so we're starting to see a lot of interest in GRID from existing physicians and academics in particular as well. And so I think the, you know, plus a whole ordering process and making it easier for the physician customer has been enhanced as well. And so these continued investments in Afirma, we think have created a lot of renewed interest in the test.
And again, I think it's a very similar story to Decipher, a market that's about 60% penetrated, growing to 80% or more, and in that growth, you know, of that 20%, not only do we think we can take a majority share, if not more, you know, we can continue to take share because of the unique benefits of Afirma. Things like that meta-analysis I referred to, publications that demonstrate the performance of our test, I think also really help substantially.
So you're doing this profitably, right? So and I think, Marc, you mentioned to it, that's differentiated in diagnostics for sure. But can you maybe just sort of talk about in the model, if you have this sort of growth rate, where the sources of leverage are up and down the P&L, that gives you sort of the confidence to say you'll continue to generate cash?
Sure.
Yeah, let me start by, by saying, yeah, I think this might be one of the things that might be underappreciated. Veracyte is one of the few diagnostic companies that is generating positive cash flow, and, and, you know, profitability on, on some measure, which I'll explain in a moment. But that's based on our philosophy. You know, we've been very diligent about what we invest in the portfolio decisions that we make when we launch tests with a clear path to reimbursement and so on. And then, you know, as Rebecca said, we've got these near and medium and long-term drivers in our current portfolio of tests, that bridge us nicely to, to the long-term growth drivers.
Now, if I think about our industry, 'cause it's been a challenging industry, but if I think about that industry overall and where we are, you know, I think a well-run diagnostics company should be able to generate Adjusted EBITDA margins in the 25% or more zone. And when I say Adjusted EBITDA, I mean, you know, taking out the usual elements as well as stock-based compensation. If you look at Veracyte on that measure, in the first quarter alone, we're around 15% Adjusted EBITDA positive, 15%. So not suggesting that, you know, that's guidance for us, but that's where well-run diagnostic companies should be able to get to.
We'll continue to drive our philosophy of responsible investment and good portfolio management to make sure that, you know, as our top line grows, we have leverage in gross margin where we can, and, you know, we have leverage in the R&D and the SG&A lines. Rebecca, you might want to add a little bit more color.
I think you can handle that all quite well. I think on the sales and marketing side, perhaps it is a unique opportunity to mention the leverage we do get through the specialty channel. Other diagnostic companies are servicing PCPs or med oncs, and those require much larger channels. Our sales force has been roughly stable from a size perspective over the last three years, despite the extreme, you know, the very high revenue growth we've demonstrated for the testing business. Just a good demonstration of how we are getting that leverage and that profitability profile that Marc cited.
And then maybe just last one before we cut the webcast, but I think the one thing that you've talked about in the past is the P&L already does have some costs associated with it for your growth driver, your longer-term growth driver. So can you talk about that and how that could potentially further your revenue growth in the future?
Yeah, it's a great question. I, yeah, as I recall back to that chart that showed the long-term growth drivers and launching three products in IVD in the next three years, launching our Percepta Nasal Swab test with one of the, you know, a very significant study going on right now, our acquisition of C2i and absorption of that entire business and its R&D into our business and our development of an MRD test. Those long-term growth drivers together make up more than half of our total R&D spend. And I'd say roughly, you know, they're, they're not that dissimilar in, in size, each of them. And, and I'd say, you know, if you think about where we are with the clinical study for Nasal Swab, at some point, that study gets finished, right?
If you think about the development of three IVD products, you know, at some point, those products get launched. And so I don't see a big bolus necessarily coming in the future that would be any different from the level of investment. So to that point, I also see potential operating leverage there as well. You know, and I think if you consider how many development projects we've got going on right now that we've talked about, and the way that they drive future growth opportunity, I think you can see how we, you know, how we think about our business and how we can generate incremental leverage all the way to the bottom line.
Perfect. Well, we'll cut the webcast if that works.