Hello, everyone. I am Subbu Nambi. I lead the Life Sciences, Tools, and Diagnostics team at Guggenheim. Thank you for joining us today for our inaugural health care conference, Day 3. It is my pleasure to be hosting Veracyte. Joining us is Rebecca Chambers, CFO. Thank you for being here.
Thank you, Subbu. And thanks to the entire Guggenheim team for having us.
To kick things off, congrats on the recent quarter, also not surprised. And this is, we literally, our title said Veracyte, being Veracyte now.
Yeah, I liked it. I'm not going to lie.
What feedback have you been hearing since the reporting?
Yeah, absolutely happy to get into that. But before I do, we do need to reference our Safe Harbor, if you guys don't mind. So effectively, any comments that I make today should be covered by that. You can find it on our website, and happy to have that out of the way so I can answer your question properly. So we reported last week on Wednesday and had a pretty decently sized beat, not only across the revenue lines, but also across the P&L and cash balance, and so feedback, not surprisingly given the figures, has been quite positive. Additionally, we shared long-term, not long-term, but 2025 revenue guidance for Afirma, which was above expectations of high single digits. The Street had previously been modeling more in the mid-single digit range, and so that was positively received.
We wanted to get that out there because the comp in the fourth quarter for Afirma is more challenging, and we didn't want folks to read too far into that. So that piece has been good. Decipher continued outperformance has been quite positive. And overall, I think it was another quarter of Veracyte being Veracyte across the P&L and revenue growth drivers.
And so along those lines, what are you most excited about heading into 2025? More of Decipher, Afirma, just continue beat and raise?
So I think when it comes down to next year, our goal is absolutely to set realistic expectations out of the gate for guidance. And that's something that we're currently working on for our 2025 budgeting exercise. We'll be through that here in the next couple of weeks, hopefully, and setting ourselves up for that conversation in early January. And so that's super exciting for us. I think from an Afirma Decipher perspective, there are a couple of catalysts that have recently come to bear on the Afirma side, really kind of continuing to go down the path of penetration, market share gains, incidence growth, and then the benefit of Bethesda V as a tailwind is obviously something that has embedded itself into that high single digit, that high single digit growth expectation. On the Decipher side, we're super excited about ensuring metastatic patients have access to care.
That hasn't been the case to date. We're in the tech assessment phase of going down the process post the LCD being finalized here in the Q3. And really excited for that patient population to have access to this critical care information in the back half of next year. So that year. And that would be, we're going to do Adjusted EBITDA margins in 2024 of approximately 20% or slightly more than 20% is our guide. And we do expect next year to deliver some incremental expansion from that level. So all in all, shaping up to be another good year of proof of concept on the long-term growth drivers and continued execution on the near term.
Truly emblematic of a diagnostics 2.0 era. We'll spend the next few minutes on Decipher. On the Decipher growth, you touched on this. For the growth, what is the physician profile for new adopters of Decipher? Put another way, after the NCCN guideline evidence update, are you seeing an influx of more community oncologists or private urology practices? Or are the new adopters evenly spread among community, academic? Like, how are you seeing, where are you seeing growth?
Yeah, so I mean, not trying to be cute, but yes and yes and yes. I would actually bucket it into three different groups. We sell primarily into the community and the LUGPA setting, so the large urology practices. Those are roughly split, and then kind of the tailpiece would be more on the academic side. And so across all three of those, we do see growth, but I think really what we're seeing is the vast majority, not the vast majority, the majority of growth coming from those existing customers who are deepening across the risk spectrum, their use case. So the beauty of the NCCN Level 1B guidelines is for every risk category, low, intermediate, high, they effectively elucidate the best way to use the Decipher score. And so we're historically the intermediate disease that has lended itself to the largest benefit post the NCCN Level 1B.
Is it the sales force who are going and educating existing or ordering physicians, or is it the NCCN guideline or both?
It's a little of both, I think. I think when the NCCN Level 1B guidelines came out in late February, our marketing team did a really efficient voice of customer, and what we found in that voice of customer data was about three quarters of the physicians that we surveyed knew of the guidelines, and about 70% were going to be using the guidelines, and so that gave us a lot of confidence as we started embarking on this kind of awareness journey, so I do think the criticality of, again, across that risk spectrum and really elucidating kind of the if-then statement, to use nerdy Excel language, I think that really has been the differentiating factor.
And of course, we wouldn't be able to do any of this without our amazing commercial team, the market access team, and the clinical lab operations team, which really enable us to scale this business without skipping a beat.
You previously estimated that this market is roughly 35% penetrated overall. How much do you expect the market penetration to increase by end of 2025?
Yeah, so that 35% was an exit run rate of Q4 2023. So we'll update that for Q4 2024.
This is the entire market?
Entire market, not just ours. Yep. And so the way that we go about estimating that is actually CMS. There's Medicare data for codes that comes out in the middle of the year for the prior year. So we've seen through that that in 2023, we did take about 500 basis points of share using that data. And so I think when you think about where that penetration will be next year, I think you can back of the envelope it a bit based on for 2024, sorry, based on where we are today, plus incremental share gains that we've seen to date. So I don't know if we'll be ready to put out an estimate based on 2025, because I think to do so, you have to make market growth, market share, and penetration assumptions.
The combination of all of those is obviously there's a lot of variables to play with there. But I think most importantly, we are absolutely not only improving our market dynamics, but also really kind of growing into that 80-ish% share that we I'm sorry, not share. That would be a lovely two. But 80-ish% penetration that we believe we can achieve as a class of genetic classifiers for prostate cancer.
So of the 35%, what is the share of Decipher? Is it 50%? I feel like I've heard you say.
Yeah, so we've always said more than the majority. So that's where your 50% came from. I would say, as I mentioned, over the course of 2023, based on that Medicare data, we did gain some 500-ish basis points. And over the course of 2024, it feels like those dynamics are shifting even more in our favor.
That's lovely. What physician segment area still has the most room to grow, would you say, in terms of ordering Decipher, either to increase from the previously stated 35% or whatever the estimate is going to be for?
Yeah, I think it's whether it's a community, LUGPA, or academic physician, I really think, again, it's broadening across that risk spectrum more so than a physician type. Given its NCCN guidelines, it's pretty well understood that that's the best guideline-setting body for this area. And so folks are very aware of those guidelines. That survey I mentioned was across multiple different physician types. And so I think we're pretty well covered at this point.
Perfect. And you touched on this a little bit. Do you have any updates on the Decipher metastatic LCD?
Yeah. So just for the audience's awareness, the Decipher metastatic LCD was finalized in August. And so from here on out, what we have to do is a tech assessment. So we're in the process of doing. So that should be finalized by the end of the year, maybe early next. And then we'll train kind of a super user group for our sales team and then really roll it out more broadly in Q2. So we're tracking everything's going well, knock on wood. And that's a super exciting, from a patient care perspective, a super exciting thing that we can effectively enable folks to have the benefit of knowledge of their Decipher score. But also from a financial profile perspective, that is an incremental 10%, 10% more. I can't talk all the time. 30,000 patients incrementally. Thank you. Sorry. Apologies. I couldn't get the words out.
In terms of it's a $30,000 market opportunity, incremental market opportunity, how much volume growth should we expect in like the 2025, 2026 time frame? How much volume growth?
Yeah, the way we think about it is effectively, if you look at when Medicare came to bear for the biopsy indication, kind of thinking about that as an appropriate growth curve. And then obviously, if guidelines were to come for metastatic, that would kind of change the slope of the curve, I would think. But I think at this point in time, it'll be a very nice tailwind, but it's not going to be the primary growth driver is going to continue to be penetration.
Penetration. Got it. Shifting to Afirma. Starting things off with Afirma, great to see that the high single digit was reiterated. This is a product that's been around for a decade, and it can be surprising for investors to learn that it's still growing volume significantly. High level, walk us through your Afirma growth strategy. How have you been able to achieve this growth after so many years being on the market?
Yeah, no, it's a great question. And I think the management team got to Veracyte about three years ago now, just over. And really when we got there, Afirma was a great product, but hadn't had the benefit of innovation for a couple of years. And so we really started doubling down on that investment. We invested in GRID for Afirma. We brought to bear TERT. We did some customer experience enhancements. And really through that, we've gotten into this cadence where we're in the physician's office talking about something new pretty frequently. And that really, I think, is what has driven the, the incremental acceleration even of Afirma growth over the last couple of years.
I think the other thing on Afirma that has been pretty differentiating is there have been a number of publications over the last couple of years that are more looking at the different genomic classifiers in the space, and that has been incredibly favorable for Afirma comparatively to the other tests, and so I think those two things have been quite beneficial for us.
For the growth. With the recent Medicare coverage of Afirma for Bethesda V, which you have sized at 30,000 US patients, how has the penetration in that population ramped so far?
Yeah, so about a third of those 30,000 are Medicare related. And so those are the ones we can go after right out of the gate. That just happened in July. So we're still in the very early stages. We have been running commercial samples for Bethesda V patients here and there. It's call it around 5% of our volume. And so the nice part about having the LCD now is we can go and try and get incremental payment for those Bethesda V commercial as well. So early days, I think about it given the relative size of the 10,000 as a slight tailwind for next year, more so than a slam dunk of a tailwind. But I do think it'll be. It's a very important thing from a patient perspective. And it's not a headwind for us to face next year. It should definitely help.
Should definitely help. And from a Medicare decision perspective, how are the commercial payers? Are they being receptive, realizing it's early days?
Yeah, so I think when it comes down to it, our order of operations are managed care teams' efforts. And definitely, Decipher is the absolute lowest hanging fruit to continue to go after. But with that, when contracts do come up, they will have the discussion around Bethesda V. And so I think super early days, but that will be kind of on their roadmap for the future. In general, whether it's metastatic, Bethesda V, what we tend to see is Medicare comes in and then the slow grind up in terms of ASP. And I wouldn't expect Bethesda V or the metastatic population to be any different.
In terms of timelines.
Yes.
Any other levers to pull for Afirma growth? I know I'm getting greedy now.
No, I mean, we have a great playbook with the Veracyte Diagnostic Platform, where all of our tests are based on a whole transcriptome or when we get into MRD, which I'm sure we'll cover, a whole genome, and so just continuing to play that playbook. So GRID puts out more signatures, more data, and just kind of the amazing momentum that gets generated as a result of that strategy and platform is just really the strategy on a go-forward basis.
Perfect. Just a couple of questions on IVD, then we'll go over to MRD. How does the IVD test or product business fit into your higher-level strategic vision for the company?
Yeah, it's a critical component, right? So I mean, our strategy is effectively taking our CLIA-based tests, kitting them, and selling them globally, primarily starting in Europe, given just kind of the adopter trends in the region. The first one out of the gate will be Prosigna NGS. Currently, we do have Prosigna on the nCounter. That is a situation over the course of 2025 that's going to be more of a transition as we transition from the nCounter into the NGS platform. And so I don't necessarily think of this as a meaningful growth driver in 2025. It could even be a slight headwind in 2025. But I do think of this as absolutely a long-term growth driver in a way to get patients access to the critical care information they need, whether that be through Prosigna or through Decipher. So Prosigna reimbursement is available.
Once we get that product going, we think that's going to be a nice growth driver. Decipher will be a slower ramp because we have to go country by country to get reimbursement. Obviously, given things like the STAMPEDE trial out of the UK and just general KOL awareness, we're quite excited about the long-term potential of Decipher in the region.
Along those lines, you mentioned 5% CAGR on ASP over the last two years. Could you break that down across your test portfolio? How much of that 5% is Afirma, Decipher? Are there other test franchises with the ASPs that could benefit potentially?
Yeah, fair question. For the testing portfolio, it's primarily Afirma and Decipher with, I would say, Decipher being above five and Afirma being slightly below, right, just by nature of their life cycles. So we have Decipher up to 200 million covered lives. And Afirma is closer to 275, so just by nature of where you are. But that's been a great news story. On the product side, that has more fluctuations in ASP are more tied to currency and stuff like that that I wouldn't worry too much about it.
Perfect. You acquired C2i Genomics earlier this year.
Yes.
How has the integration of the team progressed? What is the status of that integration today? Would you say that it's fully integrated and ready to go, or?
Yeah, so I mean, I think the beauty of the C2I acquisition was really that we gained, obviously, the MRD capabilities, which we had been looking at MRD and knowing it was a strategic core for Veracyte for two and a half years at that point. That organization slam dunk kind of hit the MRD bucket for us. But the other piece it brought was really nice capabilities in AI. And we don't talk a ton about our AI strategy, but there is a lot of work that was happening over the course of 2023 and 2024 internally on AI, whether that be building the infrastructure around it or thinking about different ways it could enhance the operations of our business.
And so I think the nice thing about C2i is you can't necessarily, because we've integrated from both an MRD product development perspective as well as an infrastructure perspective, you can't necessarily there's C2i employees that are working on legacy Veracyte products and vice versa, or projects and vice versa. And so I would say it's going quite well. We're hitting our timelines internally that we've set for getting the muscle-invasive bladder cancer test launched in the H1 of 2026. So that's progressing well. And that team has been a wonderful contribution to the organization.
So the H1 2026 launch, what remains to be done between now and then?
Yeah, so one of our underlying philosophies is to launch tests with reimbursement or line of sight reimbursement, if not reimbursement. And so first steps, we're setting it up in our lab. And we're laying down those. We're close to being done with that. Then we have to do the analytical validation such that we can submit a tech assessment, go through the pricing, et cetera. So I think we're decently on our way to getting there. And I think our confidence in the H1 of 2026 is quite high.
Perfect. And MRD.
With the caveat that not all of it's in our control.
Absolutely. MRD has become a competitive and litigious space.
Yes, of course.
Right. So whenever anyone brings up MRD, the next thing you think of is injunction. So how are you thinking about your test offering from a strategic competitive standpoint with the big Natera’s of the world? And on the other hand, now even Tempus, Exact, Myriad, all developing their own MRD tests. How are you thinking about competitive positioning, not only from landscape, but also from the IP perspective?
Yeah, happy to cover that. We view MRD to just be an incredibly large market with really critical information for patients. So whether it's $20 billion or other estimates, obviously, it's huge. I think from where we come from, from a competitive landscape position, there is room here for many players. So I think we're going after muscle-invasive bladder cancer, which is probably one of the smallest indications as a pilot to really kind of elucidate the power of the platform. Then from there, we'll go into other indications that make a lot of sense for us internally, given where our different disease specific indications are.
Why it took us decently long to do an acquisition in the MRD space was one of the factors was not only how good is the science and making sure we thought we were picking the right play there, but also making sure we had FTO. And so I think you hear many companies talk about whole genome sequencing as an approach to MRD. That is effectively doing whole genome sequencing for what is called the landmark study right out of the gate, and then subsequent to that, moving to more bespoke panels. Ours is effectively whole genome sequencing, whole genome sequencing, whole genome sequencing. And really why we think of it that way is to, again, go back to that power of the Veracyte Diagnostic Platform to more data, drives more publications, reimbursement, commercial activity, et cetera.
And so I think playing along to that strategy, we benefit ourselves by not only having what we think is a very solid test from a performance perspective, but also getting around a lot of the internal IP, not internal, but the IP challenges that have plagued this space for a while.
Rebecca, then does cost ever become an issue? Because even Guardant was just talking about their Reveal test, which is technically a tumor diagnostic. So you are sequencing a lot more, not whole genome, but still quite a bit. So then how are you thinking about COGS? Is it because of the NovaSeq X that you think this offering looks interesting, or have you figured out a workaround to make it?
No, it's a great question, and admittedly, I do think it'll have higher COGS than the non-whole genome sequencing-based test, but that may not for something more like the Natera test that Common is very specific to. For those whole genome sequencing tests that then are going and doing very deep sequencing on a bespoke panel, I don't know what the economics will shake out. I think it depends on how deeply they're sequencing those targets. They have that answer as well as better than I do, but I think what I can say is both given the cost down sequencing trajectory, as well as, again, going back to that information being gathered and the publications, we think at scale, this definitively can be attractive on an Adjusted EBITDA basis.
We might have lower gross margins, but I think then that'll be offset by also lower R&D expense and lower S&M expense. And so I think the net-net of those two things is a very attractive business at scale. Now, the caveats to that are obviously we don't have reimbursement yet, and so we don't have price yet. And that will be you have to have an assumption around that. So I think with the C2i acquisition, we effectively gained access to a $20 billion market with some risks out there still, whether it be reimbursement or COGS. But I think it was a relatively reasonable call option to go after the market.
I did want to touch on Percepta Nasal Swab. Any other test to any other study to keep track of besides the NIGHTINGALE?
NIGHTINGALE.
Nightingale. Okay. On financials, I'd be remiss if I don't ask anything. Thinking about capital allocation priorities, as you start to generate more cash each quarter, what are your focus areas for capital allocation?
Yeah, so obviously, what we're trying to do from a financial profile perspective is hit that perfect balance between investing in long-term organic growth while also delivering an enhanced profile. And I think as we look forward, we had a massive step up in Adjusted EBITDA margins this year. And going forward, we're going to try and get that balance to be a little bit more balanced. And so I think the cash generation we saw this year was amazing. We will continue to generate a decent amount of cash. We do have some milestone payments coming up in 2025 that will use some of that cash for C2i, assuming we're successful in getting those done. But I think it's more of the same, right? Invest in the organic business. We have an incredibly high bar for M&A over a five to seven to 10 year period.
Absolutely, we'll be doing M&A, but at this point in time, we have our hands pretty full with five great strategic growth drivers, and so there's nothing in the portfolio that we're saying we need to go get. There's nothing that's missing from the portfolio that we need to go get, so we're pretty excited about that.
Kudos to you guys, actually, to identify which is the highest ROI and investing in it and almost bringing it close to perfection. I have normally asked this question three years from now, what will investors wish they realized about Veracyte today? And I think most investors get it. But any final thoughts?
Yeah, no, I just think study as the engine goes is really an important approach here. And I think we have gotten more recognition for that of late. But that is our strategy, right? Say what we're going to do, go do it, and tell you we did it. And I don't think three years from now, hopefully, that is an even stronger portion of the Veracyte brand. And then there's some really cool long-term growth drivers here that hopefully really come to bear over that time frame. So we're super excited about 2025. We're super excited about the long term for Veracyte. And just appreciate being able to tell the story.
With that, Rebecca, thank you so much for joining us.
Thank you.
Thank you all for joining us.