Veracyte, Inc. (NASDAQ:VCYT) Q3 2023 Earnings Call Transcript

Veracyte, Inc. (NASDAQ:VCYT) Q3 2023 Earnings Call Transcript November 7, 2023

Veracyte, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.16.

Operator: Good day, and thank you for standing by. Welcome to the Veracyte Third Quarter 2023 Financial Results Webcast. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Tristan Ribar. Please go ahead.

Tristan Ribar: Good afternoon, everyone, and thanks for joining us today for a discussion of our third quarter 2023 financial results. With me today are Marc Stapley, Veracyte’s Chief Executive Officer; and Rebecca Chambers, our Chief Financial Officer. Veracyte issued a press release earlier this afternoon detailing our third quarter 2023 financial results. This release, along with the business and financial presentation is available in the Investor Relations section of our website at veracyte.com. Before we begin, I’d like to remind you that various statements that we may make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties, and the company can give no assurance they will prove to be correct.

Further, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte files with the Securities and Exchange Commission, including Veracyte’s most recent forms 10-Q and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today’s earnings release accessible from the IR section of Veracyte’s website. I will now turn the call over to Marc Stapley, Veracyte’s CEO.

Marc Stapley: Thanks, Tristan, and thanks everyone for joining us today. I am pleased to share our third quarter results as well as an update on progress across our growth drivers. Our Q3 revenue was approximately $90 million, an increase of 19% compared to the prior year period. Yet again, our core testing business drove this strong outcome with impressive revenue growth of 27% versus the prior year period. We also continued to further enhance our already differentiated financial profile, generating $14 million of cash flow from operations and marking the fourth out of the last five quarters with positive cash flow. Our proven framework of driving test adoption through robust clinical evidence, reimbursement and guideline inclusion has provided indisputable differentiation for our leading on market tests, enabling us to serve more patients and grow revenue at an accelerated rate.

During the quarter, we reported approximately 15,500 Decipher Prostate tests up slightly sequentially as summer seasonality was more than offset by a reduction in whip [ph]. Given Decipher’s growth, we have invested in our San Diego lab operations over the course of this year, focusing on both lab capacity and efficiency. I’m incredibly proud of our lab operations team that has executed on these improvements. One of the impressive outcomes of their efforts is that the Decipher turnaround time is now lower than we’ve ever seen, enabling us to get answers to physicians and their patients even faster. Consequently, Decipher whip was lower at the end of the quarter than we forecasted by more than 500 tests, which were resulted and recognized as revenue.

With the faster turnaround time as the new normal, our whip should remain approximately at this lower level going forward. We again saw a record number of unique ordering physicians for the Decipher Prostate test in the quarter, as our highly productive urology salesforce continued to broaden awareness of the test level one evidence status in NCCN guidelines. There are hundreds of publications and presentations contributing to evidence for the Decipher platform and we continue to engage with KOLs through our Decipher GRID research offering. During the quarter, Decipher GRID was ordered by physicians close to 50% of the time. As a reminder, Decipher GRID information is added to the patient report upon physician request to provide further gene expression and signature data for research use only, which may offer additional insights into prostate cancer molecular biology.

Furthering clinical evidence for our products is a key tenet in our proven framework. This quarter was no exception as we presented six abstracts at the recent American Society for Radiation Oncology or ASTRO Conference. This included three oral presentations focused on a large randomized Phase 3 trial, which showed the Decipher Prostate genomic classifier’s ability to predict risk of metastasis among patients with clinically high risk disease. This is our 12th validation study of Decipher in a Phase 3 randomized trial demonstrating the test performance and clinical utility for enabling physicians to apply precision medicine for patients with prostate cancer. As far as we know, no other molecular test for prostate cancer comes close to this level of clinical evidence.

With high risk prostate cancer becoming an increasingly worrying trend, we remain committed to providing access for patients across the care continuum. As part of this, we have developed and validated our Decipher offering for those patients with advanced stage, metastatic and castrate-resistant prostate cancer. We are currently engaging with Medicare’s MolDX program on their draft coverage policy, or LCD, to enable decipher testing of this patient population. We expect the draft LCD to be finalized over the coming year. Once that is completed, we will submit for technical assessment a requirement to grant Medicare coverage and will in parallel engage commercial payers. We view these steps as critical to ensure our ability to more completely serve the close to 300,000 prostate cancer patients diagnosed each year in the United States.

Moving to Afirma. We delivered another record quarter with approximately 13,500 tests reported. Our dedicated commercial team added more than 65 new accounts in the quarter, including some large health systems and competitive wins. We believe this growth is being driven by increasing usage with existing customers as well as market share gain. Our current estimate is that more than 550,000 patients receive a thyroid fine-needle aspiration procedure in the United States annually to assess their thyroid nodule for cancer. Of those, approximately 119,000 are cytologically in the indeterminate or Bethesda III-IV categories, which have historically accounted for the vast majority of Afirma’s patient population. This year, the Bethesda system for reporting thyroid cytopathology broadened their recommendations for which patients may benefit from molecular testing to include those with a Bethesda V cytology diagnosis who likely have thyroid cancer.

To this end, we are strong believers that Afirma can provide critical information for the approximately 15,000 additional Bethesda V patients annually who are now included in the recommendation for molecular testing. Given Afirma’s strong performance and positive outlook, we are once again updating our revenue growth expectations to be approximately 18% for fiscal year 2023. Afirma’s success is due in part to continued enhancements we’ve made to the test over the last 12 months, including the addition of TERT promoter mutation testing and ongoing customer experience improvements such as our customer portal. We continue to work with leading KOLs to advance the science around thyroid nodules and cancer and as a result, are excited to announce that we will be launching our [indiscernible] Afirma GRID Report this quarter.

This research tool, similar in concept to Decipher GRID, leverages Afirma’s whole transcriptome derived sequencing platform and database and was developed through our novel discovery work and through published literature. It is designed to serve as a comprehensive resource for research into molecular characteristics that may ultimately help improve the understanding of how to manage patients with thyroid nodules and cancer. Going forward, our focus is to utilize this new tool to continue to partner with academic researchers and KOLs to advance findings that may one day help to further personalize treatment for patients. For both prostate and thyroid cancer there is still a lot to learn to better support patients in their diagnosis and treatment, and we are proud to be able to facilitate new research with our GRID offerings.

Our goal for both tests, which are still significantly underpenetrated in the market, is that every patient that can benefit from our molecular diagnostic is able to access Decipher Afirma and we strongly believe that continued research will help drive benefits for patients everywhere. Turning now to our long term growth drivers, we continue to make significant progress on both Percepta Nasal Swab and our global IVD strategy. Our NIGHTINGALE study for the Percepta Nasal Swab test has grown to approximately 90 sites, and we remain on track to finalize trial enrollment no later than the second quarter of 2024. We continue to view the Percepta Nasal Swab test as serving a critical clinical unmet need as it improves the assessment of identified nodules for risk of malignancy in current or former smokers who undergo recommended screening for lung cancer, as well as provides a risk classification.

This patient population continues to grow as recently the American Cancer Society expanded the lung cancer screening guidelines for former smokers, already a population of 15 million in the United States. With this update, the population appropriate for screening has been expanded to ages 50 through 80 instead of 55 to 74, and now includes anyone with a significant smoking history, even if they stopped smoking more than 15 years ago. We meaningly advanced our IVD strategy this quarter as well. We had another solid quarter for our Prosigna breast cancer test as product revenue increased 21% versus the prior year period, driven in part by demand from the Nordic region. As a reminder, earlier in the year, Prosigna was adopted as the definitive breast cancer test by the Government of Norway, following a nationwide prospective study involving more than 2,000 patients.

Looking ahead, we’re excited about a report published this month by the Scottish Health Technologies Group as it recommended a favorable position for Prosigna reimbursement, which we believe will foster further demand for the test in the region. Our move of the manufacturing of our Prosigna assay from nanostring to our Marseille, France location is progressive. This transition, while always an important part of our IVD strategy, has become increasingly critical over the last few months as we have faced a number of supply challenges. Consequently, we intend to stand up our own manufacturing line faster than we had originally planned and are doing everything we can to ensure that all patients continue to have access to the Prosigna test. This situation reinforces the need for us to control our supply chain.

Beyond simply improving our long term economics around our IVD strategy. Our global supply chain and manufacturing teams, working collaboratively with the commercial team have done a fabulous job taking on this accelerated goal and I’m proud of all they have accomplished to date. In spite of our mitigation efforts, we do expect this to be a headwind to volume and revenue in the fourth quarter, the impact of which has been offset by strong testing outlooks reflected in our updated revenue guidance. Recall that product revenue represents less than 5% of our total revenue. As a reminder, our decentralized IVD strategy is designed to make our clinically impactful tests available to patients all over the world. Fundamentally, we believe that the quality of our diagnostics and level of evidence supporting them is what ultimately differentiates us, as we can clearly see is happening in the U.S. market.

Based on our own experience in the field, customer feedback, the growing installed base of NGS and qPCR platforms, and the cost structure of other platforms, we have decided to adopt a multiplatform strategy for our tests. We now believe this approach will help us reach more patients with our tests more quickly and hence accelerate long term growth. Leveraging the nCounter development work already completed our team has already begun bridging Decipher Prostate to qPCR and will surely be commencing a project to bridge our nasal swab to NGS. To enable our launch of products on NGS as announced earlier today, we have already signed an agreement with Illumina to develop and offer some of our tests on their NextSeq 550Dx instrument. We are on track to launch these new products consistent with prior expectations, the timeline for which was previously predicated on submission to the notified body in 2024 and 2025, respectively.

Given our updated plan, our recent interactions with the notified body, and the current evolving regulatory framework for IVDR, we expect the Decipher Prostate will commercially launch in mid to late 2025 and nasal swab in 2026. At that point, we expect to be able to immediately leverage our existing IVD commercial team who are selling Prosigna to drive towards reimbursement and adoption country by country for these new tests with the benefit of a large existing installed base of instruments. I’m excited about this multiplatform approach to launching our tests in the OUS market, underscoring our belief that exceptional cancer care begins with broad access to exceptional diagnostics. To help us further advance our global vision, we were pleased to announce the addition of two highly respected industry veterans to our senior leadership team during the quarter.

Dr. Phil Febbo has joined Veracyte as Chief Scientific Officer and Chief Medical Officer; and Dr. Marie-Claire Taine is now GM of our IVD Business based in Marseille, France. Further, we recently launched a new corporate website, which brings to life our vision and how we are differentiated from other companies in the space. In closing, Q3 was an exceptional quarter with strong execution in our core testing business and progress across our long-term growth drivers. We are now focused on executing our remaining goals for the year while also setting the stage for global leadership in cancer diagnostics. With that, I will now turn to Rebecca to review our financial results for the quarter and our updated guidance for 2023.

Rebecca Chambers: Thanks, Marc. As Marc mentioned, we achieved excellent results in the third quarter with $90.1 million of revenue, an increase of 19% over the prior year period. We grew total volume to approximately 32,500 tests, a 23% increase over the same period of 2022. Quarterly testing revenue was $82 million, an increase of 27% year-over-year, driven by strong adoption of our Decipher Prostate test, post-level one evidence designation by the NCCN and continued penetration of the Afirma market, as well as strong prior period cash collections. Total testing volume was approximately 29,500 tests, which includes the impact of our improved lab efficiency and whip reduction that Marc mentioned. Testing ASP was approximately $2,750 per test, benefiting from approximately $1.5 million of out of period collections.

Adjusting for this impact, testing ASP would have been approximately $2,700. Third quarter product volume was approximately 2,850 tests and product revenue was $4 million, up 21% year-over-year. Biopharmaceutical and other revenue totaled $4.1 million, down 47% year-over-year. As expected, reductions in customer projects, extended sales cycles and overall spending constraints across the industry led to the decline. Moving to gross margin and operating expenses, I will highlight non-GAAP results which exclude the amortization of acquired intangible assets, restructuring costs, and the impairment of long lived assets, but does include routine stock-based compensation. Non-GAAP gross margin was 69%, up approximately 350 basis points compared to the prior year period.

Testing gross margin was 73%, up 400 basis points compared to the prior year period, benefiting from efficiency gains, fixed cost, leverage, test mix and higher ASP. Product gross margin was 39%, roughly flat versus the prior year period. Biopharmaceutical and other gross margin was 18% down year-over-year given lower fixed cost absorption. Non-GAAP operating expenses, excluding cost of revenue were up 13% year-over-year at $58 million, driven by higher personnel costs and clinical trial expenses, as well as investments in facilities and infrastructure. Research and development expenses increased by $2.8 million to $13.3 million. Sales and marketing expenses decreased by $0.5 million to $23.8 million, and G&A expenses were up $4.3 million to $20.6 million.

We recorded a GAAP net loss of $29.6 million, which included $7.3 million of stock-based compensation expense, $7.3 million of depreciation and amortization, and a $34.9 million impairment charge tied to our decision to adopt a multiplatform IVD strategy. We ended the quarter with $202 million of cash and cash equivalents, well ahead of our expectations. Turning now to our updated 2023 guidance. We have raised our revenue projections yet again to $352 million to $354 million as compared to our prior guidance of $342 million to $350 million. This increase is based on our strong third quarter results and an improved outlook on testing revenue, which takes into account the Q3 whip impact in out of period collections, which we do not anticipate repeating.

This guidance also contemplates Q4 product revenue of $2 million [ph] to $3 million [ph] given the supplier challenges previously mentioned. Moving to cash, cash equivalents and short-term investments as always, our comments are barring potential M&A. We now forecast to end 2023 with more than $200 million of cash on hand accounting for the impact of upcoming milestones and contingent consideration payments, capital expenditures related to our lab expansion and other working capital trends. Importantly, this updated guidance represents an increase of approximately $30 million compared to our expectations at the beginning of this year, driven by the strength of our testing portfolio as well as the fabulous execution of our managed care and billing teams.

To date, this year has been an incredible one for the Veracyte team and I’m excited to continue to deliver on the financial goals we’ve set for 2023 and beyond. We’ll now go to the Q&A portion of the call. Operator, please open the lines.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Tejas Savant with MS. Your line is now open.

Unidentified Analyst: Hello, this is Yuko [ph] on for Tejas. Thank you for taking our questions. Maybe starting with the Illumina collaboration that you announced today; how does this collaboration fit into more centralized testing model in the U.S.? Or is the focus here mainly OUS adoption? And if that’s the case has there been any changes in the strategy to build the test-on [ph] nCounter?

Marc Stapley: Yes, great question. Thanks for that. So the collaboration with Illumina is very much focused on the OUS market, and it’s regarding our distributable IVDs as kits on the NextSeq 550Dx platform. Now, remember we’re very much from a clear standpoint, we’re a customer of Illumina’s today, and this doesn’t change or impact that in any way, shape or form other than we’ve expanded our relationship with Illumina to relate to outside the U.S. as well. So we’re excited about that. In relation to the nCounter approach, the question you asked there. Yes, the way that this multiplatform strategy of ours will take place is we are going to leverage the best instrument or instruments for the test. So as we talked about in the prepared remarks, we will launch Decipher Prostate on qPCR.

We will launch Nasal Swab on NGS, and for every other future test we’ll consider the platform or platforms on which we’ll launch those tests. The nCounter we’re still going to support very much for our Prosigna test and others that we have in place today, like Lymphmark for example. No changes there. Prosigna is actually one good example where we will also launch that product on NGS, which expands and provides more options for our customers. Hopefully that answers your question.

Unidentified Analyst: Yes. No, that was great. Thank you. And then a separate follow up question. You touched on this during the prep remarks, but it sounds like some of the timelines have changed for submission of Prostate and Nasal Swab for the IVDR process. I was wondering if you could elaborate on some of the discussions that you had with the notify body and whether what from the discussions may have changed the timelines there?

Marc Stapley: Yes. So actually the timelines for when we now expect to launch these tests commercially has not changed. And when I say these tests, I’m talking about Decipher Prostate and Nasal Swab. But we’ve moved from providing a submission timeline, the steps after that, which would largely be outside of our control and unpredictable from a timeline standpoint to now, a commercialization timeline, which we think is better, more predictable and clearer. And so now we’re at a point where we’re comfortable saying when we’re able to commercialize these tests based on our roadmap and our project plan, whereas previously we weren’t ready to put a commercialization time out there. So had you previously assumed something like at least a year for commercialization, you would have landed on Decipher Prostate in 2025 and Nasal Swab in 2026.

We’re now confirming we will be ready to launch commercially Decipher Prostate in 2025 and Nasal Swab in 2026 consistent with that assumption, okay. So we’ve just taken, I think, less of the uncertainty out of it and made a little bit more committal – a lot more committal in my opinion, in terms of when we’re ready to commercially launch. Now, one thing I want to be very clear about, when we’re ready to commercially launch from an IVDR perspective, it doesn’t automatically get us reimbursed and adopted in every country. Remember and we’ve always said this we still have to go country-by-country and drive reimbursement decisions and drive KOL support and adoption. So that doesn’t change, which is why we continue to position this as a long-term growth driver.

Rebecca Chambers: And just one thing to add to that, Yuko, obviously this decision to broaden our strategy to include other platforms is really predicated upon the growing installed bases of those other platforms and as well ensuring that we can serve even more customers than what the install base of the nCounter allowed for. So we really very much view this as something that is going to not only solidify the timelines that Marc discussed, but also really allow us an opportunity to grow revenue even more quickly given the number of instruments already in the field across qPCR and NextSeq Dx.

Unidentified Analyst: Great. Thank you very much.

Operator: Thank you. One moment for our next question. Our next question comes from Matt Sykes with Goldman Sachs. Your line is now open.

Unidentified Analyst: Hey, guys, this is Prashant Kedia [ph] on for Matt Sykes. Congrats on the quarter; really great to hear the results. So how does an MSEd Test fit into the paradigm of screening for lung cancer with Percepta Nasal Swab and LoDo CT?

Marc Stapley: Yes. That’s a really great question. So we’ve talked about this a little bit before, and the way we think about multi-cancer early detection and basically healthy screening today is very different than the way we position and think about Nasal Swab. So Nasal Swab is focused very much on patients who have been identified with a lung nodule and therefore a high risk for lung cancer, and helping to make an appropriate decision whether to accelerate treatment or avoid unnecessary procedures for those patients. Today, very few people out of the 15 million or even more, as we talked about in the prepared remarks who could or should be getting screened today are actually getting screened. So it’s a small percentage it’s about a million.

And then there’s actually more lung nodules found incidentally, actually, than there are by screening. So clearly there’s a lot of people, including us who care a lot about getting more and more people screened. Now, the way I think about Multicancer Early Detection is that could feed that funnel. So if a patient is identified through one of those tests in the future, assuming that they are adopted and reimbursed as potentially having lung cancer, the next step would be a low dose CT. And if a lung nodule is identified, then that puts that patient firmly into the workflow for Nasal Swab, for example. And so that’s how we think about it fitting in. Of course, at that point you have to believe that there’ll be reimbursement for these tests, Multicancer Early Detection tests for healthy individuals.

And you also have to believe that there will also be reimbursement for low-dose CT and Nasal Swab. Having said that, I continue to believe that at least in the nearer term, the incidental population will continue to be larger than the screening population until that issue of under screening is resolved. And that will be, as we launch Nasal Swab test will be one of the primary use cases and drive a significant volume.

Unidentified Analyst: Got it. Thank you. That’s helpful. And how are you planning on increasing market penetration with Afirma? Is it more sales reps, additional coverage, expansion, product updates, or can you give us some more color there?

Marc Stapley: More of what we’ve been doing quite honestly, I mean, as you’ve seen this year, we far exceeded our original expectations with Afirma coming into the year, and we recently increased our guidance on that to 18% growth, and that’s significantly higher than we anticipated. And it would appear that the multitude of things that we’re doing are absolutely paying off in terms of penetrating the market and bringing on new accounts, which continues to be an encouraging sign. So what are we doing? We’ve enhanced the product. We’ve added mutation testing to our product offering. We’ve launched a portal for customers to make it a lot easier for them to order the test and for the billing information to be correct. We just announced our grid offering for research use only for Afirma.