Veracyte, Inc. (NASDAQ:VCYT) Q1 2023 Earnings Call Transcript

Veracyte, Inc. (NASDAQ:VCYT) Q1 2023 Earnings Call Transcript May 4, 2023

Operator: Good day and thank you for standing by. Welcome to the Veracyte First Quarter 2023 Financial Results Webcast. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Shayla Gorman, Director of Investor Relations. Please, go ahead.

Shayla Gorman: Good afternoon, everyone, and thanks for joining us today for a discussion of our first 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 first quarter 2023 financial results. This release, along with a business and financial presentation, is available in the Investor Relations section of our Web site 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 Web site. I will now turn the call over to Marc Stapley, Veracyte’s CEO.

Marc Stapley: Thanks, Shayla, and thanks everyone for joining us today. I am very excited to share our first quarter results, which were even better than we anticipated almost across the board. We delivered revenue of $82.4 million, 22% growth over the prior year, driven primarily by outperformance of Afirma and Decipher. Further, with our continued focus on financial discipline, we ended the first quarter with cash, cash equivalents and short-term investments meaningfully ahead of our projections at $178 million, roughly flat to the prior quarter, even with the seasonal use of cash that we anticipated. Behind this balanced approach to growth and capital preservation is our proven framework of identifying the specific clinical unmet needs, developing a test to address that need and securing the clinical evidence, reimbursement and guideline inclusion required to drive sustained market penetration.

This approach is the force behind the performance of our Afirma and Decipher test and enables us to invest in our long-term growth drivers. This quarter, we delivered close to 12,500 Afirma tests for patients being evaluated for thyroid cancer, more than we anticipated, given that we had expected a greater impact due to seasonality, which is typical in the first quarter. We saw positive growth trends across both our ordering base and orders for existing provider. On the reimbursement front, we secured four new payer contracts, making the test an in-network benefit for over 4 million additional health plan members. In addition to the outstanding work of our commercial and reimbursement teams, I’m excited to share that as part of our initiative to enhance our best-in-class Afirma tests, we recently launched the addition of TERT promoter mutation testing to the Afirma report.

There have been several studies published recently that correlate the presence of the TERT promoter mutation to a high risk of malignancy as well as highlighting that such mutations co-occurring with the BRAF V600E variant are associated with a poor prognosis. Given the value of these insights for informing patient care, such as whether more aggressive surgery or treatment is wanted, our team works hard to develop a high-quality DNA assay that allows us to reliably determine the TERT mute — promoter gene mutation status for patients with suspected or diagnose thyroid cancer to further empower physicians to optimize clinical decision-making. We believe that product enhancements such as this, along with the work we’ve done to improve the customer experience and to streamline ordering will continue to benefit Afirma’s performance in the coming quarters.

Given this as well as our strong first quarter results, we now expect the bolster growth rate for Afirma in the high single-digits for the full year. Turning to Urology. We continue to expand on the budding evidence surrounding the Decipher Prostate Test, further helping to establish the test as a new standard of care. At the American Neurological Association Annual Meeting earlier this week, multiple abstracts were presented focusing on Decipher Test, particularly exciting with data from two large Real-World data sets encompassing more than 100,000 men with prostate cancer, which reinforce the clinical utility of our tests. In the first study, researchers paid data from the National Cancer Institute their database with patients who had undergone Decipher Prostate Testing and found that use of our test was independently associated with a two-fold increase in conservative management among those with favorable risk disease.

In the second study, over 90,000 Decipher Prostate Test results were linked to electronic health and claims data to demonstrate the decipher score at initial diagnosis was independently predictive of risk of metastasis, and after radical prostatectomy was predictive of both biochemical recurrence and metastasis. In addition to the data presented at AUA, we published a number of studies last month that further advance the clinical utility evidence for the Decipher Prostate Test. The first study published in European Urology Oncology found in a cohort of over 4,000 patients, the Decipher Prostate could help better identify those patients with early micrometastatic disease who may benefit from treatment intensification. This study adds to growing evidence around the use of decipher prostate to help inform treatment decision-making in initial diagnosis.

Additionally, new data from an analysis of an NCI-sponsored Phase 3 study published in the International Journal of Radiation Oncology Physics, known as the Red Journal, choose the Decipher Prostate Test can help physicians more accurately categorize personal risk and select appropriate treatment for men with intermediate risk prostate cancer. This is important because prostate cancer deemed intermediate risk by NCCN guideline is the most heterogeneous all risk groups in the disease and a wide variety of treatment is available. Of note, this randomized study in which patients were followed for nearly 13 years, is the first to validate any gene expression biomarker in the intermediate risk patient population. The attainment of Level 1 evidence the validation of our test in the most recent NCCN guidelines, along with the stellar execution by our team and our differentiated Decipher Grid report led to Q1 Decipher prostate volume of more than 12,500 techs.

Like Afirma, this growth was also driven both by strong adoption from new ordering position, as well as higher volumes from existing accounts. Building on the framework, we’ve established with a firm decipher we are making good progress on our long-term growth drivers. Decipher patient enrollment for NIGHTINGALE, the clinical utility study for our Percepta Nasal Swab continues to progress well, demonstrating the potential for our novel noninvasive tests to help guys positions netted for patients with potentially malignant lung launches. We look forward to presenting expanded preliminary data on the familiarity phase of the trial, which enabled investigators to learn how to incorporate the test into patient management in advance of the clinical utility trial at the American Thoracic Society, or ATS International Conference later this month.

The global launch of our test menu to patients outside the United States is another key long-term growth driver for Veracyte. Our current IVD product offering, Prosigna for breast cancer patients had a record quarter, delivering close to 3,000 tests, demonstrating traction and adoption supported by clinical evidence. With the submission of our Envisia Genomic Classifier to European regulators in December 2022, we are now responding to feedback from the notified body — in the meantime, we continue to build clinical evidence for Envisia and are looking forward to the presentation of abstract at ATS, demonstrating the test impact on patient management and its ability to predict disease progression in patients within interstitial lung disease.

We believe our focus on evidence generation will help drive adoption of NVIDIA globally, bolstering the LDT in the US, while gaining important KOL support in Europe in preparation for the international launch of the IVD. We’re also making good progress building out our broader menu of diagnostic IVDs to US market with the type of prostate expected to permission in 2024 and our nasal swab expected for submission in 2025. While our biopharma business is facing significant headwinds over the course of this year, given the impact of a sizable customer pulling back on planned spending and the current macro environment, we continue to advance our unique multi-omic offerings. We were pleased to share three abstracts and host a Spotlight Theater at the AACR Annual Meeting, highlighting our distinctive set of assets to help biopharma partners that all points along the drug development process.

We are continuing to build out our pipeline of new customers to fuel the long-term growth prospects of this business. As I laid out on our call last quarter, one of the strategic focus areas for 2023 is to identify new opportunities to expand our testing menu beyond our currently available products and the pipeline I outlined. As part of these efforts, we held our first annual discovery day in April, bringing together our R&D, medical, clinical and commercial teams from across the globe to imagine the future for oncology diagnostics and Veracyte’s important role as a leader in shaping that future. I’m extremely pleased with the work our teams are doing on this front and our investments to drive the next phase of growth for the company. Before I close, I’d like to highlight the publication of our inaugural environmental, social and governance report earlier this week.

This ESG highlights how our mission and values are deeply embedded in our business and demonstrates not only our dedication to transforming patient outcomes all over the world, but also our commitment to our shareholders, employees, business partners and other stakeholders. I’m pleased to provide transparency into our ESG efforts and I’m excited to build on the foundation we late to further advance our program. In summary, Q1 was a fantastic quarter marked by solid execution across the team. We’re excited about our progress to date and our clear focus for the future. With that, I will now turn to Rebecca to review our financial results for the quarter and updated expectations for 2023.

Rebecca Chambers: Thanks, Marc. As Marc said, we have another excellent quarter, with $82.4 million in revenue, an increase of 22% over the prior year. We grew total volume to approximately 28,800 tests, a 24% increase over the same period of 2022. Quarterly testing revenue was $72.4 million, an increase of 29% year-over-year, driven by higher-than-expected Decipher Prostate and Afirma volume, as well as strong cash collections in the quarter. Total testing volume was just under 26,000 tests. Testing ASP was $2,800 per test, benefiting from approximately $2 million of out-of-period collections. Adjusting for this impact, testing ASP would have been slightly greater than $2,700. First quarter product volume was approximately 2,900 tests and product revenue was $3.9 million, up 31% year-over-year, biopharmaceutical and other revenue totaled $6.1 million, down 30% year-over-year, primarily due to lower IVD contract manufacturing and overall spending constraints across the industry, as previously discussed.

Moving to gross margin and operating expenses, I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets as other acquisition-related expenses and restructuring costs, but does include routine stock-based compensation. Non-GAAP gross margin was 68%, up approximately 300 basis points compared to the prior year. Testing gross margin was 73%, up 400 basis points compared to the prior year, benefiting from higher lab volume mix and long-dated collections. Product gross margin was 44%. Biopharmaceutical and other gross margin was 29%, down year-over-year, given lower fixed cost absorption. While we are forecasting a sequential step down in consolidated gross margin as we invest to support our better-than-expected volume outlook, we are reiterating our full year expectations of non-GAAP gross margins in the mid-60s.

Non-GAAP operating expenses, excluding cost of revenue, were up 18% year-over-year at $58.1 million, driven by ramping clinical trial and IVD development expenses as well as higher personnel costs. Research and development expenses increased by $4.2 million to $12.7 million. Sales and marketing expenses increased by $2.7 million to $25.2 million and G&A expenses were up $2.1 million to $20.1 million. We recorded a GAAP net loss of $8.1 million, which included $8.1 million of stock-based compensation expense and $6.7 million of depreciation and amortization. Overall, we ended the quarter with $177.9 million of cash, cash equivalents and short-term investments, well ahead of our expectations. Turning now to our 2023 guidance. We have updated our projections to $330 million to $340 million, higher than our previous revenue guidance of $325 million to $335 million.

This increase is a result of our strong performance in the first quarter and updating testing revenue expectations of mid- to high teens, offset by a greater than previously expected decline in biopharma and other revenue. For the remainder of the year, we are forecasting sequential revenue to increase in Q2 and the decline going into Q3, given typical seasonality in the summer holidays before finishing 2023 with quarter-over-quarter growth in the fourth quarter. Moving to our expectations for cash, cash equivalents and short-term investments. As always, our comments are barring potential M&A. In 2023, we now anticipate maintaining our 2022 year-end cash balance of approximately $180 million, even with the impact of prior acquisition-related contingent consideration.

I am proud of how we started 2023 and look forward to continuing to deliver on our plans and financial projections. We’ll now go into the Q&A portion of the call. Operator, please open the line.

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Q&A Session

Operator: Thank you. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Puneet Souda of SVB Securities. Your line is now open.

Puneet Souda: Great. Thanks. So Marc, Rebecca, thanks for taking the question. So first on Afirma, and I’d say congrats on the really solid beat here and the guide raise. So, if you could talk a little bit about that product. What’s driving the strength there? Is it the sales force optimization as a data? Is it just more conversations around that product? Maybe just talk to us what’s driving the strength in Afirma. And you’re modeling high-single-digit for the year, what could — can you talk a little bit about what could push that a little bit higher or maybe a little bit lower as we go through the year?

Marc Stapley: Yes. Thanks, Puneet. Thanks for recognizing the strong performance of the Afirma product and the Afirma team. I think it’s pretty much all of the above that you mentioned, but mostly I’d say, it’s driven by really strong commercial execution, continued enhancements in the product and the kind of the process of ordering and engaging with physicians. A good example of an enhancement in the product is the launch of TERT that we recently launched in the quarter that enables further clinical utility of the test, there’s always publications including around TERT and more data in evidence as well. And I think I really do have to give a lot of credit to our sales team, who are visiting physicians, visiting customers, talking about the benefits of Afirma with them.

There are some competitive dynamics out there, too, and it feels like we’ve got some real tailwinds there as well, at least anecdotally, it feels that way. So, very excited about how Afirma has been going so far. In terms of kind of potential for that growth rate to be any different, I think I think one of those drivers could always be competitive dynamics. But we’re continuing to add new physicians. We’re continuing to broaden the adoption within current physician and provider basis. And so to the extent we’re able to take incremental share that would be helpful to drive that up. Again, there’s always competitive dynamics that can go the other way, too. We just — that’s why we keep investing in the product and our sales team. Anything you want to add?

Rebecca Chambers : Nothing, you covered it well.

Puneet Souda: Got it. That’s great. And then just a quick one on the TERT mutation, is this change the LCD pricing or what you can obtain from commercial pairs here in the near term or long-term?

Rebecca Chambers : Yes. Thanks, Puneet. I’ll take that one. The answer for all intents and purposes is not necessarily. So TERT will be ordered for a subsection of patients. And at this point in time, while there is a code there isn’t necessarily pricing associated with that code. And so we are doing this primarily for the benefits of patients and to ensure continued enhancement of the product. We’ll obviously work over time on getting that price, but given the list price being in the $300 range, we wouldn’t expect that to materially impact ASP one way or the other, even if we’re — once we’re successful with — once we’re successful getting this contracted and covered. Again, it’s a very small percentage of patients for, which TERT will be ordered, which is why we don’t think even once we are successful in getting covered lives for TERT will have a meaningful impact to ASP, but it’s important for those patients critically.

Marc Stapley: Yeah. And just to add to that, I mean only 1% to 2% of thyroid nodules that undergoing molecular testing are expected to have TERT promoter mutations, right? That success what we essentially order for more than that, that would be the outcome. But yeah, as Rebecca said, it’s a small subset of cases but important to have.

Puneet Souda: Make sense. And then just last one for me on biotech funding, obviously, the macro situation and biotech funding continues to be a challenge and somewhat reflected in the biopharma revenue this quarter as well. So maybe just talk to us about what is the level of moderation through the year? What should we be the imagining for step down for the full year within the context of the guide for biopharma? Thank you.

Marc Stapley: Yes. I mean, remember, truly this is something I think we called out several quarters ago as a potential headwind, and I think we were fairly early in seeing that. But then again, A, we have a pretty concentrated position with a small number of customers accounting for a large portion of our biopharma revenue. So that’s one factor. And we’re very early in — we’re very much involved in the early clinical research work, which is, I think, the area across all of biopharma that is most impacted versus existing ongoing clinical trials and on-market products. So we’re feeling the brunt of it that one of our goals has been to diversify our customer portfolio there. And I think we’re making — well, we are making good progress at doing that.

But we still remain fairly concentrated. A cue suggests that’s going over. It’s a very small percentage of our revenue. Biopharma and other is roughly 10%, biopharma is around just slightly more than half of that. And so a little movement here and there, obviously, translates to a fairly big percentage change.

Rebecca Chambers: And Puneet, just to help with the math a little bit, we’ve given updated Afirma guidance of high single digits as you cited earlier. We give an updated testing revenue growth for the year of mid to high-teens. We continue to expect the product business to do around mid-teens. And so obviously, your back solve is that biopharma and other line. So you should get pretty close to it with that math.

Puneet Souda: Got it. That works. Okay. Thanks both.

Rebecca Chambers: Thank you.