Veracyte, Inc. (NASDAQ:VCYT) Q1 2024 Earnings Call Transcript May 7, 2024
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Operator: Good day, and thank you for standing by and welcome to the Veracyte First Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session [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, Shayla Gorman Senior Director Investor Relations. Please go ahead.
Shayla Gorman: Good afternoon everyone, and thank you for joining us today for a discussion of our first quarter 2024 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 2024 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.
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 Shayla, and thanks everyone for joining us today. Following a very robust end to 2023, I am excited to share that we have continued our positive momentum with a very strong start to this year. We delivered first quarter revenue of $96.8 million, growing 17% compared to the prior year period. This strength was driven by our testing business, which grew 25% meaningfully exceeding our expectations. The performance of the Decipher Prostate and Afirma tests again demonstrated the incredible power of the Veracyte diagnostics platform to drive market penetration. This unique approach relies on broad set of genomic and clinical data deep bioinformatic and AI capabilities and a powerful evidence generation engine, which ultimately drives guidelines.
Guideline inclusion and combined with our proven commercial and managed care excellence is designed to ensure durable adoption and reimbursement for our on-market diagnostics. In the first quarter we delivered 16,500 Decipher Prostate test hitting a new quarterly volume record with growth coming from both new and existing providers. Our incredibly productive urology sales force continues to drive adoption through awareness of the test utility and associated clinical evidence as well as strong guideline representation. 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 include a separate table that summarizes treatment implications for patients based on both the NCCN risk classification and the Decipher score.
These updated guidelines are proving to be a meaningful resource to provide physicians with clear summarized evidence from clinical trials on how Decipher Prostate can inform treatment decisions. On the reimbursement front, we also made significant progress in the quarter, signing a contract with a major commercial payer to make Decipher Prostate and in network offering bridge close to 30 million members. We are thrilled to see this payer’s patient population obtain more seamless access to the Decipher Prostate test enabling that treating physicians to more efficiently optimize day care. Generating additional clinical evidence for Decipher remains a priority for us to drive further guideline inclusion for durable reimbursement I mentioned previously and increased awareness in the significantly under-penetrated prostate cancer market.
Last month a publication in JCO precision oncology showed that among patients undergoing active surveillance for prostate cancer, the Decipher test is prognostic for identifying those whose disease is likely to progress. Pinpointing the optimal candidates for Active Surveillance, which can help patients delay or avoid interventions such as Surgery, Radiation or Hormonal Therapy is challenging given the potential harm of these treatments weighed against the risks of cancer progression and missed opportunities to cure. These significant findings make the site for the only Prostate Gene Expression test to have treatment outcome data from a Prospective, Multicenter, Phase 2 randomized trial in the Active Surveillance population. Providing a tool like Decipher that could help to identify those whose disease is likely to progress, to give physicians important insights to help them with this critical decision, while also aiding in the further penetration of this portion of the market.
Moving to Afirma, we reported approximately 14,000 test results and 14% revenue growth compared with the prior year, in line with our expectations. With Afirma, we continue to illustrate our differentiation, resulting in market share gains due to broaden awareness of previously published evidence demonstrating the quality and performance of our test. Another point of differentiation has been the launch of Afirma GRID RUO tool designed to advance the science around Fibroid Nodules and cancer. This quarter we saw a high level of interest in grade with approximately 50% of physicians requesting a report on their test order forms in March. The addition of the Afirma, TERT Promoter Mutation Test enhances the clinical utility of our BioD offering, also reinforcing our competitive position.
This quarter, following publication of analytical validity data for the test in the Journal of Endocrinology and Metabolism, TERT Testing received Medicare coverage. While TERT represents a small portion of our total Afirma volume, the limited revenue impact, this is yet another indicator of the strides we are making to provide the most complete offering possible for physicians and their patients facing a potential Thyroid Cancer diagnosis. Looking ahead to our growth drivers over the coming years, we believe that Decipher Prostate and Afirma will continue to grow meaningfully, as we drive towards 80% penetration for both Prostate and Fibroid Cancer Molecular Tests, while continuing to gain market share and bolster ASPs. For Decipher, we believe the updated NCCN guidelines will be a meaningful catalyst to broaden awareness and change physician behavior.
We recently conducted a voice of customer survey on this update, which clearly urologists as well as medical radiation and urologic oncologists across the academic community in large urology group practice or blood processing. Not surprisingly, 82% of respondents were aware of the updated NCCN guidelines and 75% of respondents utilized the principles of risk stratification section, which details treatment implications based on the NCCN classification and Decipher score. As a result of ordering trends since the publication as well as the survey feedback our confidence in our outlook on Decipher growth over a multiyear period has been further solidified. In addition, we continue to anticipate the draft of Medicare Local Coverage Determination or LCD, for patients with Metastatic Prostate Cancer to become final later this year or early next.
We estimate that there are an additional 30,000 patients annually who could benefit from the prognostic and predictive information Decipher delivers to their clinicians, our pivotal moments in their cancer journey. Meanwhile, we unfortunately continue to see growth in the incidence of Prostate Cancer with the American Cancer Society estimating there will be approximately 300,000 new cases in 2024, up again from 2023 making Decipher even more important for more patients. For Afirma, in addition to the market dynamics previously highlighted, we are beginning to see standard of care changes of physician adoption in rural areas, where we see a long tail of clinicians who are currently utilizing genetic testing for this patient population. Additionally, we are engaging with MolDX on a draft LCD to cover thyroid nodules who will testify cytology, expanding access to patients who can also benefit from Afirma.
Now turning to our longer-term growth drivers, we are focused on three vectors. Global expansion through our robust IVD strategy, solving new cancer challenges through the utilization of our platform. For example our Percepta Nasal Swab test and with the acquisition of C2i genomics serving more of the patient care journey through Minimal Residual Disease or MRD and recurrence testing. As we often do and as we committed to do following the C2i acquisition, during the quarter we continued our portfolio prioritization to rationalize our investments outside of these three key areas. As a result, we downsized the commercial support for our InvisioTest. While we will continue to offer this important test to those patients facing interstitial lung disease, we will no longer maintain a separate InvisioTest sales force.
Now shifting to our focus on global expansion, we are on track with the key product and market development activities from multi-platform IVD approach, developing our deciphered prostate test on qPCR and our Prosigna and nasal swab tests on NGS. Recall that once these tests are made available, we will still need to go country by country to drive adoption and reimbursement, utilizing the clinical evidence that we already have and are continuing to generate with our CLIA-based tests. This is yet another example of the leverage we get from the Veracyte Diagnostics platform where our CLIA strategy built around data, insights, proof, and utility will fuel our AVD strategy outside the US. On our second growth driver, solving new cancer challenges via Percepta Nasal Swab, we have made good progress with our Nightingale trial and have patients enrolling across our almost 100 sites.
While we remain excited about our progress to date, the current pace of enrollment per site is tracking below our updated expectations. We’ve designed this study with a high degree of scientific and clinical rigor, endorsed by the cancer community, and we believe the slower rate of enrollment is consistent with typical challenges currently faced by large, multi-site pulmonology trials and isn’t related to physician interest or market potential of the nasal swab test. While the pace of a call in April would be indicative of enrollment completion around the end of the year, our internal modeling has wide error bars, and this pace may or may not continue over the coming months. Given that, we will update you next when the study is nearing completion.
Our last long-term growth driver is serving more of the patient journey. Now that we have integrated the C2i Genomics team into Veracyte, our excitement for the technology potential has only grown. We kicked off the development of our first MRD test for muscle-invasive bladder cancer in our ClearLab, which we intend to launch in the first half of 2026. As we mentioned last quarter, C2i’s novel whole genome sequencing approach to MRD fits well into the Veracyte Diagnostics platform, making it the ideal solution for us to expand our test offering throughout the patient journey. As a testament to the strength of this approach, we are continuing many of the collaborations with academia and industry that C2i initiated and have seen strong interest from potential partners and collaborators as we present the technology and begin to build clinical evidence for the test.
Between the inbound interest we have received since announcing the acquisition and the momentum in our development activities, we are confident in the strength and extensibility of our new MRD platform and the market potential. We believe this will prove to be a pivotal acquisition for Veracyte across numerous indications over time. With that, I will now turn to Rebecca to review our financial results for the quarter and expectations for 2024.
Rebecca Chambers: Thanks, Marc. Q1 was a strong start to the year with $96.8 million in revenue, an increase of 17% over the prior year period. We grew total volume to approximately 33,500 tests, a 16% increase over the same period in 2023. Testing revenue during the quarter was $90.3 million, an increase of 25% year-over-year, driven by decipher and a form of volume, along with ASP growth, driven by payer contracting and prior period collection. Total testing volume was approximately 31,000 tests. Testing ASP was approximately $2,900 as we resolved and collected approximately $3 million of out-of-period payments. Adjusting for this impact, testing ASP would have been approximately $2,800. We began to see some benefit of coverage for the deciphered prostate from the payer mark described over the second half of 2023, and a larger benefit with the contract now in place as of the middle of Q1.
Looking ahead to the remainder of 2024, this incremental contract is now forecasted to benefit testing ASB. First quarter product volume was approximately 2,500 tests and product revenue was $3.5 million, down 9% year-over-year as Prosigna demand was impacted by supplier issues seen previously. Biopharmaceutical and other revenue was $3 million in line with our expectations and down 51% year-over-year given overall spending constraints across the industry. Moving to gross margin and operating expenses, I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets, other acquisition-related expenses, and restructuring costs that does include routine stock-based compensation. Non-GAAP gross margin was 68%, down approximately 70 basis points compared to the prior year period.
Taxing gross margin was 71%, down 160 basis points compared to the prior year period as we have invested in our footprint and equipment expansion to meet increased decipher demand. We expect to leverage these investments as volume continues to grow. Product margin was 25%, down versus the prior year period driven by startup costs associated with the full-scale ProSigna manufacturing. Biopharmaceutical and other growth margin was 6%, down year-over-year due to lower fixed cost absorption. We have taken steps to address the cost structure of this business that we expect to begin to see play out in the second half of the year. Non-GAAP operating expenses, excluding cost of revenue, were up 6% year-over-year at $61.6 million. Research and development expenses increased by $2.5 million to $15.2 million, given personnel additions due to the C2i acquisition and increased costs related to our NIGHTINGALE Clinical Study.
Sales and marketing expenses declined by $1.2 million to $24 million. G&A expenses were up $2.3 million to $22.4 million, driven by higher personnel costs. We reported a GAAP net loss of $1.9 million, which included $8 million of stock-based compensation, $5.6 million of depreciation and amortization and $4.6 million of C2i acquisition-related expenses. As expected, we used $9 million of cash in operations and ended the quarter with $209.2 million of cash-in-cash equivalents, including the benefit of approximately $4 million of acquired cash. Turning now to our 2024 outlook, we are excited to raise our total revenue guidance to $402 million to $410 million, from our prior guidance of $394 million to $402 million. This reflects an improved outlook for our testing business, with revenue growth of 15% to 18%.
A meaningful increase as compared to the prior guidance of 13% to 15%. We are also raising cash guidance and expect to end 2024 with between $236 million to $240 million in cash-in-cash equivalents and short-term investments. Moving to the second quarter, we are forecasting a sequential increase in total revenue, given typical seasonality and the impact of reimbursement decisions on Decipher ASP. We expect Q3 to be roughly flat to Q2, with a sequential step-up in revenue in Q4. I am thrilled with our strong start to the year and our commitment to driving revenue growth with a focus on profitability and continued cash generation. We’ll now go into the Q&A portion of the call. Operator, please open the line.
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