Veracyte, Inc. Q3 FY2021 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Veracyte's Third Quarter 2021 Financial Results Conference Call. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Tracy Morris, Veracyte's Vice President of Corporate Communications and Investor Relations. You may begin.

Thank you, Erica. Good afternoon, everyone, and thanks for joining us today for a discussion of our third quarter 2021 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 financial results. This news 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 that 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 filed with the Securities and Exchange Commission, including Veracyte's most recent Forms 10-Q and 10-K. I will now turn the call over to Marc Stapley, Veracyte CEO.

Thanks, Tracy, and thanks, everyone, for joining us today. It's a pleasure to be here to provide an update. We are pleased with our performance in the third quarter as we delivered revenue of $60.4 million, representing growth of 94% over the prior year, despite some COVID-19 related headwinds. We have also executed on some key milestones since our last update, significantly advancing our strategy. In August, we completed the acquisition of HalioDx, securing our future to develop and manufacture our own test kits for the nCounter system. This will provide physicians and their patients all around the world with access to our growing menu of tests, which we are in the process of transitioning to the instrument. Prior to considering the transfer of our tests onto the nCounter, they were developed as laboratory-developed tests (LDTs) for the U.S. market in one of our CLIA labs. We pursue reimbursement via a process of evidence development, publications, guideline inclusion and key opinion leader adoption. Our tests are designed from the ground up to answer very specific clinical unmet needs while fitting into the physician's workflow. And they leverage not only our deep scientific expertise in whole transcriptome genomics, but also now our expertise in immuno-oncology, a rapidly growing field. With the addition of HalioDx, we now address eight of the top ten cancers in the U.S. by indication. Our expanding menu of tests will improve outcomes for patients all over the world at every step of their journey by, for example, ruling out unnecessary surgeries, providing diagnostic clarity, helping physicians with treatment decisions, or helping to detect cancer early when it can be successfully treated. To further assist physicians with the treatment of patients, our menu of tests is bolstered by our partnerships with biopharma companies to whom we provide our extensive genomic and clinical data and services to assist in the development of therapies and companion diagnostics. Turning now to the quarterly results. As always, I'll discuss our progress in the context of our strategic drivers of commercial growth, evidence development, pipeline advancement and global expansion. Beginning with commercial growth, the Decipher Prostate genomic classifier continued to gain strong traction in the market, further fueled by ongoing sales team expansion. You will recall that our prostate cancer business is less impacted by COVID-19 because many of our urologist customers practice in community settings as opposed to hospitals, and community settings in general have been more accessible to patients and our sales reps. We expanded coverage for Decipher Prostate, making the test a covered benefit for an additional 5 million plan participants, and bringing the total number of covered lives to more than 150 million people nationally in the U.S. We also signed a new contract with a large Blues plan and a national government payer. In September, the National Comprehensive Cancer Network, or NCCN, published its 2022 guidelines, which specifically recommend treatment decisions based upon the patient's Decipher post-radical prostatectomy, or RP score. Ours is the only genomic prostate cancer test with this level of recommendation, which we believe will help to further drive adoption and reimbursement. Our Afirma Genomic Sequencing Classifier, or GSC, continues to be the new standard of care in thyroid cancer diagnosis. Afirma GSC revenue and volume increased over prior year, although both were slightly down sequentially, as we experienced summer seasonality with higher than typical rates of vacations, hospital staffing shortages and challenges from the COVID-19 delta variant. Approximately 70% of our Afirma samples come from procedures performed in a hospital setting, which have tended to be more impacted by COVID, limiting biopsy procedures and sales rep access, particularly in those areas where the case count and hospitalizations have been high. We were also pleased to welcome Dr. Joshua Klopper as our new Medical Director for Endocrinology. Dr. Klopper was an investigator on our original clinical utility study for the Afirma test, and he will play a key role in further establishing the test to standard of care and guiding our ongoing market development work in thyroid cancer. Our pulmonology business continued to be impacted by COVID as we saw in prior quarters. This stems from the ongoing reduction in the number of bronchoscopies, the procedure used to collect samples for both our Percepta GSC and Envisia tests. Despite limited access, we continue to build awareness of our pulmonology products by leveraging digital marketing to educate our customers and targets with key opinion leader-led online educational events, peer-to-peer engagement tools and other digital communications. Our Prosigna breast cancer business gained momentum in Europe where our ability to report molecular subtype information and enable laboratories to perform the test locally gives us key competitive advantages. Our next strategic growth driver is evidence development. We further boosted our library of clinical evidence across our urologic cancer, pulmonology and endocrinology products with two published studies and six abstracts at major medical conferences, which we believe will help facilitate adoption and reimbursement for our tests. At the CHEST annual meeting in October, we unveiled expanded clinical validation data for our Percepta Nasal Swab, which further reinforced the test's ability to help physicians assess lung cancer risk in patients with lung nodules. The findings also showed that our test delivers strong clinical performance across different nodule sizes and cancer stages and for patients who have already had other cancers. Importantly, the data showed that when the nasal swab identifies patients as low risk for cancer, its sensitivity was very high, 97%, meaning that it will miss very few cancers. Conversely, when the test identifies patients as high risk for cancer, its specificity was also high, 92%, meaning that it can help ensure that patients who are more likely to have lung cancer can be quickly guided to further diagnostic procedures and treatments if needed. Also at the CHEST meeting, researchers shared results of the new decision impact study for Envisia for interstitial lung disease, including idiopathic pulmonary fibrosis, or IPF. The findings showed that use of the test increased physician diagnosis of IPF, and that when they did diagnose the disease, they were more confident in their decision and also more likely to initiate IPF therapy. Accurate, timely diagnosis is important for IPF patients because it can enable them to begin treatment with antifibrotics that can slow progression of their disease. Further, data showed that immunosuppressive agents, which are frequently used to treat many interstitial lung diseases, can actually be harmful to patients with IPF. Data from two important studies for our prostate test were shared at the American Society for Radiation Oncology, or ASTRO, annual meeting in October. The first study, which examined our Decipher Prostate test, was the first to validate the use of any genomic test in a prospective randomized cohort of prostate cancer patients with long-term follow up. In this case, a median of 11 years. Results demonstrated that Decipher Prostate test scores are independently associated with distant metastases, prostate cancer specific mortality and overall survival in patients with clinically high-risk prostate cancer. The findings suggest that use of the test can help identify patients who may require treatment intensification beyond standard of care therapy. Additionally, findings from a multicenter, randomized Phase III trial presented at ASTRO suggest that the Decipher Prostate RP test can guide timing and intensity of treatment for men experiencing prostate cancer progression following surgery. For the Decipher bladder test, our tool that helps physicians manage treatment decisions for patients with bladder cancer, new data were published in the Journal of Urology showing that the test accurately identified patients whose bladder tumors were most likely to respond to chemotherapy prior to radical cystectomy. These findings suggest that the test could ultimately help physicians optimize treatment planning for their patients with bladder cancer based upon their tumor subtype biology. Until now, there has been no reliable way for physicians to distinguish these cancer types, resulting in overuse of neoadjuvant chemotherapy with little benefit for many patients. Additionally, results of a long-term clinical utility study for the Afirma GSC were published in the Journal of the Endocrine Society. These findings showed that use of the Afirma GSC resulted in 41% fewer surgeries among patients whose thyroid nodule fine needle aspiration results were indeterminate compared to patients who had no molecular testing. Additionally, when surgery was performed, patients deemed suspicious for cancer by the Afirma GSC were nearly twice as likely to have cancer compared to those who had no molecular testing. Turning to pipeline advancement, which is our third strategic growth driver. We have recently achieved a number of key milestones. We were delighted to launch our Percepta Nasal Swab test for early lung cancer risk assessment in October. We believe the clinical need for this test is significant because physicians today lack objective accurate tools to determine which patients with lung nodules are likely benign and can therefore avoid unnecessary diagnostic procedures, and which patients likely have cancer and should be directed to further diagnostic workup and treatment if needed. With 15 million Americans currently eligible for annual lung cancer screening and 1.6 million lung nodules found incidentally, the ability to reliably determine next steps becomes increasingly important for patients, physicians and the healthcare system. With the noninvasive Percepta Nasal Swab, we believe that more lung cancers will be detected early when they can be successfully treated. We are making the Percepta Nasal Swab test available to a limited number of sites as we assemble the clinical utility evidence to help secure reimbursement, working up to an initial 50 sites that we would plan to engage in our clinical utility study. Work on Percepta Genomic Atlas, our genomic profiling test for patients with confirmed lung cancer, is progressing. We now expect to launch the test in our CLIA lab in early 2022 and still anticipate 6 to 12 months post-launch to receive reimbursement. The test will round out our portfolio of three products serving the lung cancer patient from early detection to diagnosis and treatment. Another key product launch was our Decipher bladder test. Our sales team has begun offering the test to our urology customers, the same physicians that we serve with our Decipher Prostate test. The launch will be steady and measured to ensure that we maximize the long-term potential of this test, which could help in the treatment of up to 80,000 patients a year without disrupting our growing prostate business. As I mentioned earlier, we completed our acquisition of HalioDx on August 2, marking a key step in our strategic plan for global expansion. I've been delighted to welcome the company's talented team to Veracyte and four of its leaders to my executive team, namely Vincent Fert as Executive Vice President of Immuno-Oncology and EU operations; Stephane Debono as Senior Vice President and General Manager of Immunoscore and International Diagnostic Operations; Corinne Danan as Senior Vice President and General Manager of our new biopharma business unit; and Fabienne Hermitte as Senior Vice President Global Quality and Regulatory Affairs. Our combined team is already collaborating on the move of our IVD test manufacturing from NanoString to our facility in France. This transition, which we estimate will take 24 months, will give us end-to-end control over our IVD product business. In parallel, we plan to port additional tests, including Envisia, Decipher Prostate and the Percepta Nasal Swab to the nCounter analysis system so that we can make them available to physicians and their patients in global markets. We have made great progress in finalizing the plans for these development projects, which will be an exciting collaboration between our experienced R&D teams in South San Francisco, San Diego and Marseille, and I look forward to updating you on the timing in due course. The HalioDx acquisition also expands our scientific expertise into the emerging area of immuno-oncology, offering a range of products and services for clinicians and biopharma partners that leverage novel insights into the tumor microenvironment. The impressive Immunogram platform gives our biopharma partners a multimodal 360-degree biomarker analysis of the tumor site, helping them to understand and predict patient response to immunotherapy with the potential to help further inform patient care from treatment decisions to risk of recurrence. Additionally, the acquisition has brought us the Immunoscore colon cancer test. This test is intended to guide treatment decision making by giving physicians a clear and actionable measurement of how an individual patient's immune system is responding to their cancer. The integration has gone extremely well so far. I'd like to thank Bonnie and the workstream leaders and teams from both Veracyte and HalioDx who have worked tirelessly to ensure that we accomplished our integration goals while maintaining a strong focus on their respective businesses. In summary, we had a strong quarter in which we delivered solid revenue growth year-over-year and positioned our tests for further physician adoption and reimbursement. We also made significant progress in transforming the company for long-term growth through the launches of key new products and through the successful acquisition of HalioDx to achieve our global strategic vision. I'll now turn the call over to Rebecca to give a detailed overview of our results.

Thanks, Marc. As Marc mentioned, we are pleased with our third quarter performance. Our revenue for the quarter was $60.4 million, an increase of 94% over prior year and included a $4.7 million revenue contribution from HalioDx. Our strong results were driven largely by outstanding commercial execution in our urology business. Testing revenue equaled $50.9 million with an average selling price of approximately $2,700 per test. Afirma, Envisia and Percepta GSC were over 11,000 tests in total, an increase of 10% compared to the third quarter of 2020, while Decipher contributed nearly 7,500 tests for the quarter. Product revenue contributed $3 million, or 45% growth year-over-year, with Prosigna volume of around 2,150 tests. Biopharmaceutical and other revenue equaled $6.5 million, including HalioDx. Testing gross margin was 68%, and our product gross margin was 50%, both of which were slightly lower sequentially. Biopharmaceutical and other gross margin was 37%, lower sequentially, primarily due to a purchase price accounting adjustment to the inventory held by HalioDx. In total, gross margin was 64%, a decrease of 400 basis points sequentially. Operating expenses, excluding the cost of revenue, increased $10.3 million sequentially to $55.4 million. Of the sequential increase, $7.5 million was related to stock-based compensation expense, intangible asset amortization and acquisition costs attributable to the HalioDx acquisition. Broken down by category, the $55.4 million of operating expenses are as follows. Research and development expense grew $1.8 million to $8 million, driven primarily by the two-month impact of the HalioDx R&D organization. Sales and marketing expenses grew $2 million to approximately $21.7 million, again driven primarily by the two-month impact of HalioDx. General and administrative expenses were $20.7 million, including approximately $5.8 million of acquisition-related expenses. Total operating expense included $8 million of stock-based compensation expense. We recorded a net loss of $14.1 million, including $6.3 million of net loss from HalioDx and $5.8 million of acquisition-related expenses. Net cash used in operating activities was $1.4 million, and we ended the quarter with $168 million of cash, cash equivalents and short-term investments. Turning now to our 2021 guidance. Given the potential for volatility created by vaccine mandates, staff shortages, COVID and supply chain challenges, we are maintaining our previous guidance range while adding the contribution from HalioDx. As a result, we are now projecting revenue of $210 million to $218 million, including HalioDx revenue of approximately $10 million. In all, we are pleased with the quarter and remain confident in our position and ability to execute on our plans as we build on our success through 2021 and beyond. Thank you for your time. I will now turn the call back to Tracy.

Thank you, Rebecca. We will now go into the Q&A section of the call. And joining us will also be Dr. Giulia Kennedy, Veracyte's Chief Scientific Officer and Chief Medical Officer; and Dr. Tina Nova, General Manager of Thyroid and Urologic Cancer. Operator, please open the line.

Operator provided instructions. Your first question comes from the line of Puneet Souda from SVB Leerink. Your line is open.

Yes. Hi, Marc and Rebecca. Thanks for taking the question. First one is really on the guide. I just want to clarify the $10 million contribution from HalioDx. When the acquisition happened, if I recall correctly, it was growing at a clip rate of about 25% or so. Just wondering if that is what you're contemplating this year, or if there is any change from that in the fourth quarter? And then if we look out to 2022, is there any difference versus that prior expectation?

Yes. Thanks, Puneet. Appreciate the question on that. If you do the math, we had HalioDx in our numbers for essentially two months of the quarter in Q3. And our guide for Q4 contemplates a couple of things. Firstly, it contemplates the same kind of volatility that we and others are seeing around the quarter in general related to COVID first- and second-order effects, for example due to the delta variant, on the supply chain potentially and on staffing shortages and other factors. So that's one element. The other is, while the integration is going exceptionally well, I have to say, I've been involved in many acquisitions in the past, and they always have some distraction for the business. We've been able to ride that fairly well so far. But I want to make sure in our guidance we give ourselves a little bit of room for that. More specifically, one of the things that the HalioDx team in Marseille is very focused on right now is working across with our R&D teams in San Diego and South San Francisco to develop our products for the nCounter platform. That's the same team that carries out third-party IVD work. And so while that team is able to juggle different things, again, I want to make sure we've got room in our forecast for that. Bear in mind and remember, we acquired HalioDx primarily for the manufacturing capability, and so that is our priority number one: that transition. Meanwhile, in addition to that, we got some fantastic assets in the IVD services business and the biopharma business and the Immunogram platform and Immunoscore. So we're going to benefit from those over the longer term, but right now, short-term priority is the manufacturing transition.

And the only thing I'd add to that, Puneet, is that does extend into 2022, per Marc's comments. Our priority will be the biopharma business as well as the manufacturing and contract manufacturing for IVD.

Okay, great. And then in terms of the sluggishness that you're seeing, obviously impacted on Afirma and more Percepta as well with hospital access. Could you remind us where you stand today here in November in terms of the rep access? What are you seeing in terms of both the thyroid in-person sales reps and the prostate in-person sales reps? And any indication that that is on a steady improvement versus, let's say, September or so?

Yes. Parsing it out, there's a lot of volatility here business by business and month by month. Let me go through it. Timing-wise, we did see a greater effect than we anticipated in the middle of the quarter. Things definitely improved towards the end of the quarter. But October has gotten off to a start that's more similar to the beginning of the quarter than the end so far. If you go business by business, we continue to see across the pulmonology business, which is the most impacted, problems with access and reduced number of procedures. These are hospital-based settings and we do see an impact in pulmonology. That's not gotten better recently, and we're not anticipating much change there right now. Afirma did get impacted, and we anticipated that might be the case because Afirma is about 70% in the hospital setting. In areas particularly impacted by the COVID delta variant regionally, we did see the most impact on both sales rep access and patient reticence in procedures. We also saw an impact in staffing shortages, which are across the board, but we definitely saw that happen in Afirma. That's one thing that we think could continue and might be exacerbated by vaccine mandates and so on. So one of the things we remain cautious about is the staffing situation at our customers. Moving to Decipher. Decipher's been particularly resilient during COVID to case counts and to most geographic impacts. There is not zero impact, but it's relatively negligible when you look at the growth of the business. It is a growing business. However, I think staffing shortages would be something to watch for that business as well going forward. So we're continuing to remain cautious about that.

No. Thank you. You covered it.

Got it. And just last one on nasal swab. That's obviously an important product for you. As you stand today, given the early work you're doing with the sites, could you remind us what sort of reimbursement we should imagine for this product? And in terms of the data sets, do you have enough data at this point to move forward the reimbursement or the clinical utility work you're doing with these early sites that will be included into reimbursement?

I appreciate that. Yes, really important product. Nasal swab is incredible progress. As I mentioned, this quarter we launched the product at limited sites, and we're continuing to grow those sites. In terms of the data, we announced new data this quarter that enhanced the clinical validity data of the test, and we can spend more time on that if people want to. But in terms of clinical validity, we've got some strong data for the nasal swab. The next step is the clinical utility data through those sites, and that's going to take time. We want to pick the right sites, and we want to get this done the right way to secure the long-term prospects for this product and make sure it's launched in the best possible way. We're in the process now of doing that. We'll gather the data. We still think reimbursement could be a fairly broad range from 12 to 24 months until we get to that point. But the most important focus right now is building that clinical utility data and going through the reimbursement process, something which Veracyte has had extensive experience with and an exceptional track record of doing well, and so we're leveraging our experience there.

Great. Thanks, guys.

Your next question comes from the line of Tejas Savant from Morgan Stanley. Your line is open.

Hi, this is Hugo on for Tejas. Thank you for taking our questions. Would you comment on whether you're seeing any pressure on the supply chain now? And what are some of the actions that you're taking to ensure there are no disruptions?

Yes. The supply chain pressure is something lots of people are talking about, and it's very real for many. Throughout COVID, we've been able to ride that out very well with our suppliers. We've made a concerted effort to talk to many of our large suppliers and see what they're seeing and hearing right now, because one thing you do have to worry about is the second- and third-order effects on them and their suppliers. So far, so good. That doesn't mean that things couldn't happen, but so far, we haven't had major problems. Every now and then there's issues, but we're able to resolve them fairly quickly with our vendors and partners who collectively I think are doing an exceptional job of managing through this. We're remaining cautious and watching it closely and anticipating the odd road speed bump here and there. But so far, nothing major to report.

Great. And then would you provide an update on the rollout of nasal swab and the number of sites where you have rolled it out so far? What's been the early feedback on the classifier so far?

Yes, again, it's really early. We engaged with a lot of key opinion leaders, so we got a lot of feedback even before we launched the products in these sites. Launching the nasal swab in the sites now is giving us additional feedback on the actual utility with real patients. We started to launch it; we've got sites already in place, and we're going to drive that up to as many as 50 clinical utility sites. That's a number we could flex either way, but for now that's our more aggressive plan to achieve the patient numbers that we want to access. We've already gotten patient samples, and it's great to see things are happening. As a result of even those first patient samples, we've gotten some feedback on utility and ease of use. It's a little early days, but as we get through the next quarter, we'll certainly have a lot more experience and possibly something more to share on the next call.

Great. Thank you so much.

Your next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open.

Hi Marc and Rebecca. Thanks for taking my questions, appreciate it. Maybe just, Marc, first a big picture question. Given all the integration that's going on and the competitive nature of the diagnostics field, I'm wondering if you can update on the commercial field force you have now, and any issues or positives from the integration? I'm sure some of those have come with their own commercial forces. But just wondering how you feel in terms of your right size for the commercial capabilities that you have currently.

Yes. It's a great question. We have a really strong sales team, and we've been bolstering that team in many areas. If I take each one in turn: Decipher is adding sales reps at a steady clip. You can't go too fast because you disrupt; it takes a while to get the reps trained and ready. There's a certain optimal level, and we think we've hit that optimal level and have accelerated when appropriate. Afirma has a very experienced sales team that's been with us for a while, and we've continued to build that sales force. Part of our next strategy for 2022 is figuring out how many more sales reps we need to add in that business to go after significant remaining white space. There are not enough patients getting the Afirma test today. More patients need access, which means potentially more sales reps for us in more territories. Pulmonology, because we have a broad portfolio of products and the nasal swab will be a significant volume driver, we have built a meaningful sales team there and continue to focus on the commercial launch of that product over the next couple of years. Our strategy is to ensure our sales team continues to grow and is ready for the launch and volumes that we're likely to get. We'll make sure we have enough salespeople ready to meet the demand for that product, which could grow significantly. Our Prosigna business is growing nicely in Europe with strong country managers, reimbursement capabilities and market access teams. Through the Halio acquisition, we acquired capabilities in IVD services, biopharma and Immunoscore; each of those businesses comes with sales and business development capabilities that we're now leveraging across Veracyte as appropriate.

No, I think we're very picky about who we hire. We have a very extensive interview process and look for the best. As Marc said, you don't want to bring too many on too quickly because you've got to keep the balance of the lab and billing and customer service all in check with your reps. I feel like we have accelerated over what we had originally planned by about three reps.

Great. That's really helpful color. Appreciate it, Marc. And then Rebecca, just one quick one for you on the gross margin side. I know when you exclude HalioDx, it was an increase year-over-year. Just would love to hear your puts and takes and what's going to that, and any views you have into the end of the year on the gross margin side, whether it's on the ASP or the COGS part of it.

Happy to do so. In the quarter we were impacted by a purchase price accounting adjustment to the HalioDx business, which brought down that gross margin relatively significantly. We would expect on a go-forward basis that to normalize. Gross margins on a go-forward basis should be in the mid-60% range, including the impact of HalioDx, whereas ex-Halio the core business would be more in the high 60s. On a go-forward basis, average selling price is relatively stable; we've seen it around $2,700 now for a couple of quarters. From a cost-of-goods-sold perspective, it's highly tied to volume. So assuming volume comes through the business, we would not expect that to be a significant point of conversation. Inflation is something we're watching, but currently not impactful.

Great. Great to hear. Thanks for taking my questions.

Your next question comes from the line of Mike Matson from Needham & Company. Your line is open.

Yes, thanks for taking my questions. With the HalioDx Immunoscore test, are there any plans or ability to leverage that into additional gastrointestinal tests or other types of cancers?

Yes. The great thing about Immunogram as a platform, from which Immunoscore is derived as one product, is it is a platform and it does have applicability to multiple cancer types. Anywhere that it's applicable in looking at the tumor microenvironment and seeing how the individual patient is responding is a potential application. There are a number of cancers where it may be more or less applicable, and there's published literature on that. In terms of how we roll that out and the strategic plan for that, we're still working on the details. Vincent Fert is leading that across our sites now for Immunogram.

Okay. And then, it looks like your operating expenses were kind of in the low 40s if I strip out the one-timers, the acquisition-related stuff. Is that right? And then is that kind of the run rate we should expect in the nearer term?

Thanks for the question. It was in the low 30s if you strip out stock compensation, intangibles and acquisition costs. I think that's the clarification. Yes, I think as we go forward, that's a fair rough estimate, obviously ahead of 2022 planning, specifically more for the fourth quarter.

Yes. Okay, got it. Thank you.

Your next question comes from the line of Brian Weinstein from William Blair. Your line is open.

Hey, good afternoon. This is Griffith on for Brian. Thanks for taking the questions. First, a question on the lung cancer space. Guardant announced plans for a lung cancer screening assay for smokers pre-CT. Could you provide an update on your NOBLE trial and your own pre-CT program? And specifically, do you have any idea what percent of nodules are discovered incidentally versus as part of a screening program?

On that second part first, there are 15 million people who are high risk and eligible for screening under current USPSTF guidance. Of those 15 million, roughly 1 million are actually undergoing screening on an annual basis, and 1.6 million nodules are found incidentally. In all cases, nodules are confirmed by low-dose CT, which is very sensitive, but there is a high rate of nodules that are benign. You need a test like the nasal swab to help determine which nodules are benign and which may be cancer. The NOBLE study is going well. Enrollment is continuing and we're getting samples in; it's a very important trial for us and will help open up markets earlier on in the care continuum.

No, your comments were spot on. It's going very well. We're accruing, and we hope to gather 9,000 patients ultimately and follow their course over the next number of years. It's going to be a very rich repository for us moving forward.

Okay. And then just one on Decipher. Could you talk a bit more broadly about the drivers there? Sales force adds, product line extensions and the coverage wins, any idea on the rough magnitude of each of those? Really trying to understand how impactful bladder could be in 2022.

So as you know, we just started with bladder and we're very excited to have that out on the market. It's one of the first molecular tests to be offered in bladder. It's going to be most used in muscle-invasive bladder cancer, where many patients are treated with chemotherapy prior to radical cystectomy. Many patients do not benefit from that chemotherapy; it doesn't reduce the tumor size and can be detrimental prior to surgery. Radical cystectomy is a complex surgery, taking six to eight hours, and you want patients in the best health possible. The average age is around 73 and many are long-term smokers, so health can be poor. By running our test and being able to say which patients should and should not receive chemotherapy prior to surgery, there's a great advantage. It's a first-of-its-kind test. There are about 150 surgeons who focus on these surgeries, and they are located in the same offices as our urologists who treat prostate cancer, so it fits right in and we can use the same sales force. We have Medicare coverage at a reimbursement a little over $3,400 for Medicare. We'll see more Medicare patients from bladder than prostate because of the age difference. We also have data published in the Journal of Urology substantiating the test's utility. On the prostate side, we've continued to add new sales reps every quarter and are still seeing a lot of growth. Prostate remains behind in molecular testing adoption, so there's still a lot of white space and many doctors to call on. At the ASTRO meeting, Decipher was featured prominently, and we keep adding to our GRID database, now over 100,000 patients, which we use to offer additional molecular information to our physician customers as needed. I see a lot of market runway for both products in 2022 and beyond.

Thanks, Tina.

Great detail. Thanks, guys.

Your next question comes from the line of Thomas Flaten from Lake Street Capital. Your line is open.

Hi guys, this is Travis filling in for Thomas. One question I had is regarding HalioDx. You said you want to do IVD testing, development and manufacturing operations. Could you tell us how that process is going and provide more color on that?

HalioDx has over 15 years of experience in IVD development and manufacturing. First and foremost, the manufacturing capability will be used to manufacture our own kits for the platform in Canada and outside the U.S. That process will take approximately 24 months to be completed, and planning work has already started. The IVD development capability is a real gem from the acquisition: the team in Marseille has built a strong business and we can leverage that to port the CLIA tests we've developed in the U.S. over to the nCounter platform. Our internal team has experience doing this for customers, and we'll be able to do this for Veracyte internally. The planning has progressed nicely; we are not yet ready to say which products in which order and by which date, but we've got draft roadmaps and will port Envisia, Decipher Prostate and the Percepta Nasal Swab, with other tests like bladder as potential candidates in the future.

Got it. Thank you very much, and congrats on a great quarter.

The next question we have is from Andrew Cooper from Raymond James. Your line is open.

Hey, thanks for taking the questions. Maybe first to get a little clarity: you mentioned the 24-month timeframe for porting manufacturing over. But historically you had noted Envisia could be faster for getting onto the nCounter platform. Is the 24 months to get prepared for nCounter or really to manufacture yourselves as opposed to relying on NanoString? How should we think about the cadence?

Thanks, Andrew. The 24 months refers to the manufacturing transition — getting ourselves ready to manufacture the kits out of Marseille. That is distinct but connected to the development projects, which are a separate parallel path: three individual IVD development projects to port the tests to the nCounter platform. Work on Envisia had already started and agreement on concordance between nCounter and our existing assay is high, so Envisia is ahead in progress. We still have to go through validation and verification, manufacturing connection and regulatory considerations such as IVDR in Europe. Those two efforts are happening in parallel. The manufacturing transition timing is roughly 24 months; the development projects span the next few years and we're continuing to refine that plan.

Okay, helpful. One more: when you think about Percepta Nasal Swab and the path there, it's a soft launch now to build data. Once you have the clinical utility data, how do you stage the full launch? Will it be incremental or a rapid scale, and how do you think about investments ahead of completion of clinical utility data?

That's a great question. The clinical utility phase is thoughtfully planned and deliberate; we need to move at an appropriate pace. Once we get reimbursement, we need to be ready for a full-scale clinical launch for a potentially high-volume test. During the same period we will be refining and putting in place the commercial capabilities and infrastructure to launch at scale. We want to ensure our CLIA lab is ready to process samples, and our sales team is scaled up. We'll be doing that work over the next 6 to 12 months so that we are prepared for volume when reimbursement is in place.

Great, I'll stop there. Thanks.

There are no further questions at this time. I would like to turn the call back to Mr. Marc Stapley. Please go ahead, sir.

Thank you. I appreciate all the great questions. I'd like to take this opportunity to thank the entire global Veracyte team for their tremendous efforts and dedication as we continue to advance our business on multiple fronts. We now have over 700 dedicated employees, and it's been gratifying to see the collaboration across teams, offices and continents as we've worked together to build Veracyte into a global diagnostics leader that improves outcomes for patients all over the world at every step of their journey. I look forward to updating you on our progress at our next quarterly call. Thank you, everyone.

Ladies and gentlemen, this concludes our call today. Thank you for joining us. You may now disconnect.