Veracyte, Inc. Q1 FY2022 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to Veracyte's First Quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press on your touch tone telephone. If anyone should require assistance during the conference, please press. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Sheila Goldman, their Director of Investor Relations. You may begin.

Good afternoon, everyone. And thanks for joining us today for a discussion of our first quarter 2022 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer, Rebecca Chambers, our Chief Financial Officer, Dr. Tina Nova, President of our U.S. CLIA business, and Dr. Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer. Veracyte issued a press release earlier this afternoon detailing our first quarter 2022 financial results. This news release, along with a 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. Furthermore, 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. 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.

Thanks, Sheila. And thanks, everyone, for joining us today. I'm delighted to share an update on our strong first quarter results, which included revenue of $67.8 million, an increase of 85% year-over-year. We announced our new organization in January, and it is clear that this new structure is already enabling our team to execute and deliver impressive results. Veracyte's success is built upon our ability to answer important clinical questions that enable physicians to make better-informed care decisions, helping patients avoid unnecessary surgeries or other interventions, and accelerating time to appropriate treatment. Our tests address eight of the 10 leading cancers by U.S. incidence, as well as interstitial lung disease, or ILDs, and have benefited over 350,000 patients to date. I recently had the privilege of speaking with one of these patients, Mr. Keith Boil. Keith is an idiopathic pulmonary fibrosis patient in Southern California whose story demonstrates the challenges in diagnosing ILDs, including IPF, and the important value our Envisia test provides. IPF is one of the most serious types of ILD and is often very difficult to diagnose with high-resolution CT imaging alone. This can lead to delayed diagnosis and treatment. In 2017, Mr. Boil had a persistent cough which led him to a medical clinic, marking the beginning of his diagnostic journey. After the initial incorrect diagnosis of pneumonia, Keith saw five pulmonologists and underwent additional tests and misdiagnosis over a span of 18 long months. Finally, his new pulmonologist at UCLA, an early user of Envisia, offered him our test. Keith was aware of Envisia and had been eagerly awaiting its launch, so this was welcome news. Envisia confirmed an IPF diagnosis, giving Keith and his family the clarity they so desperately needed. I asked Keith why this clarity was so important. He was extremely clear in his response; it not only validated his use of anti-fibrotic treatment that can be damaging in some other pulmonary conditions, but it also enabled him to join a lung transplant list, a list that he is still on to this day hoping that at some point he will benefit from this important surgery. Keith is doing well at the moment and is enjoying extensive travel with his wife Lorna; we wish them both well and thank them for allowing us to share Keith's story. With patients like Mr. Boil in mind, we were encouraged to see that an updated clinical practice guideline highlights the role of our Envisia Genomic Classifier in the diagnosis of IPF and other ILDs. Additionally, a review article and a separate commentary on the Envisia classifier appeared online in the official publications of the American Thoracic Society and reinforce the intended clinical value of our test, which is to enable physicians to make a confident diagnosis of IPF without the need for invasive surgery. Having a confident IPF diagnosis can help patients like Keith Boil obtain the treatment they need in a timely manner. We look forward to continuing to engage with the pulmonology community to advance understanding of the role our test can play in patient care and to further reinforce the evidence supporting the test's ability to positively impact patient outcomes. Turning now to our first quarter results. We continue to execute well against our near-term and long-term corporate imperatives. Our Decipher Prostate test again outperformed our expectations as we continue to gain significant traction in a competitive market that we estimate is only about 20% penetrated. We believe our continued growth has benefited from key publications, particularly the clinical utility data from a randomized Phase III trial, which were presented at the recent ASCO GU symposium, and confirmed a key role for the test as a prognostic that can help physicians and patients make informed treatment decisions in the intermediate risk setting. We are looking forward to the ASCO meeting in Chicago next month where additional clinical utility data will be shared, characterizing the Decipher Prostate test usage and association with treatment decisions for men with prostate cancer in both the post-biopsy and post-surgery phase. The findings are based on data for the Decipher Prostate test which were linked to the National Cancer Institute's Surveillance, Epidemiology, and End Results, or SEER, program. Additionally, at the upcoming American Urology Association meeting, our KOL partners will share data to provide new insights into the genomic underpinnings of prostate and bladder cancers. These data are derived from analysis of our extensive and growing Decipher grid database, which contains genomic profiling information for over 100,000 clinical samples used in the development and commercial use of our Decipher prostate and Decipher bladder test. Turning to Afirma, our most established and highest volume diagnostic test, we were pleased with our test growth of almost 10% during the quarter and our ability to impact more patients. We also added over 50 new accounts in Q1, further penetrating the long tail of endocrinologists who had not previously utilized Afirma. Our ongoing investments in our flagship product will ensure that we're able to continue to engage even more physicians. Moving to our lung portfolio, in addition to the new ILD guidelines, we are encouraged by early signs of recovery for our Envisia test, which saw a 27% increase in volume compared to the first quarter of 2021. In lung cancer, our team has done a tremendous job preparing the Percepta genomic Atlas tests for launch. Having carefully evaluated the optimal utilization of this test to address the unmet clinical needs for lung cancer patients, where time to result and precious tissue sample are key factors, and to optimize reimbursement, we have made the decision to explore novel channel opportunities for PGA that leverage its unique sample type; tissue from diagnostic bronchoscopies directly into our preservative. This channel opportunity will take a number of quarters to evaluate, so we hope to share more about this at a later date. On the IVD side, we are also looking forward to the ESMO breast cancer meeting this week in Berlin. Researchers there will present consensus findings from the procure trial demonstrating European breast cancer experts’ beliefs regarding the role of gene expression profiling tests, including Prosigna, to inform treatment decisions among women with early-stage breast cancer. We also delivered very strong quarterly growth in biopharma in tandem with further solidifying our offerings for biopharma partners, which are intended to leverage our robust multiomics and immuno-oncology capabilities along with our extensive clinical data. At the American Association for Cancer Research or AACR meeting last month, we introduced our new Veracyte biopharma Atlas, which we believe is uniquely positioned to help advance the next generation of precision medicine in oncology. This novel metastatic Pan Cancer database is designed to be populated by leveraging our best-in-class essays to provide insights that help inform drug development efforts for participating companies. This template offering is modeled on bespoke programs that are already in place with major biopharma partners. Of note, we are particularly excited by some of the novel immuno-oncology insights that we are uncovering through our biopharma and academic partnerships and look forward to revealing more in several abstracts being presented at ASCO and through other exciting publications that we anticipate in the coming months. Moving to our longer-term growth drivers, we remain very optimistic about our Percepta Nasal Swab test for patients who are facing a potential lung cancer diagnosis. As the largest cause of death among all cancers by far, lung cancer is a disease that particularly affects smokers or former smokers and one that can often be successfully treated when caught early. While a highly-sensitive imaging approach, low dose CT under existing screening recommendations, is very effective at identifying patients with potentially cancerous lung nodules, physicians need a more objective, accurate tool to determine next steps for those patients. This is where the Nasal Swab comes in. Already clinically validated, our test could be used to assess patient risk noninvasively, alongside the CT imaging standard of care to help avoid unnecessary procedures for low-risk patients while accelerating time to treatment for high-risk patients. We believe that the ILDs screening paradigm is here to stay, given its high sensitivity, proven reduction in mortality rates, inclusion in U.S. PSTF guidelines, and relatively low cost to the healthcare system. We encourage further screening for patients who qualify under guidelines beyond the very low 6% that we believe are currently being screened. With diagnostic tools like our Percepta Nasal Swab, we anticipate that more and more physicians and their patients will achieve greater confidence in annual screening. We look forward to the presentation of new data at the American Thoracic Society meeting this month, which evaluate the ability of the Percepta Nasal Swab test to accurately assess lung cancer risk among current and former smokers with lung nodules, regardless of best smoking burden history. Meanwhile, I'm pleased with the progress we are making with enrolling sites for our clinical utility study, and with the headway to date on our path to reimbursement. We are also making solid progress in our efforts to expand our IVD testing menu on the encounter analysis system to fuel our global expansion for years to come. Our IVD development and R&D teams are working closely together to launch our Envisia test as an IVD on the encounter instrument in 2023, followed by our Decipher prostate and Percepta Nasal Swab test in each of the subsequent years, respectively. As we build this menu on the encounter, we will be creating opportunities for labs in many countries to make these tests available to their patients. Meanwhile, our commercial and market access teams are working hard to pave the way for reimbursement of these tests country by country, and our scientific teams continue to build a body of evidence needed to support both reimbursement and adoption, leveraging the work that is already done for the U.S. market via our centralized CLIA lab model. This is a perfect illustration of the flywheel effect that is enabled by our Naval clear and IVD based strategy. Finally, we are advancing the manufacturing transition of our IVD kits, beginning with Prosigna, to our facilities in Masai. We are tracking ahead of our year-end goal of handling our own inventory management and global customer fulfillment. By the end of next year, we expect to be fully manufacturing the kits in France, enabling us to benefit from the end-to-end management of the supply chain for these kits. In summary, Q1 was a great quarter marked by strong execution by our team. We're excited about our progress and where we are heading. With that, I will turn the call over to Rebecca to review our financial results for the quarter and expectations for 2022.

Thanks, Marc. As Marc mentioned, our strong first quarter performance exceeded our expectations with total revenue of $67.8 million, an increase of 85% over the prior year. We grew total volume to over 23,200 tests, a 61% increase over the same period in 2021, and a 4% increase compared to the fourth quarter of last year. We delivered over 8,800 Decipher urology tests, which exceeded our expectations, leading in part to testing revenue of $56 million, an increase of 69% versus the prior year quarter. Testing ASP was approximately $2,650 per test, up slightly sequentially. Testing volume was approximately 21,000 tests, including close to 11,000 Afirma tests of almost 10% year-over-year, as Marc mentioned. Due to the change in the billing code for Afirma in 2021, we have had some delays in collections that impacted ASP in the quarter. First quarter product volume was approximately 2,200 tests, resulting in revenue of $3 million, down slightly compared to Q1 2021 as volume growth was more than offset by a decline in Europe. Biopharmaceutical and other revenue equaled $8.8 million, as growth in our immuno-oncology offering was bolstered by the timing of biopharma milestones and contract IVD activities. This timing impact, as well as better than forecasted urology cash collections added approximately $2 million of revenue to our first-quarter results. Moving to gross margin and operating expenses, I will highlight non-GAAP results which exclude the amortization of acquired intangible assets and other acquisition-related expenses but do include routine stock-based compensation. We've chosen to call out select non-GAAP measures to provide useful supplemental information about the financial performance of our business and enable comparison of financial results between periods where certain items may vary independent of business performance. I encourage you to review the GAAP reconciliation of these non-GAAP measures, which can be found in today's release available on our website. Non-GAAP gross margin was 65%, a decrease of 100 basis points sequentially driven primarily by the fourth quarter's $4 million J&J Nasal Swab milestone. Excluding this impact, gross margin was 100 basis points higher sequentially. Testing gross margin was 69%, approximately flat sequentially, and product gross margin was 47% higher sequentially driven by lower startup costs for the manufacturing transfer of our IBD kits compared to the prior quarter. Biopharmaceutical and other gross margin was 49%, exceeding expectations given the timing of the milestone and IVD development revenue, and lower sequentially due to revenue from the milestone recorded in the prior quarter. Non-GAAP operating expenses, excluding the cost of revenue, increased $2.9 million sequentially to $49.1 million, primarily driven by higher compensation-related expenses associated with annual merit increases and the timing of payroll taxes. Accordingly, sales and marketing expenses grew $1.4 million to approximately $22.5 million, and G&A expenses were up $2.6 million to $18 million. Research and development expenses declined by $1.1 million to $8.5 million, driven by the timing of clinical trial and project spend. Non-GAAP cost of revenue and operating expenses included $5.6 million of stock-based compensation. We recorded a GAAP net loss of $14.5 million. Net cash used in operating activities was $8.9 million, and we ended the quarter with approximately $164 million of cash and cash equivalents. Turning to our 2022 guidance, we now expect revenue of $265 million to $275 million, or 21% to 25% growth versus the prior year. This range, compared to our previous guidance of $260 million to $275 million, reflects our strong performance in the first quarter. For the remainder of the year, we are projecting slightly higher Q2 revenue, followed by a sequential decline in Q3 given summer holidays before finishing 2022 with quarter-over-quarter Q4 growth. In closing, we are very pleased with our performance so far this year; we continue to have confidence in our financial position and remain focused on execution in 2022 and beyond. I will now turn the call back to Sheila.

Thank you, Rebecca. We'll now go into the Q&A section of the call. And Tina Nova, President of our CLIA U.S. business, and Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer, will join us. Operator, please open the lines.

Our first question comes from Brian Weinstein with William Blair. Your line is open.

Hey, guys. Thanks for taking the question. Excuse me. Good afternoon.

Good afternoon.

Hey, I was hoping maybe Tina or somebody could just jump into some of the performance and Decipher to get a little bit more information about what's continuing to drive that growth better than your expectations. Is it some sort of a utilization metric that's better? Is it deeper penetration inside of new accounts? Just any insights on Decipher would be great. And then the second question is, good to see Afirma up around 10%; that seems like that's also a little bit better than maybe you guys were thinking about there. I think we were thinking maybe mid to high single digits if things went well for a growth rate for the year, so the 10%, a little bit above that. Can you just talk about how we should be thinking about Afirma trends through the year as well? Thanks.

Sure, Brian. Thank you so much. Yeah, we're very excited about the performance of Decipher; it's just continued to improve and grow and, as you said, increase penetration into the market. And for this last quarter, the sales team productivity was at an all-time high. And we have continued to bring sales reps in, as you know, and do a lot of very extensive training, and we're really making headway out in the field. The other thing is that we continue to build a lot of clinical evidence which really makes it very nice for our sales team to go to physicians time and time again and share the new data from the studies that we have generated data from. And that really makes a big difference; they really like that. And as Marc mentioned, we have an abstract coming out at ASCO soon. And just as a reminder, the market is still only 20% penetrated, so we still have a lot of room to grow in the future, which makes it a very exciting product. On the Afirma side, you're right; it was really great to see that 10%. Again, more training going on and just deeper penetration once again. And also, I'm starting to see a lift of being able to get into more hospitals. January was tougher, and it got easier in February and almost back to normal by the end of March. And Afirma was affected by COVID, just on access more than anything else. So we're almost back to normal there, so it's great to see that increase in Afirma.

Brian, one clarification. Just so we saw 10% volume growth, which I think is great, and our team is doing a really nice job there of getting new physicians and continuing to go off to the long tail there. We did see some headwind on the ASP side that Rebecca mentioned in her comments, and so we're going to continue to focus on that. So when you net it all out, the revenue growth, I'd say, was roughly in line with our expectations, maybe a little bit lower, but it doesn't really change our perspective for the rest of the year.

And I think the trend that you saw this quarter plus or minus a bit is what we're expecting for the rest of the year. So on a volume basis, I would say an expectation in the high single digits, maybe not all the way to 10, but we are expecting volume in the high single digits, but that to be biased down slightly because of some of the ASP items that we're improving on the revenue basis. So that more in the mid to high as you mentioned.

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

Hey, guys. This is Dave. How are you doing?

Hey, Dave.

Any additional color you can give for a clear idea of the contribution from Halio into Decipher that factored into the solid beating rate you had?

I’d be happy to discuss Decipher. When considering both the organic and inorganic factors driving this business, I can provide the disclosure you requested. We manage the business with a portfolio approach and allocate resources accordingly. Our portfolio includes various products, each at different stages of their life cycles. This leads to fluctuations in performance in any given quarter. This is why the company had previously indicated and proceeded with the acquisition of the Decipher and Halio assets to drive growth. Decipher contributed a significant portion of our year-over-year growth, exceeding $20 million, while Halio contributed just over $7.5 million. You can find detailed quarterly figures in the Q. Our strategy behind these acquisitions was intentional and aligns with our goals, and we are satisfied with their performance this quarter and our expectations for future contributions.

Maybe thanks for back or maybe something to add on the life cycle comment. I mean, as you know, we talked about this before that Afirma is a very mature, we believe the market is over 50% penetrated by tests like Afirma. And so it's towards the latter pub; it is still growing, as you just heard; part of it slides cycle Decipher is a product that's at an inflection point of its life cycle and really starting to go up that S-curve and take some great share. And then we have the pulmonology portfolio in the IVD product portfolio that are much earlier stages of their life cycle. So we've got pretty good coverage as a portfolio business across the various stages here. And we're continuing to invest in all those different products to maximize the growth opportunity in return product.

Great, that's helpful, thanks. And Dan, really good to hear about the continued evidence generation for the Percepta Nasal Swab. Could you give us any additional color on the new data to be presented at ATS?

We can't get any more detail than we've already provided because obviously it's going to be presented, but I don't know, Julie, if you want to spend any time on the evidence development that we're doing and our philosophy and approach there, and then what we've been able to provide so far as a teaser on ATS and how the studies go.

Sure. Sure. So for the Percepta Nasal Swab, I can't say that the test has been clinically validated, and we continue to look at the data and provide more and more detailed information about how the tests can be used in various populations. And specifically, some of the work that we're going to be presenting at ATS is going to speak to how the nasal swab performs in people with varying smoking burden. So I think that's an important factor in developing confidence in the test. And we look forward to sharing that with you at the ATS.

Thanks, Giulia.

Our next question comes from Mason Carrico with Stephens; your line is open.

Hey, guys. On the Percepta Nasal Swab, as we progress through 2022 and into 2023 and potentially get closer to that broader commercial launch, what are some of the incremental investments that still need to be made ahead of that launch, whether it's expanding your footprint, lab stuff, sales reps, equipment? Any color on how to think about that would be helpful.

Thank you for that, Mason. I'll take a moment to discuss the long-term opportunity here. As I mentioned earlier, the Nasal Swab is a groundbreaking test in that it offers a non-invasive option for individuals potentially facing a lung cancer diagnosis. In the U.S., there are about 15 million people who should be screened for lung cancer using a proven and effective method, along with approximately 1.6 million incidental findings each year. This represents the target market for our test. As Julia highlighted, this test has been validated for individuals with lung nodules who are current or former smokers, which identifies our primary audience. Moving forward, over the next couple of years, we will focus on building the clinical utility evidence necessary, securing support from key opinion leaders, working toward guideline inclusion, and further developing evidence. These are established paths to achieving test reimbursement, which is our ultimate objective. This test is poised to significantly improve the lives of numerous patients and offers immense value to the physicians treating them. We are committed to this goal, and we are proceeding thoughtfully in this endeavor. In terms of implementation, we already have a sales team in place, given our extensive pulmonology portfolio, and we will expand the team as needed. This follows a formula we have successfully utilized in the past with Afirma and Decipher. Our lab is prepared and will utilize much of the foundational work we have developed over the years. Thus, our focus in the upcoming period will be to ensure that the test reaches as many patients as possible, which is our primary aim.

Got it. Thank you. Maybe one more for me here. On Decipher prostate, I'm not sure if you have this level of granularity, but is there any color you could provide on the proportion of growth from this test that's coming from maybe expanding the market, converting doctors from traditional methods to utilizing a genomic test versus taking share from competitor tests out there?

The data on market share is challenging to acquire, but we believe that Decipher prostate is effectively increasing its share while also expanding the overall market. It’s evident that the market is growing as more urologists adopt molecular diagnostics, and we believe that a substantial number are choosing Decipher, which has around 20% penetration. For comparison, Afirma, one of our most successful molecular diagnostics, has achieved significant penetration in its market, which stands at around 50%. Using this analogy, we see no reason why prostate diagnostics shouldn't reach those levels and even surpass them, which is what we are focusing on.

Got it. Thanks for that, Mark. That's it for me. Thanks, guys.

Thank you.

Next question comes from Tejas Savant with Morgan Stanley. Your line is open.

Hey, guys. Good evening and thanks for the time here. Maybe to kick things off, as we think about your lung portfolio, can you just share with us how should we think about the relative contributions from Envisia versus Percepta? On the one hand, the Envisia, you now have the updated clinical practice guidelines, but there's relatively limited therapeutic options for IPF. But on the other hand, lung cancer screening adherence remains relatively low. So as you think about the medium-term here, any color you could share on the relative sizes of Envisia versus Percepta? And then, of course eventually Nasal risk.

Yes. At this point, the relative contribution from both of them in terms of revenue is relatively small because of two reasons. One, they are at the early stage, and two, for the last couple of years, they were both severely impacted by COVID, given the physician s that we're targeting there and the procedures. As I mentioned in the remarks, Envisia grew really nicely this quarter. So I would say Envisia is starting to show good traction. And then getting those guidelines out with so much extensive discussion around Envisia and such a significant number of respondents actually recommending the use of Envisia, I think that's a really encouraging sign for that product. So I think Envisia is going to be a decent grower as time goes on. And it's a little early to say post-COVID in terms of Percepta GSC how that's going to perform. And, of course, Nasal Swab, if you think about it, that's by far the largest market that we're tackling with our pulmonology portfolio, and that's where we're putting the bulk of our investment in order to grow this entire lung portfolio.

Got it. Fair enough. And then, Marc, just given the broader market backdrop here and the geopolitical uncertainty, etc., even concerns of a recession, are you revisiting any of your expansion plans with a focus on perhaps near-term revenue generating opportunities versus perhaps something which is important that potentially is not going to move the needle for you for, let's say, like two-and-a-half years or three plus years? And so a similar question on the margin side as well as you think about optimizing your for the near term.

I will address the first part and then Rebecca can cover the margin aspect. I joined the team in the middle of last year, and we put in significant effort to develop the 2022 plan. We considered multiple years because there are several important growth areas for the business that extend beyond the current year. We've already made many decisions regarding our investments and resource allocation. The current macroeconomic situation does not prompt us to rethink these decisions, as we have a clear strategy in place. Most of our investments are directed towards long-term growth opportunities, while we are also ensuring that we support our on-market products as expected. Our objective is to expedite the launch of new products, including the Nasal Swab and various IVD products outside the U.S., and we understand what is required to achieve this. Unless something drastically changes, I don't foresee us altering those plans. At the same time, we are committed to continuing the necessary investment in Afirma, Decipher, and our other products.

And on the margin side, Tejas, not just a similar answer. So outside of wages, we haven't necessarily seen a large impact on our cost of goods. And obviously, we do have opportunities to increase efficiency of the lab, which we are actively undertaking, as well as increased efficiency of our collections process, which I commented on in the script. So those two things will benefit margin accordingly, and we're setting ourselves up for really having a nice profile on a go-forward basis based on the activities we are working on in hand. Another important factor is that we also are decently very well capitalized. So we did burn a very small amount of cash in the quarter. But when it comes down to it, we're managing this business to be plus or minus breakeven, and we will burn a little bit of cash this year as we go through some of the contingent consideration of the Halio acquisition. But when it comes down to it, we are very well capitalized; we have the cash we need in hand to invest in this business and to run this business to profitability. And we're excited to see where our products deliver for patients and shareholders.

Got it, very helpful. Thanks guys, I appreciate the time.

Thank you.

Next question comes from Paul Knight with KeyBanc; your line is open.

You commented earlier on the increasing volume post-January, February, March; how was that trending? And should we assume some sequential testing volume growth year in 2Q, 3Q?

We anticipate seeing growth in the second quarter, followed by a decline in the third quarter due to typical summer holidays and related seasonality. The pulmonology franchise has been most affected by COVID. Nonetheless, our results fall within our guidance range. For Afirma, we noticed improved access throughout the first quarter, overcoming earlier challenges, especially in January. Therefore, we believe Afirma's growth will be influenced more by standard seasonality rather than COVID at this stage.

And then Decipher, what would you guide us to in terms of the organic growth on test volume at Decipher?

Yeah. I think we've given a lot of disclosure on the Decipher franchise and the components of our portfolio. We're not going to get in the habit of guiding each product line-by-product. Decipher is contributing very nicely to the total company overall growth rate, and I would say is additive to it but I wouldn't want to go beyond that.

Our next question comes from Mike Matson with Needham & Company; your line is open.

Hi, this is Joseph speaking for Mike. I have a question about the manufacturing transition. It’s been over a year since we started, but are you planning to ramp up any biopharma services or IVD development services, or are these currently on hold during the transition? Is it all focused solely on manufacturing the test kit? Additionally, could you provide more insight into the interest from pharma regarding your immuno-oncology offerings? You've touched on that a bit in your prepared remarks. Are you considering expanding immunogram into different countries or adding new services? Thanks.

That's a great question. I would distinguish the manufacturing transition from the biopharma services offerings as they are quite separate. First, regarding manufacturing, we are progressing well with making our own kits for the encounter system at our facility in Masai, France, through several stages. Ultimately, we will have complete control over the end-to-end supply chain, and we maintain a steady supply throughout this process due to our strong partnership with NanoString. Therefore, we can meet the needs of our IVD business, primarily Prosigna, and next year, Envisia. On the biopharma side, it's exciting that we've consolidated the biopharma organizations of three companies into one global entity. We are actively engaging with biopharma partners both in the U.S. and internationally, gaining significant traction. We recently announced the Alice, which has drawn strong interest in biopharma. By utilizing our proprietary assays, we can create databases filled with multi-cancer data, starting with metastatic cancer, which is of great interest to biopharma partners as they work on clinical trials that coincide with their drug development, focusing on relevant biomarkers and patient identification. There is a lot of productive work happening in our biopharma business, and we will share more about that in the future. One noteworthy outcome of these relationships is the potential for publications. We are excited about the developments in this area, and while we can't share too much at this time, we anticipate interesting opportunities ahead.

Okay. Great. Thank you. And then one more. Obviously, you guys just announced the inclusion of Envisia into the ATS guidelines. Maybe looking towards the future, the next year or so, is there any of your tests that you're hoping, expecting for clinical guideline inclusion, whether it be certain club guideline or, I guess, maybe the bigger one, the NCCN guidelines? I know Decipher is already in there. I believe Afirma has also mentioned they're included in the guidelines. So, yeah, maybe any test in the future could dramatically improve awareness or adoption?

Yes, I mean, let me start with the macro point and then, Tina, maybe you want to talk about the approach with Decipher, which I think is really a good illustration of the power of this, but typically what we're trying to do with the evidence development that we invest in is to gain KOL support, educate physicians, and end up in guidelines as well, and that formula has worked very well for us in the past. So whether it's Nasal Swab in the future, which of course we think should be in guidelines, and we'd like to get it there or continuing growth in the number of respondents who recommend Envisia or continuing on our other products. And of course, here we are going to want to do this outside the U.S. as well. And we do this outside the U.S. as well with our products. But Tina, do you want to talk a little bit about the success so far and what's got more room to go as far as the guidelines.

I believe we always consider guidelines, as they are crucial. We are actively working on trials to generate more clinical evidence to support those guidelines, and this remains a continuous focus for us. Regarding Decipher, it took multiple efforts to reach its current status. We began with RP and gradually improved our biopsy strength, and we will keep advancing in this area. This aligns well with our recent experiences with the Envisia guidelines, which also had to start somewhere. The discussion surrounding them was constructive, emphasizing the key clinical value of our tests, providing us a strong basis for discussions with physicians, who show great interest in these topics. Engaging with them about guidelines is invaluable. Envisia has now established its foundation, and we will strive to enhance that further over time, similarly to our method with Decipher.

Thank you. Absolutely makes sense. All right. Well, thanks for taking our questions.

Thank you.

Thank you.

Our last question comes from Puneet Souda with SVB Securities; your line is open.

Hey, guys. Alright, thanks for the questions. Maybe the first one, I don't know if this was covered already, but in terms of labor costs, we're obviously seeing that labor inflation happening in a number of labs. But just wondering; I wanted to make sure I covered that with you first. Is that something you are seeing, and is that reflecting into the margin expectations this year?

Yeah. Thanks for the question, Puneet. Yes, we are seeing that to some extent, just like everyone else is in the industry. I would say that we are managing it, however. We obviously just delivered great gross margins in the quarter, and our outlook for the full year is in the low 60s to mid-60s on a blended basis depending on revenue mix in any given period. While we are expecting to continue to see that at its current state, it's not necessarily really biasing our margin expectations at this point in time. We are offsetting it with efficiencies in the lab as well as really honing in on our collections and ensuring we're optimizing those components of our business. So it's manageable, but it's there.

Thanks for that information. I appreciate it. Regarding Nasal Swab, I know you've shared some details, but I would like to clarify. We've encountered various datasets on Nasal Swab since it started. Could you help us understand how this upcoming dataset compares to what you've presented before? Specifically, I’m interested in its performance and significance, so could you provide some insight into where we currently stand with the data?

Julia mentioned this earlier, but I want to clarify that this dataset will not replace the valuable data presented recently; it offers a different perspective on smoking burden. We will continue to produce data cuts similar to what we've done before, which is why we launched a second set of data that shows the test's performance considering individuals with prior cancers, among other factors. We remain focused on this area. Regarding the overall performance of the tests, it's important to note that this test is both highly sensitive and highly specific. It is effective for both intake and follow-up, as noted in the script. We envision its use in the market for patients who have detected lung nodules through LDCT, which is very effective at identifying such nodules. This test's sensitivity and specificity make it particularly appealing in that context, as we aim to reinforce diagnostic confidence. The classifier supports this, thanks to our team's exceptional work. Therefore, I believe that's the correct perspective to maintain, and I don't expect any new data that would alter this viewpoint.

Okay, that's helpful. And then Decipher continues to obviously do well, but maybe this question is more about Afirma. I think you guys have pointed out a number of times that this is now a very maturing product. So maybe just can you sort of elaborate, how should we be thinking about the growth rate on Afirma longer-term given the sort of the magnitude of this, it contributes to your revenue. Thank you.

Thanks, Puneet. I think we did our best to address that question a little bit earlier on where we shared that in the quarter, Afirma grew close to 10% from a volume perspective, albeit slightly less than a revenue perspective for the reasons that I stated in the script. As we look forward throughout the course of 2022, I think the mid to high single-digit estimate that was thrown out there is not unreasonable. This is obviously later in its lifecycle, and we are excited about the contribution that the product does provide to the overall portfolio of our products from a growth perspective. That being said, we're all in the stage of having it be one of the most successful diagnostics out there. And therefore, obviously, the curve does start to flatten at some point, and we are there. I think the good news with Afirma is that it is also an incredibly profitable product, and to that end, it and its overall financial profile not just the revenue side.

Okay. Got it. And just last one, if I can squeeze in for Tina. Great to see the performance here and the momentum you have behind Decipher. But just anything that we need to know in terms of data or anything that we'd be optimally watching out at DW or ASCO? Thank you.

Yeah. As Marc mentioned, we definitely will be presenting at ASCO, and we certainly try to do everything we can to be at every major meeting and to have a presentation. Obviously, I can't go into the details of that, but we will be showing data that really demonstrates that Decipher increases utilization in the area of active surveillance. And that is an area that has been hard to show over the years. So we're very excited about the study that we're doing in combination with Dr. Spratt from Case Western and with the NCI SEER program.

Okay. Great, guys. Thank you.

Thanks, Puneet.

This concludes the question-and-answer session. I'll return the call back over to Marc Stapley for any closing remarks.

Great. Thank you very much, Michelle. I appreciate it. In closing, I'd really like to express my appreciation for my leadership team and for all our employees throughout the company. We introduced the brand new organizational structure in January, and through the collective team's hard work, dedication, and collaboration, we're already seeing the benefits, and that reflected in our strong Q1 execution. The clear focus of our team and bright lines of accountability are ensuring that we are optimizing our near-term opportunities while delivering on those really important long-term strategic imperatives we talked about today. We're also investing in our corporate culture; we completed some important work during the quarter to define the culture we want to enable us to drive our performance and achieve our ambitious goal of becoming a global diagnostics leader. Employees at all levels and across all the geographies have enthusiastically embraced this opportunity to help shape our company's culture and our future. It's exciting to see their collective passion driven by that desire to continue to see patients like Keith Boil and their families all over the world benefit from Veracyte's suite of diagnostic tests. I couldn't be prouder of our team or more excited about where Veracyte is headed, and I look forward to updating you on our progress in our next earnings call. Thank you.

Thank you. This concludes the conference call. You may now disconnect.