Veracyte, Inc. Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Veracyte Second Quarter 2022 Financial Results Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shayla Gorman, Director of Investor Relations.

Good afternoon, everyone. And thanks for joining us today for a discussion of our second 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 US CLIA Business; and Dr. Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer. Veracyte issued a press release earlier this afternoon detailing our second 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 the 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. Furthermore, we are not under any obligation to provide further updates on our business trends or 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, Shayla, and thanks everyone for joining us today. I'm pleased to provide an update on our second quarter financial results, as well as our key growth drivers. As you saw in today's earnings release, our strong execution during the quarter resulted in impressive Q2 growth of 32% versus the prior year, with revenue equaling $72.9 million. I was particularly proud of our endocrinology and pulmonology commercial teams who worked tirelessly in the wake of an unexpected supply chain issue to ensure that our patients were taken care of and had access to our tests, more on that later. The largest contributor to our second quarter revenue was our Decipher Prostate product with growth of close to 1,200 tests as compared to last quarter; we saw the largest sequential increase in this product to date. Adoption is growing nicely, yet we still estimate that market penetration for this class of tests is currently less than 30%. This gives us confidence that there remains ample room for growth and for penetration to continue to meaningfully increase for a number of years. Decipher Prostate's adoption has been propelled in part by the growing body of literature demonstrating the test's ability to guide treatment decisions for men with localized prostate cancer. Last month, we announced findings from a multicenter randomized Phase 3 trial, which were published online in Annals of Oncology. This study demonstrated that the Decipher Prostate test can help identify patients who are at highest risk of cancer progression following prostatectomy and who would benefit from earlier, more intensive treatment. In May, we were delighted that the American Urological Association and the American Society for Radiation Oncology issued an updated clinical guideline that is favorable toward genomic testing, including the Decipher Prostate test, to help guide care for men with localized prostate cancer. The guideline authors specifically cited extensive evidence, including from multiple Phase 3 clinical trials, which demonstrated that the Decipher Prostate genomic risk score is strongly associated with prostate cancer outcomes. We believe this additional clinical data, as well as posted guidelines, will augment the already extensive body of evidence we have generated in support of our prostate tests. Moving to Afirma, fortifying and building our endocrinology business remains a key strategic imperative. As a result, our investment in the product and associated clinical evidence continued during the quarter. A new meta-analysis presented at the ENDO 2022 annual conference showed that the Afirma GSC's real-world performance is consistent with and even stronger in some cases than the test's clinical validation study findings. Additionally, a new study published in Thyroid demonstrated the accuracy of our Afirma medullary thyroid cancer classifier in identifying MTC, a rare but aggressive form of thyroid cancer in preoperative samples. This classifier is already part of our Afirma GSC test. We believe that clinical evidence such as this, combined with our continued investment in product enhancements and the customer experience, will support Afirma growth in the next year of mid to high single digits. Regarding our Q2 results, we saw slightly lower volume growth than we expected. During the quarter, we were surprised by a key vendor that underwent a floor ERP transition, significantly impacting their ability to process our customer orders on a timely basis. Our team mobilized quickly to identify and prioritize critical orders, locate and assemble key components, and transact thousands of shipments in-house while working with the vendor to optimize their activities for our customers. Through what I would only describe as the heroics of our team, we were able to meaningfully minimize the impact to those customers and, most importantly, their patients. We believe that in the end very few patient procedures were delayed. While the true impact on Afirma is difficult to quantify, we estimate that this situation lowered volume by approximately 4% compared to the prior year and our expectations. At this point, the vendor's internal issues are now largely resolved and we are back to a near normal level and timing of shipments from them, with our team continuing to supplement as needed. Another standout in the quarter was our biopharma business, which generated key data as well as strong quarterly revenue. An oral presentation at ASCO detailed that our Immunoscore immune checkpoint or IC assay can identify patients who are likely to benefit from immune checkpoint inhibitors or ICIs in metastatic non-small cell lung cancer. Further, a publication in The Lancet Oncology also demonstrated similar results in metastatic colorectal cancer. These findings are important because, while immune checkpoint inhibitors have revolutionized therapeutic management of patients in a number of cancers, current biomarkers are limited for identifying the patients who will benefit. We believe that the Immunoscore IC assay could help biopharmaceutical companies select the right patients for their immune therapies and help improve the success rate of their clinical trials. Notably in combination trials, including ICIs. We look forward to additional future publications incorporating our immuno-oncology assays. These exciting findings reinforce our confidence that immuno-oncology will continue to be an important part of Veracyte's long-term strategy. Going forward, we are particularly focused on our multiomic biopharma offerings as we believe we have a differentiated asset. At the same time and after thorough analysis of our immuno-oncology portfolio, we have decided to pause our commercial efforts for the Immunoscore colon cancer diagnostic test. Given the breadth of investment opportunities in front of us with early-stage products at various phases of being launched or developed, paired with our acute sense of fiscal responsibility, we are prioritizing our focus and resources accordingly. Moving now to our long-term growth drivers. We were pleased to share additional performance data on our Percepta Nasal Swab test at the recent ATS meeting. These data demonstrated that our test could accurately determine lung cancer risk across a range of tobacco-related exposures, ensuring that it can be used reliably in people whose lung nodules were found incidentally or through screening. With respect to broad commercialization of Nasal Swab, we remain focused on securing a clear path to reimbursement prior to driving high volume growth and generating clinical utility data to ensure commercial success, including finalizing patient enrollment in our Nightingale Study by the end of next year. Activation of sites is progressing well, and while patient enrollment is lagging our expectations by about a quarter, we are starting to see momentum build. Early signs from the test and treatment results that we have on a small number of patients are encouraging, as we're already seeing a positive impact on treatment decision-making. Of course, we don't yet have the ultimate patient diagnosis, but our robust clinical validity data, which we have already shared, gives us confidence in the outcomes that we expect to see when we do. We are monitoring the data as it is generated and plan to take advantage of opportunities to publish favorable interim clinical utility results in an effort to drive the earliest reimbursement decision possible. We're excited to witness the positive impact Percepta Nasal Swab will have on patients and providers. Another key long-term growth driver is the transition of our test onto the nCounter Analysis System to fuel our global expansion. We believe the menu of IVD tests in development are exclusive diagnostic rights to a best-in-class instrument, and the team's extensive track record of developing IVD tests positions us extremely well to succeed in global markets. We already offer the Prosigna breast cancer test and are on track with our development submission timeline for our broader menu, as previously detailed. With that, I will now turn the call over to Rebecca to discuss our financial results in more detail.

Thanks, Marc. As Marc said, our continued focus on execution drove strong quarterly revenue of $72.9 million, an increase of 32% over the prior year. We grew total volume to over 24,900 tests, a 19% increase over the same period in 2021 and a 7% increase compared to the prior quarter. We delivered testing revenue of $59.7 million, an increase of 18% versus the prior year quarter. Testing ASP was approximately $2,650 per test, roughly flat sequentially. As expected, ASP was again impacted by the 2021 Afirma billing code change. Despite this, our confidence has grown that this is a temporary impact, which should abate next year. Testing volume was approximately 22,600 tests, with strong Decipher urology growth driving approximately 10,000 tests. Afirma volume grew 3% as compared to the prior year. However, we estimate volume growth would have been approximately 7% without the vendor-driven supply disruption Marc mentioned. Second quarter product volume was approximately 2,300 tests, resulting in revenue of $3.1 million, up 16% compared to Q2 2021, despite a currency headwind. 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. Non-GAAP gross margin was 66%, an increase of approximately 50 basis points sequentially, driven primarily by higher biopharmaceutical and other margins. Testing gross margin was 69% and product gross margin was 47%, both flat compared to the prior quarter. Biopharmaceutical and other gross margin was 53%, an increase of approximately 350 basis points sequentially due to project mix. Non-GAAP operating expenses excluding cost of revenue declined by $0.1 million sequentially to $49 million as lower benefit expenses were partially offset by ramping clinical trial and project expenses. Research and development expense increased by $0.6 million to $9.1 million, and sales and marketing expenses grew $0.6 million to approximately $23.1 million driven by personnel expense. General and administrative expenses were down $1.2 million to $16.8 million, primarily due to lower professional fees compared with the first quarter. Non-GAAP cost of revenue and operating expenses included $6 million of stock-based compensation. We recorded a GAAP net loss of $9.5 million, which included a $3.3 million intangible asset impairment resulting from the Immunoscore colon diagnostic test commercialization decision. Net cash provided by operating activities was $0.7 million, and we ended the quarter with approximately $164 million of cash, cash equivalents and short-term investments. Turning to our updated 2022 guidance, we expect revenue of $272 million to $280 million or 24% to 28% growth versus the prior year on a reported basis. This range compared to our previous guidance of $265 million to $275 million reflects our strong performance in the second quarter, continued outperformance of our urology business, Afirma revenue growth of low to mid single digits, and current currency rates. Q3 revenue is expected to be lower sequentially due to the impact of summer holidays on our testing, biopharma, and contract IVD businesses, as well as the large Q2 contract IVD order. For Q4, we are forecasting quarter-over-quarter growth. For the second half of 2022, we expect to see an increase in operating expenses, driven primarily by higher R&D expenses. With the current inflationary environment and recession concerns on the horizon, we believe our diagnostic testing business, which makes up the vast majority of our revenue, will remain resilient. With this in mind, we are confident that we have adequate cash on hand to ultimately take the business to profitability, barring M&A. We believe this positions us to invest in our long-term growth drivers while ensuring that our cash profile is suitable for the foreseeable future. In closing, we are pleased with our performance this quarter and remain focused on making the necessary decisions to drive long-term growth with a clear path to profitability. I will now turn the call back to Shayla.

Thank you, Rebecca. We'll now go into the Q&A portion 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.

This is Griffin on for Brian. Maybe just to start on Decipher. Could you just talk a little bit more about that growth outlook and runway in terms of ASPs and units? It's a growing part of the story? And then as we think about layering on bladder, could you just talk about what, if any, impact there was from bladder in the second quarter and how you're thinking about that in the second half?

I'll start and I'll invite Tina and Rebecca as needed. You saw again another quarter here of strong performance by the Decipher Prostate business in particular, and cited a lot of reasons for that, including continued evidence development, which we just got a really good steady drumbeat here, and the penetration is a key factor. We said in the script that less than 30% penetration of these types of tests in the market, of which we believe Decipher Prostate has significant share, majority share. And so we expect to continue to drive incremental penetration of this market with our test. There is no reason that we see ahead of us for that momentum to slow down, so very excited about where prostate could go. Tina, anything you want to add to that and feel free to talk about the bladder, which was the second part of Chris' question.

I think we really saw fantastic performance by our sales team in the last quarter. They continue to do a terrific job out in the field. Also, I think that the amount of data we continue to release and show physicians that shows our test makes a real difference in the risk of progression after surgery. We just had an increase in some guidelines from the AUA and the American Society of Radiation Oncology update that shows our risk score is strongly associated with outcomes, independently showing some data that came from SEER, where we looked at 10,528 patients and showed the correlation between outcomes and what was predicted by Decipher. So that data continues to help. Bladder is a much, much smaller market. The test has a much smaller indication. Although it's just starting out in the marketplace, it's not at the same level as the prostate test.

With regard to what's implied in our guidance and what was recognized in the second quarter, Griffin, I would effectively view that as a rounding error at this point in time. Obviously, to Tina's point, this is an exciting opportunity ahead of us. But just like other early-stage products, it takes quarters and years to generate the incremental evidence and demand for this product. Importantly, given how wonderfully the Decipher urology franchise is operating at this point, we are very cautious about disrupting that through incremental bladder efforts. Right now we want to make sure we are really focusing on biopsy and radical prostatectomy, because it's really what's driving the growth here. Bladder is exciting over a three to five-year period. In the next couple of quarters, it's not where I'd focus my attention; I'd really personally focus it on radical prostatectomy and biopsy.

And then just second on biopharma, a growing part. I'm assigned to that IVD contract payment here, but it's such a fundamentally different business post HalioDx. Can you just talk a little bit more about the nature of those revenues? When you talk about those growing faster than the corporate average, understanding it's just a portion of the total biopharma revenues, but I'd love to just get more color on that.

The biopharma business, we have obviously put the three parts of the biopharma businesses together and they are somewhat different, but there is a lot of overlap and commonality there too. The reason we put them together is we can drive a lot of improved access to markets in the U.S. for the tests that came or the capabilities that came out of our HalioDx acquisition, for example, and vice versa. A lot of the revenue that is focused on purely the biopharma line is coming from today is really our immuno-oncology assets, which is why I talked about those as being a key growth driver and strategic investment for us in the future. I'd like to see more of that penetrating our U.S. customer base, which we should expect to see in the future. Similarly, the incredible amount of data that we've generated on both the Afirma side and the Decipher side and the lung side as well, being able to leverage those globally with our existing customer base is pretty strong in Europe as well. Whether it's clinically relevant biomarker identification, enhancing our customers' clinical trials through biomarkers or companion diagnostics work, there is opportunity globally to do a lot with the assets that we've obtained here. On the IVD services side of the business, it continues to leverage the capabilities that that team has that we're actually deploying internally right now to develop our own assays but also for third parties.

On that last point, I would just add, our goal is not necessarily to grow the IVD services business; it’s really to ensure that that business is enabling our long-term opportunity with the nCounter instrument and product on a global basis. So that business is much more – we're much more keen to work on the manufacturing transfer than we are to really drive revenue growth through that line. Griffin, you mentioned the growth rate of the biopharma business, biopharma and other business. I just wanted to clarify that we haven't necessarily given a long-term growth rate for that business and we aren't going to be in the habit of doing so today. If you look at 2022, though, this is a human capital business, and we did call out some timing impacts on the first half of the year. So I would take those into account. As a result of those timing impacts, we expect the second half to be sequentially lower than the first half in terms of revenue. Additionally, the seasonality of both businesses in the biopharma line, given their human capital dependence, is obviously pretty acute in the third quarter. In aggregate, we do think about this much more on an annual basis rather than on a quarterly basis, given it's a lumpier business than the testing or product business. So hopefully that helps with modeling over the long-term as well as 2022.

Our next question comes from Puneet Souda with SVB Securities.

Can you provide an update on the current status of hospital access for Afirma and the pulmonary franchises? Specifically, how are your sales representatives doing with face-to-face interactions, and are there still any challenges in that area? Please give us the latest information on this matter.

I would say we're pretty much back to business as usual here. The level of access we're seeing across the board is what you would expect, barring any local region lockdowns, which we haven’t seen lately. If that were to happen again, it would of course affect access. However, absent that, it seems like our teams are getting the access they need, making it feel almost like business as usual too. Tina, do you have anything you want to add to that?

No, I think that's exactly right. The one thing we do continue to see is some struggles with staffing, especially in the physician offices rather than the hospitals, and that remains an issue that we see. But outside of that, we do feel like we've gotten away from COVID this last quarter for the first time.

Yes, staffing was my next question, but perhaps Rebecca can address this. There are numerous factors at play in the business. You mentioned the challenges with Afirma this quarter, but it appears those have been successfully addressed moving forward. There may be some catching up from that, while Decipher continues to perform well, and the biopharma and colon test segments are ongoing. So, can you help us understand how to piece all of this together in terms of the growth rate we should anticipate going forward? Is a growth rate of 24% to 28% realistic, or could it potentially be better?

With regard to the moving pieces in 2022, immunoscore at this point in time, given the amount of investment and size of the commercial organization was not a material revenue driver in 2022. So I wouldn't necessarily take that into account neither here nor there on a go-forward basis. Obviously, we won't have that revenue, but again, it will not be that material of a headwind. With regard to Afirma and the impact in the quarter from the supplier issue that Marc mentioned, we don't expect there to be a catch-up there, because these patients had to go into their treatment decisions and treatment paradigms. We are not providing - that does not include a catch-up, because that is not currently what we expect. Decipher, we are expecting to experience continued strong growth over the course of 2022 and already provided kind of the biopharma and other impact in the second half regarding Griffin's prior question. Looking forward to 2023, we guided to Afirma. Decipher, we are very excited about and expect it to continue to grow quite nicely, albeit large numbers; the growth rate declines as the numbers get larger. So I'm not necessarily going to guide to a growth rate there, but we're early stages in penetration. We're incredibly excited about the continued penetration of this market and the performance vis-a-vis its peers. So all good news, just not commenting on the growth rate specifically. Obviously, biopharma and other are going to be lumpy in any given period, but we do expect growth on a year-over-year basis. The product business is early days as well, so growth. So I'll let you sum all that up and come up with an expectation for 2023 based on it. But I think you have all the puts and takes there accordingly.

And then last one, maybe for Tina. I mean, when you look at the Decipher franchise today and the competitive landscape, obviously, you have a strong position in the marketplace; data continues to be generated. Maybe just give us a sense of sort of thinking about this product longer term. What sort of positioning can you maintain in the marketplace? Seems to me it's leading the market. Are there any puts and takes competitively that you would point out where you can continue to gain more and more share in the marketplace? Just maybe talk to us about the positioning of the product and how do you see this more longer term, because obviously this is a key important driver for Veracyte.

I think that I'm very proud of the team. I think our sales team is absolutely top. I think we're good at hiring reps and we’re really good at training. I think it's very, very important because the interaction between the sales reps and physicians is extremely important. As you know, prostate was behind the eight ball in sort of getting up to speed using genomics, and so there’s still a lot of training that happens out in the field with the physician on the use of these tests; that has not changed. I think because we are still less than 30% penetration, we still have a nice runway in front of us for the future. You have to continue to publish, add new data, and ensure the best service possible: ease of ordering, reports, customer service, and what have you. All of those play just as much as an important role in the product itself. But I think we are in very good shape for the future. I feel very good about our strong position right now.

I believe the number of publications, the support from guidelines, and the range of indications for our Decipher product put us in an excellent position, in addition to what Tina mentioned. To emphasize one point, our sales team is truly remarkable based on the metrics they achieve and their sales optimization efficiency. As Tina highlighted, relationships with physicians are essential. Therefore, there is no reason to think we can't continue to grow, maintain, and increase our market share, considering the investments we are making in this product. We intend to keep moving forward; this is a key focus area for us and will remain so for the foreseeable future.

Our next question comes from Matt Sykes with Goldman Sachs.

Maybe if we could start out just on the issue you have with your vendor and their ERP. It seems very specific to them. But as you experience that and just given the real-time nature of some of the decisions your patients need to make and some of the lost revenue that resulted, did that cause you to look across your vendor relationships and just better understand what they might be going through? Maybe you understood the ERP implementation, but maybe not the impact of it. Just wondering about lessons learned from that particular experience as you manage your vendor relationships.

Everybody has been experiencing supply chain disruption and issues, including ourselves over the last couple of years. We have been able to deal with those effectively and haven't had any impacts. Then this one came along, which has nothing to do with global supply chain issues; it’s more to do with a local challenge with a specific vendor. Our team was able to put in place the necessary prioritizations and our own internal processes to make sure that no customers, no patients were left behind in terms of procedures that were delayed. Obviously, that's impossible to measure, but that's something we strove for. That distracts when being out in the field generating new business and spending time with existing customers. The effect was less patient impacting. I’m sure there are some examples where you could find that was the case, but not in the main. It was more about distraction for our sales team. So we got ourselves into that situation and did a really good job of getting ourselves out of it as best as we could in the quarter. To your broader question, every business continuously engages in business continuity planning. There are proprietary vendors with components where you can't second source and there's no Plan B. That's not the case here. There are some vendors where you need to plan ahead to have a Plan B in place and able to mobilize when needed. We're all doing that, just like anybody else. More importantly, though, this vendor probably has learned to look at their own processes and think about how to implement system changes without things like this happening again.

And then Rebecca, one for you just on the OpEx. The trend has been flattening pretty much, certainly relative to the first quarter of this year. Do you expect that OpEx trends to remain relatively stable over time? I know the G&A costs were some lower spend on professional services. Is that a one-off and should resume, or how are you thinking about the different components of OpEx? Should we expect that to stabilize in terms of the spend as the revenue continues to grow?

If you recall back to your conference, we did highlight that we are seeing a good amount of leverage through the sales and marketing line, and I do expect that to continue, specifically in the second half. We may have a small uptick as T&E comes back more than it was in the first half. Outside of T&E, we expect to see continued leverage through the sales and marketing line. In research and development, we expect to see relatively meaningful increases, tied to Marc's comments primarily on Nasal Swab as well as on the IVD development. Both programs are continuing to ramp. We are enrolling our clinical utility study, which is critically important for us to increase our spend on. To the extent that you see a meaningful increase in operating expense, the majority will be in research and development. On G&A, we expect to see a slight uptick in the second half. We have some key IT projects, which will have incremental spend primarily, and we've added a little bit of headcount, but that's around the edges. The vast majority of the gains will come from the R&D line.

And just one last quick question for me. Just the decision on continuing Immunoscore colon cancer test. Maybe some background behind that decision. Was it competitive landscape, or was it just the potential material revenue versus the cost you were putting into? I want to understand a little more behind that specific decision.

We do portfolio planning on a continuous basis and that's really what led to this rather than anything else. We looked across the level of investment that's needed, the level of development required, the building of the sales team and the commercial channel. Yes, of course, you always look at the competitive space as well. Having said that, this is a very novel test. But where we see the greatest near-to-mid-term and even long-term opportunities is in our biopharma business. Diagnostics may spawn from that over time. But just the timing of those diagnostics, the launch and penetration, relative to the investment you need to make, is obviously key in our evaluation. We did that on this product as we do on every product and reached the conclusion we did. Our team, especially in Marseille and Richmond, put a tremendous amount of effort into developing this diagnostic, but they're also putting effort into the assets that build our biopharma business too. None of that work goes to waste; it's all leveraged in that broader opportunity.

Our next question comes from Tejas Savant with Morgan Stanley.

Just a couple of cleanups on the guide here, Rebecca, for you to kick things off. I know you'd mentioned the rev rec impact from the code switch last year. Is that tracking to plan in terms of what you had baked into the guide? And that slight trimming of the Afirma guide from mid-single digit to low-mid single digit, is that just related to the vendor issue essentially that you saw in 2Q?

Thanks for the questions, Tejas. Taking them one by one on ASP. Yes, that is trending exactly how we had expected. I think we even gave, as I mentioned in the prepared comments, we gained incremental clarity, if you will and conviction probably is a better word than clarity. Incremental conviction that that trend is going to abate by the end of the year. We're obviously still working through the bits and pieces there and reaching out to specific payers. We have absolute conviction that by the end of this year, it will abate. With regard to the supplier transition and the change in the guide from mid to high to low-mid; definitively, that is all around the supplier issue. We quantified that for you previously in the prepared remarks as well, so the only real change in outlook there is the supplier issue.

And then on FX, how material are your international revenues today? I know you added that, that was the incremental line in terms of the guide. And how much of a headwind are you really baking in for the back half of the year?

Given where rates are today, international revenue, which is primarily Euro-denominated, is around 15%, and we've absorbed $2 million of incremental headwind since the last time we guided.

And then on Decipher Prostate, Marc, have you seen any noticeable shift in momentum since the AUA ASTRO guideline update from May?

I'll ask Tina to respond to that.

We always see, is it meaningful? It's really a combination of small pieces that come together. We had that and we had publications as well, and going and participating in all the major meetings this year as well where we had posters and oral presentations. It's hard to just pinpoint one...

And last one for me here, for you Marc. Given some of the restructurings underway at some of your genetic testing peers, how are you thinking about sort of being a little bit opportunistic in terms of adding to your portfolio here? There are some interesting assets, obviously, that are being shopped around. So just curious as to your take on the landscape.

I'm glad you brought that up. I do want to point out that we do feel we are in a very beneficial position relative to the strength of our balance sheet and our P&L, and the work we have done over the years to ensure that we get a reasonable ASP for our tests and that we are not overspending relative to what we are generating. We’re very prudent and fiscally responsible in that regard, which puts us in a good position. Rebecca talked about cash and the runway we have ex-M&A. We are very focused on profitability here. While we would be opportunistic in looking at the market and seeing what the opportunities are, we do that anyway and continuously. I would never say to you we are completely ambivalent about that. On the contrary, we are, as we always are, watching what's going on and paying attention, but at the same time, we are very focused on execution of our business, which is in a good position.

And Tejas, before we move on, just one last thing to add to my comments on FX. With the Halio acquisition, we are in a much more natural hedge across the P&L, given while we have a headwind on revenue, the operating expenses are effectively coming in lower than planned, given that same change in currency rate. I just wanted to share that across the P&L not perfectly on a one-for-one basis but pretty close; we are fairly hedged to rates.

Our next question comes from Andrew Cooper with Raymond James.

A lot has already been asked, so maybe just tipping a little bit; nothing tremendously new necessarily on the Nasal Swab efforts. But you mentioned wanting to get interim readouts and potentially as soon as possible and to drive that reimbursement. Can you give us a little bit better sense for what point you need to be at in the study to say, hey, it's time for an interim readout? We've got enough patients enrolled, a long enough timeframe to look at? What are the things you need to see and when, if you could bracket best case, worst case? Can you give us some guidelines for when we should be thinking about seeing some of that data?

I'll go ahead, and obviously, Giulia, if there is anything you want to add on the study design itself. Without getting into too much detail here, Andrew, for the study design, of course, we set in place certain milestones along the way where we can look at the data and see how significantly physicians are changing practice; that's one of the key things you want to measure here. We got an early look at that already, and it's a very small set of numbers, but so far, the results are very encouraging. We'll see as time goes on. There are multiple points along the way where you take a look. Depending on the results that you are seeing, that could help drive earlier publication of some of that data. I don't know if Giulia, there is anything you want to add to that, but that's...

I think that's right. It's still early days. The data are looking encouraging and we do plan on opening up the results at pre-specified times along the course of the study to check-in and see how the data looks. So we will be looking at it multiple times using a pre-specified protocol.

Our next question comes from Mike Matson with Needham & Company.

So I want to ask one on Decipher, just on the bladder test. Can you remind us what the TAM is there? And then, just thinking about prostate over the next few years, I mean, with 30% penetration and large numbers, that's probably going to start to slow down some, but bladder should be kind of ramping up. So is there potential for that to help sustain the growth of the Decipher kind of urology franchise and offset some of the slow down in the prostate side maybe over the next few years, or is it just too small to do that?

I wouldn't be thinking about a slow down in the prostate side over the next few years. I mean, where Rebecca was referring to kind of the law of large numbers as the denominator grows, but I see the momentum continuing for the foreseeable future here on prostate. On bladder, the market here is about a third of the size or so of prostate. So call it 80,000 patients a year, and our current test addresses roughly half of that market. But of course, I would look for us to do similar things that we've done on the prostate side. And over time, you build the indications out until you cover as much as possible, and so we would do that. Yes, of course; as part of our urology franchise, bladder could be a contributor in the medium to long term. But, as Rebecca said earlier, we're very focused on not disrupting any of the momentum that we have in prostate right now. So it's not a needle mover in the near term.

I'd just add that the bladder test is a much more niche market. But we are looking at other studies that we will be starting over the next few years and looking at expanding that product over time.

And then just given the kind of home run success we've seen with the Decipher Prostate test. Is there any kind of lessons learned from the commercialization strategy that can be applied to your other categories like pulmonology, which seem to be seeing a bit slower ramp, or maybe just earlier stage, it's not apples to apples? Or is there something really unique about the urology specialty or call point that has just allowed it to happen a lot more quickly than something like pulmonology?

The lessons learned across our entire portfolio revert back to our strategy here, which has always been the same. It has been done very successfully in Afirma and in prostate. Identify a clinical unmet need that fits into the physician's workflow. Generate a lot of evidence, get KOL support, get into guidelines, get reimbursement, and have a very efficient and effective commercial team that drives it. Then you can continue to repeat that. The added layer of Veracyte is being able to take those tests and make them available globally on our nCounter platform as well. That’s really the general lesson learned. Specific to prostate, remember that there have been molecular diagnostics for prostate cancer for quite some time. The Decipher product and team has done a really good job penetrating that market effectively and creating new groundwork. Pulmonology is a little different because that groundwork hasn't been laid and we are doing that, so we go indication by indication, unmet need by unmet need, and the formula is well understood at this point.

Our next question comes from Mason Carrico with Stephens.

Maybe just starting with Decipher Prostate. On the commercial team, how many reps have you added year-to-date and how many reps are supporting that test currently? If you could provide some color on the efficiency of new reps versus some of your more tenured reps; is there a metric that you could call out? And then how long does it really take for these new reps to get fully ramped and efficient?

We're at around 40 reps right now, and obviously, we want to add a handful more. The timing just depends on how things are going across the year. It takes about six to nine months for sales reps, no matter what they're selling in this business, to get comfortable and start making a difference and paying for themselves; that’s actually a pretty common timeframe.

And then thinking about ASP at this, how much room do you still have left to run in terms of penetration of the commercial payer market? Any insights into near-term opportunities or expectations regarding additional coverage over the next year or two?

Absolutely, that's something we work on all the time. There is still more runway for us to get contracts in on the commercial side; there's no question about that. It's something we're very, very focused on. Every time we add new studies, we go back to the commercial payers and share that information with them. This area was slow on the commercial side; the whole urology area was just very slow on obtaining commercial coverage. But yes, there is more runway and we continue to add new contracts every year.

That concludes today's question-and-answer session. I'd like to turn the call back to Marc Stapley for closing remarks.

Thanks, operator. I appreciate it. In the current challenging environment, I'm incredibly proud of our team's execution and financial discipline in Q2 and to date. We believe that this focus as well as our portfolio of high-value tests that address key unmet needs sets us apart in the industry. We remain committed to transforming care for patients across a range of diseases. We are doing this successfully in the U.S. and have a clear pathway and plan to bring our tests to patients in global markets. Thank you for joining us today, and I look forward to keeping you apprised of our progress.

Ladies and gentlemen, this concludes our conference. You may now disconnect.