Veracyte, Inc. Q1 FY2023 Earnings Call

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

Good afternoon, everyone, and thanks for joining us today for a discussion of our first quarter 2023 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; and Rebecca Chambers, our Chief Financial Officer. Veracyte issued a press release earlier this afternoon detailing our first quarter 2023 financial results. This release, along with a business and financial presentation, is available in the Investor Relations section of our 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. Further, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte files with the Securities and Exchange Commission, including Veracyte's most recent Forms 10-Q and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release, accessible from the IR section of Veracyte's website. I will now turn the call over to Marc Stapley, Veracyte's CEO.

Thanks, Shayla, and thanks everyone for joining us today. I am very excited to share our first quarter results, which were even better than we anticipated almost across the board. We delivered revenue of $82.4 million, 22% growth over the prior year, driven primarily by outperformance of Afirma and Decipher. Further, with our continued focus on financial discipline, we ended the first quarter with cash, cash equivalents, and short-term investments meaningfully ahead of our projections at $178 million, roughly flat to the prior quarter, even with the seasonal use of cash that we anticipated. Behind this balanced approach to growth and capital preservation is our proven framework of identifying the specific clinical unmet needs, developing a test to address that need, and securing the clinical evidence, reimbursement, and guideline inclusion required to drive sustained market penetration. This approach is the force behind the performance of our Afirma and Decipher tests and enables us to invest in our long-term growth drivers. This quarter, we delivered close to 12,500 Afirma tests for patients being evaluated for thyroid cancer, more than we anticipated, given that we had expected a greater impact due to seasonality, which is typical in the first quarter. We saw positive growth trends across both our ordering base and orders for existing providers. On the reimbursement front, we secured four new payer contracts, making the test an in-network benefit for over 4 million additional health plan members. In addition to the outstanding work of our commercial and reimbursement teams, I'm excited to share that as part of our initiative to enhance our best-in-class Afirma tests, we recently launched the addition of TERT promoter mutation testing to the Afirma report. There have been several studies published recently that correlate the presence of the TERT promoter mutation to a high risk of malignancy as well as highlighting that such mutations co-occurring with the BRAF V600E variant are associated with a poor prognosis. Given the value of these insights for informing patient care, such as whether more aggressive surgery or treatment is wanted, our team works hard to develop a high-quality DNA assay that allows us to reliably determine the TERT promoter gene mutation status for patients with suspected or diagnosed thyroid cancer to further empower physicians to optimize clinical decision-making. We believe that product enhancements such as this, along with the work we've done to improve the customer experience and to streamline ordering will continue to benefit Afirma's performance in the coming quarters. Given this as well as our strong first quarter results, we now expect the bolster growth rate for Afirma in the high single digits for the full year. Turning to Urology, we continue to expand on the budding evidence surrounding the Decipher Prostate Test, further helping to establish the test as a new standard of care. At the American Neurological Association Annual Meeting earlier this week, multiple abstracts were presented focusing on Decipher Test, particularly exciting with data from two large Real-World data sets encompassing more than 100,000 men with prostate cancer, which reinforce the clinical utility of our tests. In the first study, researchers utilized data from the National Cancer Institute database with patients who had undergone Decipher Prostate Testing and found that use of our test was independently associated with a two-fold increase in conservative management among those with favorable risk disease. In the second study, over 90,000 Decipher Prostate Test results were linked to electronic health and claims data to demonstrate the decipher score at initial diagnosis was independently predictive of the risk of metastasis, and after radical prostatectomy was predictive of both biochemical recurrence and metastasis. In addition to the data presented at AUA, we published a number of studies last month that further advance the clinical utility evidence for the Decipher Prostate Test. The first study published in European Urology Oncology found in a cohort of over 4,000 patients, the Decipher Prostate could help better identify those patients with early micrometastatic disease who may benefit from treatment intensification. This study adds to growing evidence around the use of Decipher Prostate to help inform treatment decision-making in initial diagnosis. Additionally, new data from an analysis of an NCI-sponsored Phase 3 study published in the International Journal of Radiation Oncology Physics, known as the Red Journal, shows the Decipher Prostate Test can help physicians more accurately categorize personal risk and select appropriate treatment for men with intermediate-risk prostate cancer. This is important because prostate cancer deemed intermediate risk by NCCN guidelines is the most heterogeneous of all risk groups in the disease, and a wide variety of treatment is available. Of note, this randomized study in which patients were followed for nearly 13 years, is the first to validate any gene expression biomarker in the intermediate risk patient population. The attainment of Level 1 evidence, the validation of our test in the most recent NCCN guidelines, along with the stellar execution by our team and our differentiated Decipher Grid report led to Q1 Decipher prostate volume of more than 12,500 tests. Like Afirma, this growth was also driven by strong adoption from new ordering physicians, as well as higher volumes from existing accounts. Building on the framework we've established with Afirma and Decipher, we are making good progress on our long-term growth drivers. Decipher patient enrollment for NIGHTINGALE, the clinical utility study for our Percepta Nasal Swab continues to progress well, demonstrating the potential for our novel noninvasive tests to help guide physicians for patients with potentially malignant lung tumors. We look forward to presenting expanded preliminary data on the preliminary phase of the trial, which enabled investigators to learn how to incorporate the test into patient management in advance of the clinical utility trial at the American Thoracic Society, or ATS International Conference later this month. The global launch of our test menu to patients outside the United States is another key long-term growth driver for Veracyte. Our current IVD product offering, Prosigna for breast cancer patients had a record quarter, delivering close to 3,000 tests, demonstrating traction and adoption supported by clinical evidence. With the submission of our Envisia Genomic Classifier to European regulators in December 2022, we are now responding to feedback from the notified body. In the meantime, we continue to build clinical evidence for Envisia and are looking forward to the presentation of abstracts at ATS, demonstrating the test's impact on patient management and its ability to predict disease progression in patients within interstitial lung disease. We believe our focus on evidence generation will help drive adoption of Envisia globally, bolstering the LDT in the US, while gaining important KOL support in Europe in preparation for the international launch of the IVD. We're also making good progress building out our broader menu of diagnostic IVDs to the US market, with the Decipher prostate expected to be submitted in 2024 and our nasal swab expected for submission in 2025. While our biopharma business is facing significant headwinds over the course of this year, given the impact of a sizable customer pulling back on planned spending and the current macro environment, we continue to advance our unique multi-omic offerings. We were pleased to share three abstracts and host a Spotlight Theater at the AACR Annual Meeting, highlighting our distinctive set of assets to help biopharma partners at all points along the drug development process. We are continuing to build out our pipeline of new customers to fuel the long-term growth prospects of this business. As I laid out on our call last quarter, one of the strategic focus areas for 2023 is to identify new opportunities to expand our testing menu beyond our currently available products and the pipeline I outlined. As part of these efforts, we held our first annual discovery day in April, bringing together our R&D, medical, clinical, and commercial teams from across the globe to imagine the future for oncology diagnostics and Veracyte's important role in shaping that future. I'm extremely pleased with the work our teams are doing on this front and our investments to drive the next phase of growth for the company. Before I close, I'd like to highlight the publication of our inaugural environmental, social, and governance report earlier this week. This ESG highlights how our mission and values are deeply embedded in our business and demonstrates not only our dedication to transforming patient outcomes all over the world but also our commitment to our shareholders, employees, business partners, and other stakeholders. I'm pleased to provide transparency into our ESG efforts and I'm excited to build on the foundation we laid to further advance our program. In summary, Q1 was a fantastic quarter marked by solid execution across the team. We're excited about our progress to date and our clear focus for the future. With that, I will now turn to Rebecca to review our financial results for the quarter and updated expectations for 2023.

Thanks, Marc. As Marc said, we have another excellent quarter, with $82.4 million in revenue, an increase of 22% over the prior year. We grew total volume to approximately 28,800 tests, a 24% increase over the same period of 2022. Quarterly testing revenue was $72.4 million, an increase of 29% year-over-year, driven by higher-than-expected Decipher Prostate and Afirma volume, as well as strong cash collections in the quarter. Total testing volume was just under 26,000 tests. Testing ASP was $2,800 per test, benefiting from approximately $2 million of out-of-period collections. Adjusting for this impact, testing ASP would have been slightly greater than $2,700. First quarter product volume was approximately 2,900 tests and product revenue was $3.9 million, up 31% year-over-year. Biopharmaceutical and other revenue totaled $6.1 million, down 30% year-over-year, primarily due to lower IVD contract manufacturing and overall spending constraints across the industry, as previously discussed. Moving to gross margin and operating expenses, I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets as well as other acquisition-related expenses and restructuring costs, but does include routine stock-based compensation. Non-GAAP gross margin was 68%, up approximately 300 basis points compared to the prior year. Testing gross margin was 73%, up 400 basis points compared to the prior year, benefiting from higher lab volume mix and long-dated collections. Product gross margin was 44%. Biopharmaceutical and other gross margin was 29%, down year-over-year, given lower fixed cost absorption. While we are forecasting a sequential step down in consolidated gross margin as we invest to support our better-than-expected volume outlook, we are reiterating our full year expectations of non-GAAP gross margins in the mid-60s. Non-GAAP operating expenses, excluding the cost of revenue, were up 18% year-over-year at $58.1 million, driven by ramping clinical trial and IVD development expenses as well as higher personnel costs. Research and development expenses increased by $4.2 million to $12.7 million. Sales and marketing expenses increased by $2.7 million to $25.2 million and G&A expenses were up $2.1 million to $20.1 million. We recorded a GAAP net loss of $8.1 million, which included $8.1 million of stock-based compensation expense and $6.7 million of depreciation and amortization. Overall, we ended the quarter with $177.9 million of cash, cash equivalents, and short-term investments, well ahead of our expectations. Turning now to our 2023 guidance. We have updated our projections to $330 million to $340 million, higher than our previous revenue guidance of $325 million to $335 million. This increase is a result of our strong performance in the first quarter and updating testing revenue expectations of mid- to high teens, offset by a greater than previously expected decline in biopharma and other revenue. For the remainder of the year, we are forecasting sequential revenue to increase in Q2 and then decline going into Q3, given typical seasonality in the summer holidays before finishing 2023 with quarter-over-quarter growth in the fourth quarter. Moving to our expectations for cash, cash equivalents, and short-term investments. As always, our comments are barring potential M&A. In 2023, we now anticipate maintaining our 2022 year-end cash balance of approximately $180 million, even with the impact of prior acquisition-related contingent consideration. I am proud of how we started 2023 and look forward to continuing to deliver on our plans and financial projections. We'll now go into the Q&A portion of the call. Operator, please open the line.

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

Great, thank you. Marc, Rebecca, I appreciate you taking my question. First, regarding Afirma, congratulations on the strong performance and the raised guidance. Can you share what is contributing to that strength? Is it due to sales force optimization, more data, or increased discussions about the product? Additionally, you are forecasting high-single-digit growth for the year; could you elaborate on what factors might raise or lower that projection as the year progresses?

Yes. Thanks, Puneet. Thanks for recognizing the strong performance of the Afirma product and the Afirma team. I think it's pretty much all of the above that you mentioned, but mostly I'd say, it's driven by really strong commercial execution, continued enhancements in the product, and the process of ordering and engaging with physicians. A good example of an enhancement in the product is the launch of TERT that we recently launched in the quarter that enables further clinical utility of the test. There are some competitive dynamics out there, too, and it feels like we've got some real tailwinds there as well, at least anecdotally, it feels that way. So, I’m very excited about how Afirma has been going so far. In terms of kind of potential for that growth rate to be any different, I think one of those drivers could always be competitive dynamics. But we're continuing to add new physicians and broaden the adoption within the current physician and provider base. To the extent we're able to take incremental share, that would be helpful to drive that up. Again, there's always competitive dynamics that can go the other way, too. That's why we keep investing in the product and our sales team. Anything you want to add?

Nothing, you covered it well.

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

Thank you, Puneet. I'll address that. The short answer is no, not necessarily. TERT will be prescribed only for a specific group of patients. Currently, there is a coding for it, but there isn't a pricing structure associated with that code. Our primary focus is to benefit patients and to keep improving the product. We will work on establishing a price in the future, but since the list price is around $300, we don't anticipate any significant effect on the average sales price, even if we succeed in getting contracts and coverage. Additionally, TERT will only be ordered for a small percentage of patients, which is why we believe that even with coverage, it won't significantly affect the average sales price, although it's critically important for those patients.

Yeah. And just to add to that, I mean only 1% to 2% of thyroid nodules that undergo molecular testing are expected to have TERT promoter mutations. So that, essentially, is what we expect to order for more than that; that would be the outcome. But yeah, as Rebecca said, it's a small subset of cases but important to have.

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

Yes, we highlighted this several quarters ago as a potential challenge, and we recognized it early on. We have a concentrated customer base, with a few customers making up a significant part of our biopharma revenue, which is one factor to consider. Additionally, we are heavily engaged in early clinical research, which has been more affected than ongoing clinical trials or existing products on the market. We are experiencing the impacts of this situation; one of our objectives has been to broaden our customer portfolio, and we are making good progress in that area. However, we still have a concentrated revenue stream. A small shift can result in a noticeable percentage change. Biopharma, along with other revenue, accounts for about 10%, and biopharma itself represents just over half of that.

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

Got it. That works. Okay. Thanks both.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Mason Carrico of Stephens, Inc. Your line is now open.

Hey guys. Congrats on the quarter, really strong performance. Maybe just a quick question here, I know it's probably not this simple, but how promotionally responsive is the thyroid market? Is there somewhat of a linear relationship to repetitions and growth? Could adding a few reps potentially bump up that growth rate, or how are you thinking about adding reps going forward within your thyroid franchise?

Yeah. And we've been at this for a lot of years in the thyroid business. So we've got a lot of experience there. And there's always an optimal point that you get to with commercial teams. When you start adding reps, it's not as simple as adding a rep; you have to redesign territories and reallocate territories and that creates some disruption where you have very good relationships between existing reps and their accounts. We always ask ourselves that we have continued to grow that team, but we don't have to grow it significantly in order to achieve the kind of results we're getting. I think what really matters is sales reps' effectiveness and their ability to communicate effectively with their customers. A good example, again, while it wouldn't be ordered in every patient case, it's another reason to go and talk to the physician about the addition of TERT and what it means and when they should order it, and so on. So just that routine cadence of good, strong communication between our existing sales reps and their customers. And obviously, being out on the street, finding new customers and converting new customers over to Afirma is a big part of it. As we've talked about before, total thyroid testing, molecular diagnostic testing is about just over 50% penetrated. There's a lot of customers out there, a lot of physicians who aren't ordering this test and should be when you actually look at the yield in terms of the number of surgeries that have been avoided thanks to Afirma; it should be a fairly easy conversation, but it takes some investment from the sales team in going out and visiting those accounts.

And the only thing I would add to that, Mason, is while we are adding headcount here, we're not nearly adding at the same growth rate as revenue is growing. So we're seeing immense leverage over the sales and marketing line and expect to continue to do so, which is one of the benefits of the specialty oncology channel. These markets can be served with about 50-55 sales heads, and you don't need to build sales forces that are 100 to just serve different types of physicians. So, we obviously really like this model and really are benefiting from a differentiated cash position and cash generation as a result of the leverage we're getting through the sales and marketing.

Got it. Thank you. That's helpful. And maybe on Decipher Prostate. I think last I checked, you're at like 195 million covered lives, something like that. Still seems like there's a lot of room to run there. You guys have been publishing a lot of studies. So could I just get your updated thoughts on potential coverage wins or how you're thinking about that going forward?

Yes. Yes. As you quite rightly pointed out, there is a lot of room there. There are some key coverages that we need to get. When you think about it, you've got a test here that is reasonably well-penetrated at least so far as NCCN Level 1 guidelines, with more than 70 peer-reviewed publications. There's so much evidence out there supporting the use of the test that it's still a little surprising that it can take this long. It's not for lack of trying. We have a market access team that this is what they do. They're working with payers to drive the coverage decision. So, more to come on that in the future. That's one of the opportunities that we have for future tailwinds here, and we just have to keep driving it. We're still getting, as you heard today, Afirma has been on the market for about 12 years, and we're still driving commercial coverage in some cases. So it's a core part of what we have to do in diagnostics.

And Mason, as we shared, I think, on the last earnings call, we're expecting the vast majority of the Decipher growth to come from volume as it already has quite a favorable ASP, and this quarter was no different. Decipher volume grew in the mid-40s, with pricing adding little to it, but the vast majority of that growth came from volume.

All good. Thanks guys. Appreciate you taking the questions.

Thank you.

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

Hi, good afternoon. Thanks for taking my questions and congrats on the performance this quarter. Maybe, Rebecca, I just wanted to start out on the OpEx side. I know there was a bit of an increase. Obviously, the revenues were up as well. You had mentioned IVD development ramping clinical trials. But just what should we expect from an OpEx standpoint this quarter? You gave kind of the gross margin guide, but just sort of below that, can you kind of give us a sense for OpEx trends over the course of this year?

Yes, happy to. If you look at our year-over-year growth, a good chunk of that came from increased R&D as we cited in the prepared remarks. We expect that trend of sequential growth for R&D to continue throughout the course of the year. R&D growth will be the largest contributor to OpEx growth over the course of 2023. As I mentioned earlier, sales and marketing is not expected to grow that materially throughout the year, if anything. That's a great source of leverage for us. On the G&A line, as we invest in really ensuring the systems, facilities, and infrastructure to scale over the course of the coming years—especially with the incremental volume growth we're seeing—we will expect G&A to grow slightly, albeit at a much less growth rate than R&D.

Got it. And then just maybe to follow-up on some of the comments or questions have been asked on Decipher. Thank you for that volume number. Just wondering, I think in your March presentation, you still had the penetration rate around 25%. So, I assume that's probably pretty consistent with where we are today. But just maybe any update on sort of the competitive landscape that you're seeing there and where you're seeing sort of the most traction with that product just given the volume growth?

Yes. Remember, I think a couple of factors are at play here. One is, as we talked about last time, the incidence of prostate cancer is growing; you can see that it was around 7% growth. And that's partially driving the whole market to be larger. In terms of the 25% penetration, that was our rough math at the end of last year. We're continuing to take share when as Rebecca just mentioned, this business grew in the mid-40s quarter-over-quarter. It certainly feels like that represents some share gains as well as taking share and growing the overall market.

Got it. And if I could just ask one last, just clarification question. Because I think you talked about in your prepared remarks, but just remind me on the ramp in Europe for the IVDs. You obviously have Prosigna. Is it Envisia, Decipher Prostate, and Percepta in sort of like 2024-2025 time period, or could you just maybe help me outline that a little bit better?

Yeah. So starting with Prosigna, which is on the market today and actually had a good quarter, and we talked about the growth there and how well that test has performed with close to 3,000 in the quarter which is actually a record quarter for that product, which is great news. Then Envisia, we submitted in December last year, a little ahead of schedule. And as I mentioned at the beginning of the call, we're dealing with comments from the notified body, which is a normal part of the process; what we expected and the back and forth there. We're going to submit Decipher prostate in 2024, and we're going to submit the nasal swab in 2025, and then they'll go through a very similar review and response process.

Great. Thanks for clearing that up. I appreciate it, Marc. And congrats again.

Thank you. One moment for our next question. Our next question comes from the line of Andrew Brackmann of William Blair. Your line is open.

Hi. Good afternoon. And thank you for taking questions. A lot has been asked already, but maybe if I could just do a housekeeping question here. Can you just sort of reiterate or remind us around the timeline for the NIGHTINGALE study? Is it on track to finish enrollment later this year? And how should we be thinking about a potential readout? Thanks.

Yeah. Thanks for the question there. And NIGHTINGALE, yes, actually, the progress has been really good in terms of signing up new sites. Our clinical team has done an excellent job of contracting and getting those going and with patients starting to enroll in those sites. We're starting to see some nice uptick here still expecting around the end of the year to pull through the last patient in the trial. In terms of the readout, that's where there's a lot of variability because as I think I've talked about before, we're going to take a few bites to the apple here in terms of looking at some short-term analysis. Clearly, how well we can use that to drive the appropriate clinical utility conversations for reimbursement will depend on the results of that analysis. So there's a couple of pathways there that we're pursuing in order to move as quickly as possible to reimbursement. But ultimately, as we've said before, we've got to get the clinical utility data published, which takes time, and then that drives the reimbursement conversation, which also takes time.

Yeah. And just one thing to add there is the guidelines point to a two-year follow-up, and we hope that we'll be able to effectively do a shorter follow-up than that. But the longest follow-up that would be required before we go through the publication or early readout would be up to two years.

Okay. Thanks. And then Rebecca, I've got a boring modeling question for you. I think you mentioned the sequential step down in gross margin. Can you just maybe give a little bit more color around what's driving that? Thanks.

Absolutely. I'd be happy to. We were very pleased with our gross margin this quarter, especially the testing gross margin line. Overall, we really did benefit from fixed cost absorption, both on the labor and overhead side this quarter; the benefit of mix as well as the benefit of the $2 million of higher period collections flowing down at 100%. If you look forward with the sequential impact you cited, we will not necessarily have that benefit of the prior period collections, and so that will be a headwind sequentially. We've been running lean in the lab. A couple of hundred basis points, with the majority of that coming from labor absorption, is not a sustainable business model. We'll need to staff up in the lab, which will impact gross margins on a sequential basis. In addition, we're expanding our laboratory here in San Diego to take into account growth of the Decipher franchise. We will be buying instruments and taking on the incremental space. All that will impact margins. Although, again, a mid-60s margin is a pretty solid one. Even though it's a slight sequential step down, I'll take it all day long for the growth we're seeing.

Okay, great to hear. Thanks.

Thank you. One moment for our next question. Our next question comes from Mike Matson of Needham & Company. Your line is open.

Hi guys. This is Joseph on for Mike. Maybe another question on Afirma. Now that TERT has been added, maybe looking back to when, I guess, Xpression Atlas was introduced from test. I guess I'm assuming that Xpression Atlas is probably ordered or will be ordered a lot more. But in terms of your sales force and productivity, maybe when that add-on was introduced, did you see a large uptick in interest from new physicians or what have you? And maybe you’re kind of expecting a similar thing going forward with the testing? Thank you.

Certainly. The TERT testing is crucial for some of our physicians because it matters to certain patients that we provide a readout on. It also gives our sales team a strong reason to discuss the product enhancements with physicians. This process helps us continuously improve the product and ensures that we meet the needs of physicians to deliver insights to patients.

Okay. Thanks for the color on that. Maybe a question on the installed base. Just looking at the installed base, whether hospital labs or clinical labs, maybe that versus academic institutions or pharma. If you have an idea on the split there and maybe the same question for the US installed base?

I think—I don't really think about it in terms of the nature of the installed base. I think if you think about Europe, we have to go—once we get the regulatory approval for a new test to add to the installed base, we have to go country by country to drive reimbursement. Then, once you've got that reimbursement decision in the country, you go lab by lab to drive placements. Now the placements could be in academic labs; it could be in smaller clinical labs. It's really going to be driven by the menu and the flow-through of patients in those facilities. It’s also true in the US as well.

Yes. The only thing I would add is—we are selling Prosigna in the US. It is, I would say, the vast majority of revenue is actually outside the US. I think that is where we put the majority of our investment to develop out those US markets. So just something to keep in mind.

Yes. Okay. That makes sense. And then maybe just one last one. In terms of the biopharma revenue, you had mentioned that not only from IVD development but you're seeing some pullback also from early-stage services or clinical trial services that you guys do. Has there been any effect in terms of maybe licensing revenue from the Decipher GRID database or you guys' other databases? Maybe how has that trended here in 2022 and the start of 2023?

Yes. Just a reminder, the majority of our biopharma revenue is coming from our immuno-oncology business, which itself stems from the HalioDx acquisition and a lot of it is outside of Europe also the US. There is a little bit of US-related revenue that is associated with kind of the former Veracyte Decipher businesses. But the majority of the impact we're seeing in the decline is on that immuno-oncology side. That's where we're seeing the effect. A bit involved in the very early biomarker development work where you're more likely to see that impact. So no, I'd say there's no read-through there in terms of the Decipher GRID-related activity.

Okay. Great. Makes sense. Thank you very much for taking the questions.

Thank you. One moment for our next question. Our next question comes from Tejas Savant of Morgan Stanley. Your line is now open.

Hi, guys. Greetings. So maybe I’ll talk about the real simple one for you, Rebecca. Is it fair to assume that in terms of those out-of-period collections that you called out a $2 million impact here in the first quarter, you’re essentially zeroing it out in the guide for the rest of the year?

Yes, that's fair.

Okay. Perfect. And then, Mark, a big picture one for you on biopharma. I know you called out sort of the sizable customers are pulling back on spend. But as you look to the next sort of three years or so, are there any key missing pieces in your offering that will make it sort of really step up here in terms of the traction and help better sites sort of participate more substantively in that opportunity?

Yes. It’s a great question. I don't think that there are. To the extent there are, we're working on developing those. The biggest of which is our biopharma Atlas, because we believe that there's a really interesting market demand for that. That's what we're working on, because that's one of the things we think is going to drive revenue growth in this business. We have custom assays, whether they be, in Immunohistochemistry or Proteins or we have RNA expression-based assays, multiple versions of that. We have DNA that we can do in our lab in Marseille and also here. So we've got the capabilities; we've got the assays; we’ve got the lab; we’ve got the people. We just need to drive more success on the selling side and bring more of those biopharma customers in the current macro environment. That’s a more difficult conversation. I don’t expect that current macro environment that lasts for the next three years; I would certainly hope not. We’re starting to get traction; we’ll see how that pans out. In our guide, we’re being a little bit more bearish on this side of the business right now, given some of the trends that we’ve seen.

Got it. Makes sense. And then on the nCounter Menu, Marc, I think you pointed to the Decipher Prostate in 2024 as a particularly important submission. Is there anything you can do that's within your control to pull it forward? I mean, obviously, the approval timeline and then the reimbursement timelines by country are sort of largely out of your control. But in terms of the submission itself to the Europeans, anything you can do to accelerate it?

No, it already has been. I mean, relative to the original timeline that we looked at for all of these products, we've pulled that date forward substantially. It's not happening in series. I think that's an important point to make. We don't work on Envisia, then start work on Decipher, and then start work on Percepta. All three have been happening in parallel. We’ve made good progress there; we’re moving to the next stage of that. The most important thing we can do to speed things up is on the notified body review and making sure that what we submit is a very thorough and detailed dossier. Our team has got 15 years of experience in doing this, but the regulatory process is new, as you know. So, there's a lot of learnings for the notified body and anyone who's submitted. We can point to the extensive evidence that we have for the Decipher test in the US and outside the US. Hopefully, that drives the notified bodies accordingly, because there are patients at the end of this that need this test in Europe.

Got it. That's helpful. And then one final one for me on M&A. I mean, Marc, in the past, you've talked about sort of staying away from the cash strugglers in the space, so to speak, either in cancer screening or perhaps even in the metastatic setting via MRD, et cetera. Is that sort of a red line for you as you think about the M&A opportunities in the pipeline? I mean, obviously, I'm assuming seller willingness here has gotten a little bit better following the regional banking crisis. So could we at some point sort of see you dabble in that space, or is that just sort of off-limits in terms of how you think about it philosophically.

I’m currently seeing no change in our philosophy around M&A. I’ve said it before; we’ll obviously not be blind to opportunities. We’ll keep our eyes open to things that make sense, but the bar is very, very high for us. In terms of the care continuum itself, yes, we’re not necessarily looking to enter that healthy screening area because there are a lot of people doing that, and it's a significantly heavy investment. But as far as dealing with cancer patients or patients who are suspected of having cancer, that’s right in our sweet spot all the way across the care continuum, once you’ve been identified as a patient, and that’s where you’re going to see us always continue to focus.

Fair Enough. Thank you, guys. Appreciate the time.

Thank you. One moment for our next question. Our next question comes from Sung Ji Nam of Scotiabank. Your line is open.

Hi. Thanks for taking the questions. One more question on your nCounter IVD strategy. Marc, do you think there will be market opportunities for laboratories once you just adopt one test on the platform, or do you think for this model to work that you would have to see multiple tests being adopted? How do you see that playing out? I don't know if it's too early to tell, but—

Definitely, it’s actually the right question because we've said all along, you need an extensive menu to drive adoption, and that's what we're building. Having a breast test which we do have, Envisia is more of a rare disease. I don’t think that necessarily steps up the adoption on its own. Prostate, significant indications, significant disease, pent-up demand, that starts to really move the needle. If you think about adding a nasal swab on top of that, where the population, use cases are much more significant, you really get into that extensive menu that makes it much easier to have those placement conversations. Having Prosigna today, we are seeing some traction, albeit small, but just the broader menu is needed to drive it.

Got it. And then one for Rebecca. Thank you for the cash flow guidance for the year. Sorry, I missed it. Sorry, if I missed it, but I was wondering if there might be any kind of upcoming pipeline development initiatives or any activities associated with any of the commercial launches next year that could potentially drive accelerated cash use next year.

Fair enough question, Sung Ji. We haven't gotten into our budgeting exercise for next year, so it's premature to discuss. That being said, I know Marc and I share the same philosophy, and that is one where we're going to do our best at any point in time to balance investment with cash generation. While in any given quarter or any given year, the scale may tip slightly one way or the other, overall, we're focusing on balancing those two sides, if you will. Not committing to anything, given we haven't budgeted yet, but I think that's the overall philosophy that we abide by day-in, day-out.

Yes. I think I’d add to that, something that I think is evident to everybody that really fuels and drives our business, whether we're talking about Afirma or Decipher or the adoption of Envisia, or the IVD strategy, is evidence generation, evidence development. This year, we’re investing heavily in NIGHTINGALE for nasal swab. We always invest somewhat in driving more evidence to Decipher, and we’re going to be investing in evidence development for our IVD business outside the US. To the extent we feel that there’s the affordability to do that within the parameters that we said that we will continue to do that and fund studies and ensure the evidence development is really helping drive our business.

Great. Thank you so much.

Thanks, Sung Ji.

Thank you. One moment for our next question. Our next question comes from Andrew Cooper of Raymond James. Your line is now open.

Hey, everybody. Thanks for the question. A lot has been asked. So maybe just one more on sort of the margin side of things, the cost side of things. In terms of one of the costs you made, you talked about personnel costs. Can you just give us a sense as you look to add maybe some heads in R&D, some heads in sales and marketing may be a little bit more measured away? How much of that is incremental heads versus wage inflation is really starting to kind of hit you, just a sense for kind of the hiring environment out there and what you’re seeing on the wage and labor side would be helpful.

Yeah, happy to do so. I would say, it's a little bit of both. On the wage side, given the inflationary environment when we set our merit budget for this year, we did take that into account. So I would say it was slightly elevated, though not materially so versus prior years. That would be one point. The other point is we are adding heads and doing so in areas where we think both from a laboratory perspective as well as across the operating lines we’ll get a meaningful return from. I think that's relatively evident. I would say the third thing, in the first quarter, you always have your benefit resets and your benefit and tax reset, which obviously does impact the first quarter more so than others, and you see that in our OpEx figures as well. So I would kind of think about those three things as being the primary drivers. We’re very comfortable with the budget we set, and we’re very comfortable with being vastly ahead on the cash side than where we had expected to be at this point in the year. So I think our investment levels are prudent. From a hiring environment standpoint, I would say certainly a lot better than it was before, and we're really having very little trouble finding great people to join our company; so it's nice to be able to be hiring right now.

Great. And then just one more from me. Can you give us a little bit more detail on some of the efforts and the progress being made on the manufacturing front in terms of continuing down that transition from NanoString to yourself internally? What are some of the guideposts we should be thinking about through the year? Has there been any surprises, or anything that has changed from the last update on that front?

No, nothing new. It's continuing well, and the activity to transition that over to our team in France is progressing as we had planned and the idea is to have that done at the end of this year. So we're on track to be able to do that.

I wouldn’t expect, I mean, this is a day-in, day-out type of thing at this point in time. You probably won't get meaningful updates until it's done. So no news is good news, if you will.

Yes.

Okay. Great. Well, nice quarter, and we'll stop there. I appreciate it.

Thanks.

Thank you so much. This concludes the Q&A portion. I would now like to turn it back to Marc Stapley for closing remarks.

Thanks, Steven. I appreciate it. So just to wrap up, obviously, I'm very pleased with the performance of our core testing business in the first quarter with both Afirma and Decipher exceeding our expectations. Good to see our efforts on market access and adoption in Europe drive a strong quarter for our product business. Our focus on evidence development, product enhancements, and commercial excellence is really fueling the growth of our business, which will be further supplemented in the long term by the new products that we're developing for global markets, such as our Nasal Swab in lung cancer and our IVD menu. I'm really proud of the great work the entire Veracyte team is doing for patients all over the world. With that, I'd like to say thank you.

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