Veracyte, Inc. Q4 FY2023 Earnings Call

Good day, and thank you for standing by. Welcome to the Veracyte Fourth Quarter and Full Year 2023 Financial Results Webcast. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to pass the call over to the Senior Director of Investor Relations, Shayla Gorman. Please go ahead.

Good afternoon, everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 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 fourth quarter and full year 2023 financial results. This release, along with the business and financial presentation is available in the Investor Relations section of our website at veracyte.com. Before we begin, I'd like to remind you that various statements that we may make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties, and the company can give no assurance they will prove to be correct. 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'm pleased to share that 2023 was a record year for Veracyte. Our high value tests improved care for more than 125,000 patients and their physicians, enabling better diagnosis, prognosis, and treatment decisions. I'd like to thank the entire Veracyte team for their hard work and dedication to our mission of transforming cancer care. Over the course of 2023, we grew revenue 22% and generated $44 million in cash from operations to deliver our second consecutive year of positive cash flow. This is a significant proof point that our philosophy to drive cash generation while investing in our strategic growth drivers is paying off, and we expect to achieve positive cash flow going forward. I am extremely proud of our strong financial profile, allowing us to further expand the impact we are having on patients' lives. Our successes are attributable not only to the dedication of our employees to our mission, but also to the Veracyte diagnostics platform, which refers to our unique approach to launching and driving adoption for our diagnostic tests. This is driven by broad sets of genomic and clinical data, deep bioinformatics and AI capabilities, and a powerful evidence generation engine, which ultimately drives guideline inclusion and durable reimbursement for our tests as well as proven commercial excellence. The platform creates a flywheel for the generation of novel insights that in turn drive innovation and pipeline development toward future test expansion in a way that is extensible and repeatable across multiple indications. Decipher Prostate continues to be a clear example of this platform in action. Over the course of 2023, we added eight publications and 16 abstracts to the clinical evidence library for Decipher Prostate, and an additional 12 abstracts and seven publications from our Research Use Only or RUO Decipher GRID offering. During Q4, data from multiple studies were presented at the annual meeting of the Society of Urologic Oncology or SUO, highlighting the ability of Decipher Prostate to identify patients whose prostate cancer is likely to progress. This focus on evidence generation reinforces the test's status as the only molecular test to receive Level 1 evidence designation in the National Comprehensive Cancer Network or NCCN prostate cancer guidelines. The backbone of clinical evidence supporting Decipher Prostate is clearly resonating with physicians as we delivered approximately 15,500 Decipher test results in the quarter. We now estimate that the market for molecular tests in prostate cancer is approximately 35% penetrated with plenty of headroom remaining for growth, as we believe penetration could reach 80% over time. Looking to 2024, we are focused on bringing Decipher Prostate to even more patients. We believe this will occur through indication expansion, additional payer coverage, and even more clinical studies, some of which will utilize Decipher GRID to further accelerate the flywheel of data generation and claims expansion. One example of this, we anticipate the current draft of Medicare's local coverage decision policy for patients with metastatic prostate cancer to become final later this year or early next year. As a reminder, we estimate there are an additional 30,000 patients annually who could benefit from the prognostic and predictive inflammation Decipher delivers to clinicians at a pivotal moment in their journey to treat cancer. Moving to Afirma, this was another record quarter for tests delivered. We reported approximately 15,200 Afirma results with growth driven by new and existing accounts, including competitive wins. Over the course of the last two years, we have continued to enhance the Afirma offering, adding TERT promoter mutation testing, enhancing the online physician ordering portal, and introducing the Afirma GRID RUO tool. While GRID for Afirma has only been available for a short period, the promise of advancing science and developing prognostic signatures has been well received by customers focused on research. Many have proactively reached out and are interested in collaborating to publish and fully validate new signatures. These launches and enhancements have led to increased popularity and adoption of Afirma over the course of 2023, which represented a record growth year for a product that launched more than a dozen years ago. Looking to 2024, we expect Afirma to deliver solid growth through three key mechanisms. First, continued execution to further drive penetration into both existing and new physician accounts. Second, engaging with MolDX on that draft LCD to cover the Decipher patients who could also benefit from insights provided by Afirma. Lastly, scientific engagement empowered by GRID and an enhanced customer experience to ensure that we maintain and grow our community of dedicated physicians. Decipher and Afirma are great illustrations of the Veracyte Diagnostics Platform in action. This proven approach will enable our long-term growth across three vectors: Global Expansion, Solving New Cancer Challenges, and with the acquisition of C2i Genomics earlier this month, serving more of the patient care journey. With our Percepta Nasal Swab test, we are focused on tackling new cancer challenges. We believe the test will benefit patients and physicians as a non-invasive option to help guide clinicians' next steps for patients with potentially cancerous lung nodules. During the quarter, we made significant progress, publishing the clinical validation data for the test in the journal CHEST and bringing the number of sites enrolling for the NIGHTINGALE clinical study close to 100. NIGHTINGALE is designed to demonstrate clinical utility and support reimbursement for the test and remains a key focus in 2024, as we expect to complete patient enrollment in the summer. The level of interest demonstrated by the large number of sites that have engaged in NIGHTINGALE gives us optimism in the value that the Percepta Nasal Swab test could bring to physicians and their patients. Shifting to our focus on global expansion, our strategy to deliver IVD versions of our tests to physicians and their patients outside of the United States is another key long-term growth driver. Over the last quarter, we have largely completed the transfer of kit manufacturing for our Prosigna breast assay from NanoString to our Marseille, France location. With this transition, while we maintain some near-term dependency on NanoString for component supply and instrument service, we have worked through mitigating most of the supplier issues we began experiencing in the second half of last year. As a result, Q4 Prosigna volumes were ahead of our prior expectations. Looking forward, we're monitoring the situation and doing our best to ensure continuity wherever we remain dependent on single-source suppliers. As we shared previously, we are now executing on a multi-platform IVD approach, where we leverage the quality of our diagnostics and the level of evidence supporting them to differentiate us. We are focused on key product and market development activities that will help drive a steady cadence of IVD test kit launches over the coming years. We will soon submit our existing processing test for approval under the IVDR framework, which is a key step to catalyzing launches across our oncology IVD portfolio. From there, we expect Decipher Prostate to launch in mid to late 2025 on PCR and an updated NGS-based second test around the same time to be launched on NextSeq Dx. We continue to expect the Percepta Nasal Swab to be commercially available in 2026. Turning to serving more of the patient care journey, we recently closed our acquisition of C2i genomics and I'm thrilled to welcome the C2i team to Veracyte. This acquisition enables us to enter the minimal residual disease or MRD market and expand our role across the cancer care continuum, building from our position in early diagnosis and risk assessment to treatment monitoring and disease recurrence testing. C2i's novel whole-genome sequencing approach to MRD fits well into the Veracyte diagnostics platform, making it the ideal solution for us to address this portion of the patient journey. First, the assay requires less than 4 ml of blood, much lower than many competing tests. Second, the rapid generation of patient-specific signatures is available almost immediately after the whole genome assays are performed, faster than bespoke panels that take weeks to develop. Third, the approach takes the widest possible view of the tumor genetic landscape to deliver performance that we believe enables early detection versus imaging and other molecular tests. By identifying the effectiveness of the treatment almost in real time, the physician can rapidly tailor the care plan for a patient, which we believe will lead to better outcomes. Because C2i technology uses whole genome sequencing, we get more data for evidence development, giving us a rich view of tumor biology that allows for more collaborations and will catalyze further discoveries. As we mentioned when we announced the acquisition, we will commercialize MRD first in muscle-invasive bladder cancer, where we expect to launch a test in the first half of 2026, leveraging the same strong urology channel that has delivered continued growth in Decipher. I'm excited about our trajectory and even more about the impact we are having on physicians and their patients. With that, I will now turn to Rebecca to review our financial results for the quarter and expectations for 2024.

Thanks, Marc. Q4 was another record quarter with $98.2 million in revenue, an increase of 22% over the prior year, higher than our pre-announcement due to the finalization of cash collections which benefited ASP. We grew total volume to approximately 34,000 tests, a 21% increase over the same period in 2022. Testing revenue during the quarter was $90.4 million, an increase of 29% year-over-year, driven by higher than expected Afirma volume, Decipher growth, and strong prior period cash collections. Total testing volume was approximately 31,000 tests. Testing ASP was approximately $2900 as we've resolved and collected over $4 million of out-of-period payments. Adjusting for this impact, testing ASP would have been approximately $2750. Fourth quarter product volume was approximately 2600 tests, and product revenue was $3.7 million, up 13% year-over-year as the team did a tremendous job eliminating the patient impact of the supplier issues Marc mentioned. Biopharmaceutical and other revenue was $4.1 million in line with our expectations and down 39% year-over-year, given overall spending constraints across the industry. Moving to gross margin and operating expenses, I will highlight non-GAAP results which exclude the amortization of acquired intangible assets, other acquisition-related expenses, and restructuring costs but do include routine stock-based compensation. Non-GAAP gross margin was 70%, up approximately 340 basis points compared to the prior year. Testing gross margin was 73%, up 90 basis points compared to the prior year, benefiting from higher lead volume and over $4 million of out-of-period collections. Product gross margin was 52%. Biopharmaceutical and other gross margin was 15%, down year-over-year due to lower fixed cost absorption. Non-GAAP operating expenses excluding cost of revenue were up 28% year-over-year at $65.6 million, including $3.5 million technology access fee to develop our IVD kitted tests on the NextSeq Dx NGS platform. Research and development expenses increased by $7.6 million to $18.7 million due primarily to the tech access fee and increased costs related to our NIGHTINGALE and Decipher clinical studies. Sales and marketing expenses increased by $1.8 million to $25 million. G&A expenses were up $5.1 million to $21.9 million, driven by higher personnel costs and infrastructure-related investments. We recorded a GAAP net loss of $28.3 million, which included $32 million associated with the impairment of Helio Dx biopharmaceutical intangible assets; $7.6 million of stock-based compensation; and $6.3 million of depreciation and amortization. We increased our cash position by $14 million from the prior quarter and ended 2023 with $216.5 million of cash and cash equivalents, 21% higher than the balance of $178.9 million at the end of 2022. Turning now to our 2024 outlook. We are maintaining our total revenue guidance of $394 million to $402 million. This reflects year-over-year testing and product revenue growth of 13% to 15% and a decline of approximately 50% in biopharma and other revenue as we have not seen evidence yet of an improvement in the market. We expect non-GAAP gross margin to be in line with 2023 as tailwinds from operational testing efficiency efforts and fixed cost leverage roughly offset the annual supplier list price increases and the benefit of more than $10 million of out-of-period collections in 2023. We are also maintaining cash guidance and expect to end 2024 with between $230 million to $234 million in cash, cash equivalents, and short-term investments, including $8 million of one-time acquisition-related items. As always, our cash commentary is barring potential M&A. Moving to the first quarter, we are forecasting a sequential decline in total revenue given the impact of cash collections in the fourth quarter and typical seasonality. Additionally, we expect non-GAAP operating expenses to be higher sequentially given the impact of the C2i acquisition and the annual reset of taxes and merit. For the quarter, excluding the benefit of acquired cash and customary closing considerations from the C2i acquisition, we are forecasting a slight usage of cash due to the usual timing of compensation payments. I am excited about the momentum we have heading into 2024 and our commitment to executing on our strategic priorities over the course of the year.

We will now go into the Q&A portion of the call. Operator, please open the line. Thank you. One moment for our first question, please and it comes from the line Sung Ji Nam with Scotiabank. Please proceed.

Hi. Thanks for taking the questions and congratulations on the quarter and a great year. Maybe just kind of kick off with the TERT promoter mutation capability that's part of Afirma. Could you give us a sense of kind of what percentage of the volume you know that would actually be useful for that particular testing of the Afirma volume?

Yes Sung, thanks. Thanks very much for your kind comments and certainly a great year. On TERT itself, it's a relatively rare condition. And so the percentage of patients that actually show up with that mutation is quite small. Having said that, it's proving to be extremely useful to order that test on certainly a larger number of the cases. I don’t actually know we've got the percentage to that we're currently seeing. I don’t know if you have with you.

Yes, I believe it's ordered approximately 20% of the time where we have a positive result with Afirma on. But the actual percentage that has a mutation is more in the single-digit range. But so that just gives you a sense of how frequently it is being ordered and how frequently it is being seen. I think importantly also TERT is an alternative competitive differentiator for us, and we aren't necessarily seeing an ASP uplift from TERT because it is not something we necessarily have coverage for, but it's more to Marc's point, it's more about the overall clinical contribution of having the assay than it is about a financial contribution to the Company. It's more about the patient benefit.

And one of the ways, I really think about how having that capability has helped our business is that it's given our customers another reason to engage with us. It's enhanced our test relative to both the competitive landscape and also where we think ultimately guidelines can go. And so we always felt compelled to include that as part of the Afirma offering.

And Sung Ji, I apologize. I said 20% and it was that it's actually more like a third.

Okay. Wow. Okay, fantastic. Super helpful. And then my follow-up is just on you mentioned the C2i. The first indication is going to be in the muscle-invasive bladder cancer. And could you just remind us about Decipher bladder at the genomic classifier and kind of how does that kind of go hand-in-hand with your MRD offering where the plans for the MRD offering is there? Do you think there could be synergies there? Or just kind of how should we think about the Decipher bladder platform?

Yes. I mean, there are always going to be synergies whenever we can continue to increase the menu of offerings and tests that we have in the urology space. As you know, a few years ago, we launched the bladder test. It's more of a sub-typing test to help potentially determine a course of treatment. But we read it had relatively low penetration, and we didn't particularly drive that commercially. One of the reasons being is it was the same call point; it is completely a new product, if you think about it like that. And so we do not want to distract from the benefit of that we're seeing in Decipher Prostate some, but the clinical utility is ultimately what matters. We're continuing to develop that test further and think of ways of enhancing that utility. But we've really refocused our energy now in bladder on the MRD test at this point, as we think that the market opportunity for our muscle-invasive bladder cancer test in MRD, which has a clear path to reimbursement is greater. We're going to launch a test in the first half of 2026, and so that's what you're going to see our investments in both R&D and development activities ultimately in our commercial activities as we put that test in the hands of the existing urology sales force. Beyond that, one thing you'll continue to see us do is, yes, we talked about this quite a bit before, we will work across the patient care continuum. So as we can come up with other helpful diagnostic tests that have utility in either reducing unnecessary procedures or accelerating treatment, some are predicting the performance of surgery or therapeutic actions, we will continue to do that. I continue to consider it an important part of the urology roadmap.

Got it. Great. Thank you so much. I'll get back into the queue.

Thank you. One moment for our next question, please. It comes from the line of Tejas Savant with Morgan Stanley. Please proceed.

Hello. This is Yuko on the call for Tejas. Thank you for taking our questions. I wanted to ask a couple of questions on the C2i MRD assay. What remains to be done prior to launch in the first half of 2026? What are the gating factors there and is there any lever to pull forward the launch timeline?

Sure. Thanks for that. Yeah, there are quite a few steps that we need to go through here. One of course is the integration of C2i, which is very much in progress at this point. That team is now part of the Veracyte team and then the other systems and other integration activities will continue through the early part of this year. The launch of the product program itself, the muscle-invasive bladder test, is entering into our normal product development process, and that's kicking off now that the team is part of Veracyte. We're going to have to continue to run samples on that test to further validate it and then do the tech assessment that we need to go through in order to get reimbursement. There's also a period of waiting for a response on that as well. So, quite a few different steps that we have quite a lot of experience in following and have been through a number of times before. To your question on is there a way to pull it forward, if there was, we will. We've provided a timeline that we feel comfortable with, given all those steps. But along the way, if there's any opportunity to go faster, I think you can rest assured that the team is looking for it. And that's where we are right now, but no change in the plan of record first half of 2026.

Thank you for that. And then wanted to also ask for how many genomes have C2i sequenced today? And as you think about volumes ramping, you will be generating a significant amount of data. How are you thinking about monetizing the dataset over time?

Yes. So, good question. I don't actually have the number in front of me, but it's significant. C2i has been doing this for a number of years, about five years or so. As you've seen from a lot of their publications, they looked at a number of different indications, bladder being one of them. In each of those indications, they've got a significant amount of whole-genome data on. In terms of monetizing that data, I think of it very much in the same way as I think about the overall Veracyte diagnostics platform. We've been focused on whole transcriptome in endocrinology, in pulmonology, and in urology for a while. C2i has been generating whole genomes. So we now have an incredibly rich dataset available to us. Of course, we can get interest from biopharma and expect to continue in the future. I think particularly with MRD as an asset, that continues to grow. That's not our primary focus; our primary focus is very much on our diagnostics pathway. However, opportunistically, as we have contact with biopharma who are interested in any of that dataset I've described, we'll follow up on those opportunities. We clearly have some in the pipeline right now, had some in the past, and will continue to explore that.

You can imagine a scenario where in the future, the C2i MRD assay is very similar to Decipher GRID and a pharma grid, where we are continuously generating clinical utility and other studies, which broaden our potential indication expansion and therefore will also help our commercialization efforts and managed care efforts. So, I absolutely agree with Marc. Effectively when it comes down to the diagnostic platform, we've described this kind of whole act approach, whether it's whole transcriptome or whole genome, really does allow us to monetize these markets more quickly and get a stickier response given the differentiated approach we've taken here. Just add that to Marc's commentary. I think there are a couple of different ways, we could see this play out both of which are obviously quite positive.

Thank you very much.

Thank you. One moment for our next question, please. It's coming from Mason Carrico with Stephens. Please proceed.

Hi. Thanks for taking our questions. This is Jacob on for Mason. So maybe just starting with your guidance, could you just help us think through what's embedded in your guidance for 2024? And maybe more specifically, what are those puts and takes that could play out in 2024 that gets you to the high end versus low end of your guide, with respect to Afirma and Decipher growth? I know you said you're expecting testing and product revenue to go 13% to 15%, but maybe just breaking that out a little bit more and giving us more color would be helpful.

Yes, happy to. So you're absolutely correct; we're expecting testing and product revenue growth to be 13% to 15%, thereby absorbing a good portion of the biopharma decline of approximately 50%. When you break down Afirma and Decipher, they're very different stages of their lifecycle. As a result, the Decipher growth will be higher than the average of the two, and Afirma will be below the average of the two. We're not going to get into the expectation to a point range at this time, but I think the most important thing to know is we are very confident in our ability to penetrate both of these markets up to the 80% level. While we have significant out-of-period headwind from prior periods, we remain confident in the growth and overall trends of both of these products. Importantly, for the first quarter, we do expect a slight difference between the two in seasonality. On the Afirma side, we saw a strong fourth quarter, so we are expecting it to be a sequentially down quarter for Afirma, maybe even a little more than we had seen in prior years given some of the weather impacts so far year-to-date. We are expecting Decipher to grow.

Got it. Thank you. That's helpful. And then on Decipher Prostate, more specifically, what are you seeing in terms of competition in the prostate market? Have you started to see any shift in competitive dynamics? And do you still feel like you're taking share? I guess you noted that it's currently 35% penetrated in the market with the potential to reach up to 80%. How much of that is kind of dependent on this MolDX LCD coming through at the end of this year and into next year?

To cover the second part, Steven, obviously not a great deal on that is, as I mentioned about 30,000 patients a year or so certainly very important. It would be great to get that LCD from the patient outcomes perspective to benefit from the Decipher test in that way. However, if I think about it, the most important thing we're focused on is how we continue to drive Decipher Prostate and gain market share. More importantly, we're also focused on penetrating more of the market as we do that, because honestly, at this point, with so many patients who have prostate cancer, many are still not utilizing our test or any other tests. That's definitely a concern from the patient perspective. So, with the level of publications that we've generated for Decipher, and all the clinical and research publications mentioned today, plus the NCCN Level 1 guideline, we are doing everything we can to drive further penetration and continue to be the market leader. We haven't seen any change in competitive dynamics one way or the other. We're very focused on what we can do to have the most effective test. Beyond the U.S., there's a pent-up demand for Decipher, given the extensive experience outside of the U.S. in studies involving our product. As soon as we can get our Decipher product launched on PCR, which we are planning to do in the end of 2025, our expectations for adoption are now more optimistic than they otherwise would have been. There is a lot of excitement on our side for Decipher going forward.

Next question comes from the line of Dustin Scaringe with William Blair. Please proceed.

Hi everyone. Good afternoon, and thanks for taking our questions. First here on the nasal swab, you guys published validation data in December. Just wondering if you could talk about the feedback you've received on that since publication? And then as a follow-up to that, how are you thinking about the TAM here? Given this was validated on individuals that had some sort of smoking history?

Yes. Great questions. The data that we published in CHEST in December is data that had previously been gathered over a couple of years. So getting it finalized and published is an outstanding outcome, and I congratulate our entire team and others that we collaborated with on that publication. It's great to finally see it out there. In terms of the level of interest, I think that publication does a couple of things for us. One is it helps us to commence those reimbursement conversations and start to get ahead of that. We now have a peer-reviewed publication in hand to do that. It also helps us have conversations with potential partners and others who might want to work with nasal swab in the future. So, I'm very excited about that. However, where I derive my greatest sense of interest in the nasal swab is from the NIGHTINGALE study, as we are close to 100 sites enrolling. The level of interest from those sites demonstrates the excitement about what it takes from a clinical operations perspective to identify, gain interest, and commence enrolling nearly 100 sites. This indicates that investigators and institutions are enthusiastic about the prospect of the test itself and its role in the clinical utility study.

Understood. Just staying on that topic.

I am sorry, you did ask about the market size, the TAM and smoking history. Yes, to be very clear, I mean nasal swab is aimed at smoking patients with a smoking history and it measures damage to the epithelial airway. One cause of that damage is, of course, smoking. Expanding the TAM beyond that would require a study that includes non-smokers, and that is not the biggest market we're initially targeting. By far, the largest market is those patients who are eligible for lung cancer screening and those who have lung nodules incidentally found, which is 15 million and 1.6 million, respectively. That is by far the biggest market, and a significant proportion of those are current or former smokers who would fit the eligibility criteria for nasal swab. A next step in the future could involve studies outside of this, but until we perform such studies, we cannot know the outcomes. Our focus remains primarily on the largest portion of the market.

Understood. Thank you for that. Switching over to Afirma. Just wondering if we should be thinking about any reimbursement dynamics for that test in 2024? Any considerations longer-term about pricing for this product? Thank you.

Yes, I'm happy to take that. For Afirma, if you rewind to 2021 with the code change, we did see the impact in 2022 from that. Over the course of 2023, we obviously saw the benefit of resolution of many of those impacts tied to the code change. The current ASP for Afirma is elevated due to those resolutions. So, we feel confident we will maintain that position going forward. We had some smaller managed care wins over the back half of last year that support our confidence in maintaining ASP. There are no major dynamics to think through from a payment reset perspective until 2028. We feel great about the team's efforts on the managed care and billing side, and we will remain focused on that. Regarding Decipher, it is less affected by a code change like Afirma, but we do have a strong story for ASP. We secured a number of wins in 2023 and are optimistic about potential coverage enhancements in 2024 and beyond given the level-one status and clinical support we've achieved.

Appreciate all the color there. Thank you.

Thank you. One moment for our next question. It comes from the line of Matt Sykes with Goldman Sachs. Please proceed.

Hey, guys, congrats on the quarter. Thanks for taking the question. Is there any way to quantify how much benefit you see from your established commercial infrastructure with Decipher Prostate and how much can be applied in your bladder MRD test?

Yes, it's a great question. The leverage that we're getting out of our urology sales force in prostate alone has been very significant. You can see that in the numbers. We added less than a handful of net reps last year, and yet we saw substantial growth in Decipher. One of the reasons we believe an MRD based test in bladder is the right test for us is leveraging that existing urology sales force. While it might be within a practice that might include a dozen urologists, and one of them specializes in bladder cancer, we have great access to those practices. We do not anticipate a great deal of added investment required to sell our test.

Agreed. An important point to add is that the Decipher franchise extends into the revenue cycle management and client services piece, and all the infrastructure to order the test, which has been consistently invested in and will help commercial efforts regarding MRD, including knowledge and awareness of interactions.

Got it. Thanks. That's really helpful color. And then how durable do you see Afirma as once thyroid cancer diagnostic TAM has reached that 80% penetration, and do you have a specific timeline to that penetration, Mark?

We don't have a timeline, but if you think about it, Afirma has been on the market for more than a dozen years at this point. It has taken that long to reach the penetration we currently have. With an 80% estimate out there, we have several years of growth still left in Afirma just to target the conditions we currently cover and indications we have. We have been investing heavily in Afirma, including enhancing physician ordering experiences and launching Afirma GRID. These efforts create new opportunities to engage with physicians, allowing us gains in both existing and new accounts. Thus, we still see significant headroom for growth even in endocrinology.

Thank you. One moment for our next question. And it’s from the line of Mike Matson with Needham. Please proceed.

Hey, everyone. This is Joseph on for Mike. I guess just looking at other kit development, you guys have a lot on your hands with Envisia and Decipher and others, but just wanted to ask more broadly if there are any other disease areas you are focusing on for future test development, or if you are focusing more on MRD versus diagnostic plans?

It's a great question. Veracyte has come from being a single product, Afirma company to a broad cancer diagnostic company, and now with the addition of MRD, we can go even further. If you think about the growth vectors we've discussed, I'll start with geographical expansion. The success we've had in the U.S. with our IVD product launches outside the U.S. has a roadmap for three or four products to launch over the next few years. You can see we have a real opportunity to grow internationally, demonstrating that our model succeeds here, as it has for us. The second growth vector encompasses the entire care continuum. Our model helps classify patients at risk as part of a high-risk screening program, right through to diagnosis, prognosis, prediction, and treatment monitoring. As you see, Decipher is advancing into that prediction space meaningfully. The third vector is across indications. Veracyte is involved in prostate, breast, bladder, and lung, but we can extend across other indications as well. Our platform enables us to capitalize on the extensive data we generate.

Okay. Great. I like the one-stop-shop model. I was wondering about C2i, which is CE marked in Europe. What is the indication or use case for that? I assume it is predominantly used in clinical trials currently. Do you have any strategic partnerships ongoing or prospects in Europe after the acquisition?

There are some existing. And of course, that's a pipeline as well. We're very selective about which partnerships we pursue. Our approach with the test, especially with the bladder test, is going to be an LDT type of approach. We will determine TBD if we sell a kit as an IVD in the future. That's certainly not the plan right now, as far as the initial focus is to launch as a lab-developed test and leverage the platform we've built. More to come; this is another expansion opportunity. When I talk about geographical expansion and how MRD can play into it, there’s a lot of optionality in how we might use that internationally.

Okay. Great. Thank you for taking our questions.

Thank you. One moment for our last question. It comes from the line of Puneet Souda with Leerink Partners. Please proceed.

Hi, guys. Thanks for the questions.

Hey, Puneet.

Hey, Marc. I have a question about C2i. What level of investment do you anticipate for this year? Can you share any insights for next year before the assay launch? How should we consider gross margin, especially since this assay may initially require multiple whole genomes and then whole-genome repeat assays? Additionally, how do you see Veracyte positioned in the MRD market, given the competition and an established leader?

Yes. Many thanks for that. First, I’m glad to discuss this. I spoke about this a month ago during the C2i acquisition announcement. We believe this solution fits perfectly with the Veracyte diagnostics platform and attaches to a team with a product that performs extremely well. The C2i MRD product requires a low input of blood, only 4 ml. We also can generate patient-specific signatures almost immediately after the assay is performed, faster than bespoke panels that may take weeks to develop. This is highly beneficial. Given the model we’ve got used, we believe it will perform very well, especially in bladder cancer where there is a clear reimbursement pathway. It is indeed a competitive space, but the unique aspects of the C2i product, the commitment to leveraging our existing urology business, will provide significant differentiation. Furthermore, to your question about how we will invest, we have chosen to integrate C2i, refocusing investments while absorbing the project aimed at developing the MRD test into our current portfolio. This approach will allow us to prosper financially.

Yes, happy to add. We will continue to generate positive cash flow, maintaining our consistent financial philosophy as we pursue MRD and any other opportunities. Regarding gross margin, you are correct that it is a multiple whole genome assay over time. However, we believe, from what we've evaluated, we'll see reasonable gross margins consistent with the standards we’ve set. It may not initially match our corporate average but will still present a profitable business, much like we have with Afirma and Decipher. While it will take time to scale, we are confident in our forward trajectory.

Got it. That makes sense. Thank you.

At this point, there are no changes. I want to emphasize that we're well prepared because our lab-developed testing process and quality systems are robust and proven so we expect to be in a good position. We will need to invest in a multi-stage process for regulatory compliance, but I don't foresee needing to allocate as much for this as many others that lack the foundational processes and systems we've established.

Got it. Thank you.

Thank you. And as I see no further questions, I will turn it to Marc Stapley for final comments.

Great. Thank you, and I appreciate it. As you can see, we ended a very strong year in 2023, and we set ourselves up well for continued growth in 2024 and beyond. I believe our success will continue to hinge on three core pillars of execution: meaningfully expanding the markets we serve, utilizing our established Veracyte diagnostics platform across geographies, indications, and the care continuum; embracing the best technology and adding new capabilities such as MRD and AI to our world-class platform and driving revenue growth with discipline and a focus on profitability and continued positive cash generation. These tenets will allow Veracyte to continue to build a strong foundation for growth, while achieving our vision of transforming cancer care for patients all over the world. I would like to thank our entire team for their commitment, hard work, and passion. It is fueling our progress and driving our results. Thank you.

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