Good day, and thank you for standing by. Welcome to the Veracyte First Quarter 2024 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 first speaker today, Shayla Gorman, Senior Director, Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining us today for a discussion of our first quarter 2024 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 2024 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. 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 is 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. Following a very robust end to 2023, I am excited to share that we have continued our positive momentum with a very strong start to this year. We delivered first quarter revenue of $96.8 million, growing 17% compared to the prior year period. This strength was driven by our testing business, which grew 25%, meaningfully exceeding our expectations. The performance of the Decipher Prostate and Afirma tests again demonstrated the incredible power of the Veracyte Diagnostics platform to drive market penetration. This unique approach relies on broad sets of genomic and clinical data, deep bioinformatics and AI capabilities and a powerful evidence generation engine, which ultimately drives guideline inclusion and combined with our proven commercial and managed care excellence, is designed to ensure durable adoption and reimbursement for our on-market diagnostics. In the first quarter, we delivered 16,500 Decipher Prostate tests, hitting a new quarterly volume record, with growth coming from both new and existing providers. Our incredibly productive urology sales force continues to drive adoption through awareness of the test utility and associated clinical evidence, as well as strong guideline representation. In February, updated NCCN guidelines were published with Decipher Prostate receiving a Level 1b evidence rating, the highest rating of all gene expression tests for prostate cancer. Additionally, because of this classification, the Decipher Prostate test is the only gene expression test for which the guidelines include a separate table that summarizes treatment implications for patients based on both their NCCN risk classification and their Decipher score. These updated guidelines are proving to be a meaningful resource to provide physicians with clear summarized evidence from clinical trials on how Decipher Prostate can inform treatment decisions. On the reimbursement front, we also made significant progress in the quarter, signing a contract with a major commercial payer to make Decipher Prostate an in-network offering for its close to 30 million members. We are thrilled to see this payer's patient population obtain more seamless access to the Decipher Prostate test, enabling their treating physicians to more efficiently optimize their care. Generating additional clinical evidence for Decipher remains a priority for us to drive further guideline inclusion, the durable reimbursement I mentioned previously, and increased awareness in the significantly underpenetrated prostate cancer market. Last month, a publication in JCO Precision Oncology showed that among patients undergoing active surveillance for prostate cancer, the Decipher test is prognostic for identifying those whose disease is likely to progress. Pinpointing the optimal candidates for active surveillance, which can help patients delay or avoid interventions such as surgery, radiation, or hormonal therapy, is challenging given the potential harms of these treatments weighed against the risks of cancer progression and missed opportunities for cure. These significant findings make Decipher the only prostate gene expression test to have treatment outcome data from a prospective multicenter Phase II randomized trial in the active surveillance population. Providing a tool like Decipher that could help to identify those whose disease is likely to progress can give physicians important insights to help them with this critical decision while also aiding in the further penetration of this portion of the market. Moving to Afirma. We reported approximately 14,000 test results and 14% revenue growth compared with the prior year, in line with our expectations. With Afirma, we continue to illustrate our differentiation, resulting in market share gains due to broadened awareness of previously published evidence, demonstrating the quality and performance of our test. Another point of differentiation has been the launch of Afirma GRID, our RUO tool designed to advance the science around thyroid nodules and cancer. This quarter, we saw a high level of interest in GRID, with approximately 50% of physicians requesting the report on their test order forms in March. The addition of the Afirma TERT promoter mutation test enhances the clinical utility of our thyroid offering, also reinforcing our competitive positioning. This quarter, following publication of analytical validity data for the test in the Journal of Endocrinology and Metabolism, TERT testing received Medicare coverage. While TERT represents a small portion of our total Afirma volume with limited revenue impact, this is yet another indicator of the strides we are making to provide the most complete offering possible for physicians and their patients facing a potential thyroid cancer diagnosis. Looking ahead to our growth drivers over the coming years. We believe that Decipher Prostate and Afirma will continue to grow meaningfully as we drive towards 80% penetration for both prostate and thyroid cancer molecular tests while continuing to gain market share and bolster ASPs. For Decipher, we believe the updated NCCN guidelines will be a meaningful catalyst to broaden awareness and change physician behavior. We recently conducted a voice of customer survey on this update, which queried urologists as well as medical, radiation and urologic oncologists across the academic community and large urology group practice or LUGPA settings. Not surprisingly, 82% of respondents were aware of the updated NCCN guidelines, and 75% of respondents utilized the principles of risk stratification section, which details treatment implications based on the NCCN classification and Decipher score. As a result of ordering trends since the publication as well as the survey feedback, our confidence in our outlook on Decipher growth over a multiyear period has been further solidified. In addition, we continue to anticipate the draft of Medicare's local coverage determination, or LCD, for patients with metastatic prostate cancer to become final later this year or early next. We estimate that there are an additional 30,000 patients annually who could benefit from the prognostic and predictive information Decipher delivers to their clinicians at pivotal moments in their cancer journey. Meanwhile, we unfortunately continue to see growth in the incidents of prostate cancer, with the American Cancer Society estimating there will be approximately 300,000 new cases in 2024, up again from 2023, making Decipher even more important for more patients. For Afirma, in addition to the market dynamics previously highlighted, we are beginning to see standard of care changes and physician adoption in rural areas, where we see a long tail of clinicians who aren't currently utilizing genetic testing for this patient population. Additionally, we are engaging with MolDX on their draft LCD to cover thyroid nodules with the Bethesda 5 cytology, expanding access to patients who can also benefit from Afirma. Now turning to our longer-term growth drivers. We are focused on 3 vectors: global expansion through our robust IVD strategy, solving new cancer challenges through the utilization of our platform, for example, our Percepta nasal swab test, and with the acquisition of C2i Genomics serving more of the patient care journey through minimal residual disease or MRD and recurrence testing. As we often do and as we committed to do following the C2i acquisition, during the quarter, we continued our portfolio prioritization to rationalize our investments outside of these 3 key areas. As a result, we downsized the commercial support for our Envisia test. While we will continue to offer this important test to those patients facing interstitial lung disease, we will no longer maintain a separate Envisia sales force. Now shifting to our focus on global expansion. We are on track with the key product and market development activities from a multi-platform IVD approach, developing our Decipher Prostate test on qPCR and our Prosigna and nasal swab test on NGS. Recall that once these tests are made available, we will still need to go country by country to drive adoption and reimbursement, utilizing the clinical evidence that we already have and are continuing to generate with our clear based test. This is yet another example of the leverage we get from the Veracyte Diagnostics platform, where our clear strategy built around data, insights, proof and utility will fuel our IVD strategy outside the U.S. On our second growth driver, solving new cancer challenges via Percepta Nasal Swab, we have made good progress with our NIGHTINGALE trial and have patients enrolling across our almost 100 sites. While we remain excited about our progress to date, the current patient enrollment per site is tracking below our updated expectations. We've designed the study with a high degree of scientific and clinical rigor, endorsed by the cancer community, and we believe the slower rate of enrollment is consistent with typical challenges currently faced by large multisite pulmonology trials and isn't related to physician interest in the market potential of the nasal swab test. While the pace of accrual in April would be indicative of enrollment completion around the end of the year, our internal modeling has wide error bars, and this pace may or may not continue over the coming months. Given that, we will update you next when the study is nearing completion. Our last long-term growth driver is serving more of the patient journey. Now that we have integrated the C2i Genomics team into Veracyte, our excitement for the technology potential has only grown. We kicked off the development of our first MRD test for muscle invasive bladder cancer in our clear lab, which we intend to launch in the first half of 2026. As we mentioned last quarter, C2i's novel whole genome sequencing approach to MRD fits well into the Veracyte Diagnostics platform, making it the ideal solution for us to expand our test offerings throughout the patient journey. As a testament to the strength of this approach, we are continuing many of the collaborations with academia and industry that C2i initiated and have seen strong interest from potential partners and collaborators as we present the technology and begin to build clinical evidence for the test. Between the inbound interest we have received since announcing the acquisition and the momentum in our development activities, we are confident in the strength and extensibility of our new MRD platform and the market potential. We believe this will prove to be a pivotal acquisition for Veracyte across numerous indications over time.

Thanks, Marc. Q1 was a strong start to the year with $96.8 million in revenue, an increase of 17% over the prior year period. We grew total volume to approximately 33,500 tests, a 16% increase over the same period in 2023. Testing revenue during the quarter was $90.3 million, an increase of 25% year-over-year, driven by Decipher and Afirma volume, along with ASP growth driven by payer contracting and prior period collection. Total testing volume was approximately 31,000 tests. Testing ASP was approximately $2,900 as we resolved and collected approximately $3 million of out-of-period payments. Adjusting for this impact, testing ASP would have been approximately $2,800. We began to see some benefit of coverage for Decipher Prostate from the payer Marc described over the second half of 2023 and a larger benefit with the contract now in place as of the middle of Q1. Looking ahead to the remainder of 2024, this incremental contract is now forecasted to benefit testing ASP. First quarter product volume was approximately 2,500 tests, and product revenue was $3.5 million, down 9% year-over-year as Prosigna demand was impacted by supplier issues seen previously. Biopharmaceutical and other revenue was $3 million, in line with our expectations and down 51% 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 does include routine stock-based compensation. Non-GAAP gross margin was 68%, down approximately 70 basis points compared to the prior year period. Testing gross margin was 71%, down 160 basis points compared to the prior year period as we have invested in our footprint and equipment expansion to meet increased Decipher demand. We expect to leverage these investments as volume continues to grow. Product margin was 25%, down versus the prior year period driven by start-up costs associated with the full-scale Prosigna manufacturing. Biopharmaceutical and other gross margin was 6%, down year-over-year due to lower fixed cost absorption. We have taken steps to address the cost structure of this business that we expect to begin to see play out in the second half of the year. Non-GAAP operating expenses, excluding cost of revenue, were up 6% year-over-year at $61.6 million. Research and development expenses increased by $2.5 million to $15.2 million given personnel additions due to the C2i acquisition and increased costs related to our NIGHTINGALE clinical study. Sales and marketing expenses declined by $1.2 million to $24 million. G&A expenses were up $2.3 million to $22.4 million, driven by higher personnel costs. We reported a GAAP net loss of $1.9 million, which included $8 million of stock-based compensation, $5.6 million of depreciation and amortization and $4.6 million of C2i acquisition-related expenses. As expected, we used $9 million of cash in operations and ended the quarter with $209.2 million of cash and cash equivalents, including the benefit of approximately $4 million of acquired cash. Turning now to our 2024 outlook. We are excited to raise our total revenue guidance to $402 million to $410 million from our prior guidance of $394 million to $402 million. This reflects an improved outlook for our testing business with revenue growth of 15% to 18%, a meaningful increase as compared to the prior guidance of 13% to 15%. We are also raising cash guidance and expect to end 2024 with between $236 million to $240 million in cash, cash equivalents, and short-term investments. Moving to the second quarter, we are forecasting a sequential increase in total revenue, given typical seasonality and the impact of reimbursement decisions on Decipher ASP. We expect Q3 to be roughly flat to Q2, with a sequential step up in revenue in Q4. I am thrilled with our strong start to the year and our commitment to driving revenue growth with a focus on profitability and continued cash generation.

We'll now go into the Q&A portion of the call. Operator, please open the lines.

Maybe just first on Decipher. Obviously, continued nice growth there and sort of a lot of tailwinds, which you talked about in the script. But can you maybe parse out the growth rate there for us a little bit? How should we be sort of thinking about market penetration impact versus sort of share wins or incidence growth here moving forward?

Yes, it’s an excellent question, thank you for asking. You should consider it as a combination of all the factors. It’s evident that we're both entering the market, expanding the overall market for molecular diagnostics, and capturing a significant share. Specifically, regarding Decipher, the volume numbers we provided indicate a growth of roughly 30% year-over-year, with average selling price gains contributing to a total growth rate of about 36% in Decipher revenue year-over-year. When comparing this to the market growth, you can see the implications of my earlier comments about market share. This growth is supported by numerous studies backing Decipher, as reflected in the NCCN guidelines. Moving forward, we discussed in our prepared remarks a commercial contract that is expected to slightly enhance the average selling price. Additionally, later this year and early next year, the inclusion of metastatic patients could add another potential 30,000 patients. As I consider this, I don’t foresee any barriers to maintaining the positive trend in both market share and penetration. This is why we are confident in stating that we anticipate a multi-year growth opportunity for Decipher, aiming for a scenario where ideally, 80% of patients receive treatment involving a molecular diagnostic, particularly the Decipher test.

Absolutely. The only thing to add quickly is that we will be updating our penetration assumptions annually. We did this most recently during the JPMorgan call in Q4. This is a triangulation exercise that requires data released annually and other disclosures, making it challenging to update quarterly for those reasons. However, I completely agree with Marc; we have ample opportunities to pursue, and our sales team is doing an excellent job. Our confidence has only grown over the last quarter regarding Decipher's continued robust growth in the coming years.

That's great color. And then maybe, I guess, on NIGHTINGALE, can you maybe just sort of be a little bit more specific on what might be driving that slowdown in enrollment? And I guess as you sort of think about the scenarios of outcomes here, can you maybe just sort of talk about your level of investment into that channel ahead of a formal readout, whenever that may be?

Thank you for your question. The issue we're facing is that it's quite challenging to provide specific answers due to the numerous factors impacting clinical trials, especially in pulmonology. We all recognize the difficulties around trial enrollment, much of which is managed by the site rather than by us. What we can control is how quickly we onboard sites and the number we pursue, and I'm pleased with our progress in this area, with nearly 100 sites actively enrolling. The internal processes of these sites for bringing in patients are critical. At Veracyte, our priority is conducting a thorough trial with solid scientific foundations, which is more important than the speed of enrollment. While we aim to ensure the trial is conducted appropriately, there are restrictions regarding the patients eligible for participation. Not every eligible patient wishes to join the trial, adding another variable. Additionally, resource limitations at individual sites can influence the pace of trial activity, making it hard to forecast outcomes. With that said, I prefer not to speculate on timelines for completion. However, based on the rates we observed in April, I can indicate that they are not anomalies and provide an indication that this trend could extend towards the end of the year. We are committed to adhering to good science and maintaining a robust trial to complete it as soon as possible, and we will keep you updated as we approach that milestone.

And maybe you just want to talk about what we mentioned in the prepared remarks about the level of commercial excitement.

Yes. The real question regarding the slowdown in enrollment is whether it impacts our perception of commercial interest in the product and the market. The answer is clearly no. We are not observing any negative signals; in fact, it's the opposite. Signing up 100 sites with the enthusiasm we experienced from those sites continues to boost our confidence and excitement about bringing the test to market, addressing a significant market. Therefore, our expectations regarding the ultimate market for the nasal swab remain unchanged.

Congrats on the quarter. Maybe on the MRD for muscle invasive bladder cancer. I was wondering if you might be able to kind of comment on your development strategy there, given there is some competition out there? Curious if you have a sense of how large the trial or if you're running your own internal trial? Or do you have plans to partner with biopharma companies running clinical trials and things like that? Just kind of curious if you're looking for partners or kind of pursuing the partnership strategy or if you might be going at it kind of on your own?

Yes, it's a great question. One of the main reasons we're launching first in muscle-invasive bladder cancers is that we see a clear path to getting our tests on the market and obtaining reimbursement. We can use an existing LCD, and we are currently integrating the test into our lab as it undergoes the development process. We've initiated this program with our core teams who are working diligently. We will conduct the necessary tech assessment to achieve reimbursement and implement the automation steps needed in our lab for scalability. We believe this is well within our control. The work required for the tech assessment does not involve a large number of samples to show the necessary concordance. That process is already underway. We are very confident in our ability to launch this test by early 2026 and get it into the market and reimbursed. This opportunity could reach around 18,000 patients. While muscle-invasive bladder cancer is the first indication where we see the earliest product launch, this is a comprehensive platform and not just a single test. We are excited to consider and decide on future indications and conditions to pursue with our MRD platform.

And just one thing to add to that, Sung Ji. Obviously, one of the reasons we've highlighted for really liking the C2i acquisition was effectively the whole genome sequencing approach that is taken, well, maybe slightly more expensive, the amount of clinical data we believe will give us over time, just like in Decipher and now with the Afirma GRID, also just like Afirma, will allow us to just have a body of evidence that we think will help us gain commercial traction above and beyond just what is in the tech assessment. So I think we have a number of different levers to pull to compete in this market. And obviously, MRD is a really large market. And so we're super excited to get our products and tests on the market to go after first muscle invasive bladder cancer, but then thereafter, other indications to follow.

Yes, that's a great point. To add to that, if you look back at Decipher, it wasn't the first test on the market and initially struggled to gain traction. We've reached our current position through evidence development and incremental data generated by the Veracyte Diagnostics platform that integrates all this information. While it is a competitive space, there are plenty of opportunities here.

Got you. That's super helpful. And then just on biopharma, obviously, a very small part of your business now, but just kind of curious, given others are starting to see some green shoots in that space. And so I was wondering, especially with GRID for Afirma and for Decipher kind of gaining a lot of traction, things like that. Do you think they're just as we look ahead to kind of later this year and into next year, there could be some more activity around biopharma-related activities?

I think you expressed that well. Definitely, we are beginning to see some positive signs, though it can take time for these signs to develop fully. We have a pipeline of new customers with new projects. However, it currently takes longer to move these projects from initial interest to final contract than it used to. This is part of the challenge we're facing. I agree with you regarding the data we have for GRID, especially concerning prostate, and now with MRD, we are seeing significant interest in our MRD platform. I'm hopeful that these positive signs will eventually lead to tangible results, though I can't specify when that might happen. It's certainly something we are closely monitoring. Additionally, while biopharma and related revenue have become a smaller part of our overall business as it has expanded, we still maintain a presence and competence in that area, supported by our clear side and immunohistochemistry products.

One moment for our next question. Our next question comes from Mason Carrico with Stephens.

Rebecca, congrats on a solid start to the year here. Maybe a higher level question on the prostate cancer market. What types of patients make up the majority of the 35% or so of the penetrated market? And then for the remainder of the market, I realize that metastatic patients make up a portion of it. But what type of patients make up the unpenetrated portion of this testing opportunity? Are there material differences between the 2? What's the strategy to continue to grow share and expand the market from here?

There are opportunities for expansion and growth in all indications. Currently, the primary penetration is in the intermediate space. We have potential to expand into the high-risk area, particularly with metastatic cases. Active surveillance also presents a growth opportunity. Overall, no specific area stands out, as there are opportunities for further expansion in all aspects of biopsy and RP, in the white space previously mentioned.

And we just had a really important study published on active surveillance, perhaps you want to talk about, Marc?

Yes. I mean I mentioned that a little bit in the prepared remarks, but it demonstrated the prognostic capability of Decipher in the active surveillance space and helping to reclassify which patients should be on active surveillance and which should not, which I think is really important because, as I said in the earlier remarks, you don't want to under or overtreat those patients if you can avoid it. And there's not a great deal of molecular information help there, obviously, when these tests aren't being used for 2/3 of patients to help ascertain what's the right approach. And I think with the evidence that we've now got behind Decipher, you're going to start to see more utilization there. And especially with the NCCN guidelines and particularly that table as well that talks about how to apply Decipher and how to change treatment based on the Decipher score as well as the risk category, you can clearly see how we're going to see more penetration across the entire spectrum of patients. I mean ultimately, Mason, our goal, as I said many times before, I mean, I don't think you ever get to 100% for a whole bunch of inertia reasons. But frankly, most patients with prostate cancer should be having a molecular diagnostic, and of course, we strongly believe that Decipher is the right one.

Got it. That's helpful. And then on the Afirma GRID offering, where are you seeing the most demand from a clinician standpoint? And have you seen any increased traction or higher demand from the academic hospital setting now that you've launched that offering?

I feel like we're seeing a lot of interest coming from the academic setting around GRID, similar to what we've experienced with Decipher for many years. We're now observing this interest on the Afirma side for research purposes, with about 50% of physicians showing interest in GRID. Additionally, we're noticing greater penetration, although it's not always easy to link all the positive developments related to Afirma with the outcomes. I believe it's the combination of various initiatives we've implemented, including GRID, TERT, and the portal, that contributes to this. We're also witnessing improved penetration in rural communities, which is encouraging because one of the difficulties with tests like this is reaching physicians who haven’t yet adopted either a molecular test or Afirma. This suggests that we are making significant progress in those areas as well.

Our next question comes from Tejas Savant with Morgan Stanley.

Marc or Rebecca, perhaps a quick one for you here on the Afirma side of things. So following Medicare reimbursement, over what time frame do you expect the third promoter testing to provide an ASP uplift to Afirma? Especially as reimbursement broadens out there beyond the CMS coverage you now have in place?

Yes, Tejas, it's a fair question. With the test being reimbursed at $185, it won't provide a significant increase, particularly since only about 50% of clinicians choose to run TERT, and then there needs to be a suspicious finding for TERT to be run, which is another 50% rate. You are looking at dollar figures from an average selling price perspective, which doesn't involve a large number of patients. Therefore, rather than viewing it as a boost to average selling price, I see it as removing one more barrier to drive penetration for Afirma. More importantly, our managed care business has been making substantial efforts to drive average selling price increases across both our products. Today's news regarding Decipher is substantial, and we're very enthusiastic about that, crediting the team for successfully negotiating the contract. On the Afirma side, we still have some opportunities to grow, although we have good coverage and contracting there as well. With a major payer supporting us now, there is considerable potential for growth, but the immediate impact is likely to be moderate. Going forward, the effects, including TERT, will be smaller.

I just want to emphasize one of Rebecca's points today, I totally agree. To me, TERT is helping drive Afirma because we have a more complete offering. It's important to have it for our physicians. So it's driving Afirma. It's not necessarily driving TERT revenue for TERT revenue's sake.

Got it. That's fair. And then one on just the data monetization strategy, Marc, on a go-forward basis, including that C2i data, which I'm sure you've now had a chance to get better acquainted with. And my question is less so about some of the reimbursement angle, which you already alluded to earlier, but more so from other ways to monetize it, perhaps on the biopharma side.

Yes. I believe we've discussed this before. There is always a challenge in monetizing data for its own sake. Our perspective is that data really supports the flywheel concept we often mention, which drives testing, research, evidence gathering, and subsequently more testing. From a biopharma perspective, if there is interest in that data, we naturally take advantage of it. These projects tend to be beneficial because biopharma customers typically approach us due to our success and the volume of data we possess, rather than having to assemble a team to generate that interest themselves. For instance, we are receiving interest in the prostate area. Additionally, the excitement surrounding the MRD area, particularly due to whole genome testing and the performance of our tests, is generating interest as well. We will continue to respond to these inquiries and explore any opportunities that arise. However, I wouldn't say we should expect to include data monetization in our financial projections just yet; it is primarily supporting other aspects of our business.

Fair enough. I have one last question regarding your M&A strategy. Your balance sheet looks strong, and you've slightly increased the year-end cash guidance. Following C2i, the asset clearly represents a strategically important technology, and you've mentioned MIBC along with plans to expand into other indications over time. I understand that revenue contributions may take some time to materialize, and there are also the enrollment delays with the Percepta Nasal Swab that you mentioned. Considering the current landscape and your balance sheet, could you remind us of your priorities for smaller acquisitions? Additionally, how much does the need for near-term revenue generation influence your decisions regarding these potential tuck-in acquisitions over the next year?

Thank you for the question. I appreciate your recognition of the strength of our balance sheet, which continues to improve as we increase our cash guidance. We are clearly focused on our priorities, and I want to reiterate those points today. We aim to enhance the market penetration of Decipher, which is currently at 35%, and Afirma, which stands at just over 60%. We see significant opportunities for growth in these areas. I believe these products will support our business growth for many years and connect us to our long-term growth drivers, which include the Percepta Nasal Swab, our IVD strategy beyond the U.S., and MRD. Considering these five areas—Afirma, Decipher, nasal swab, IVD, and MRD—we have a substantial workload ahead of us, keeping us very busy with numerous ongoing projects. The long-term growth projects are taking up a considerable portion of our R&D budget, as expected due to their strategic significance. Additionally, the growth of Afirma and Decipher, alongside our discovery efforts, is driving much of the remaining R&D expenditure. We are focused and have clear priorities, confidently covering our growth opportunities in the near, mid, and long term. Therefore, M&A is not a current priority for us. While we remain open to interesting opportunities that may arise, our primary focus is on the opportunities we have in front of us.

This is Joseph on for Mike. Maybe just wanted to get an update on how you guys were kind of thinking about the FDA final rule on LDTs. I guess I imagine it kind of went to your expectations. I guess it wasn't really worry for you too much at all. But are you kind of thinking a little bit more positively on any more spend needed for that? Or yes, I guess, any update on that would be good.

Yes. Thanks, Joseph. I appreciate that. I mean, just thinking about it at the highest level, as a company that has been on the market with clear tests for a number of years with the evidence that we got behind those tests, as well as having an IVD test already on the market and IVD capabilities in developing 3 IVD tests as we speak. We've always felt very ready for whatever this new regulation might throw at us. We're clear. We've got New York State and all those things now. Obviously, the more regulation adds burden to any business, of course. And so we actually think we're very well regulated already. We don't necessarily need more, but to the extent there is more, then we're ready for it. If it adds cost burden in some areas, again, we've got the quality systems in place, but there might be some things that we have to invest in order to support any new requirements that come our way, we'd be ready to do that. Able to do that. And I'd say that's already included in our projections because we also have opportunities to optimize and reduce cost as we scale, too. So I'd say that would offset any increased regulation or regulatory burden that might show up in the P&L. I would say just maybe specifically on what did come out, of course, it was great to see that existing tests get some special treatment as they should, obviously, because they serve so many patients today.

Yes, that's great. I have a question regarding the AUA conference. You had several posters there and likely occupied significant space. I was curious about the attendance. I appreciate the initial insights shared, but I also wanted to know if there were discussions at the conference about Decipher Prostate and the perspectives of American physicians regarding the test potentially transitioning to PCR. If I'm correct, that seems to be more relevant internationally and under the CLIA model here. I'm just wondering if there were any conversations around that and if it has influenced your views on test modalities.

Yes. Let me clarify that the Decipher test is currently run as a lab-based test for the U.S., and that will remain the same moving forward. Additionally, we have a whole transcript that also supports GRID. Our next step after Decipher is the IVD product that we will launch outside the U.S. There is a lot of interest internationally, and we believe there is a pent-up demand. I’m not certain how much that was evident at AUA, as I understand that the focus was primarily on the U.S. However, from what I gathered, the conference was a great success. We had a strong presence there with the abstracts we presented, and I hear our booth attracted considerable interest. Congratulations to our Decipher, commercial, and marketing teams for their excellent work at the conference. So far, feedback has been very positive. I’m sure there was excitement around the new guidelines we highlighted in our presentation. Our survey indicated that over 80% of physicians are aware of the guidelines, and 75% are using them as intended.

Our next question comes from Matt Sykes with Goldman Sachs.

Congrats on the quarter. This is Prashant on for Matt. Just a follow-up on a question that was asked earlier on Decipher Prostate. So you have biopsy tests for monotherapy versus multimodal as well as the radical prostatectomy test to determine the addition of hormone therapy. So can you just help us understand the opportunity for improvement in terms of volumes and reimbursement with respect to both subsegments?

Yes. I would say I think they really come together. You don't necessarily need to bifurcate them as we talk about the opportunity for growth. I mean, by far, the majority of growth and the majority of volume is going to come from the biopsy side rather than the RP side, but there's opportunity for them both. Mostly, as I said, mostly on the biopsy side where you have, by far, the largest volume. In terms of reimbursement, the real opportunity there is commercial contracts, like the one that we announced today. We've made great progress and great traction in getting both coverage and contracts in place. There's still opportunities. I think we feel really good about where we are so far. There's smaller payers to go after now, and we never really stop. We are still finding our payers for Afirma 13 years after the product was launched. So you just keep blocking and tackling your way through that. So that's whether I'd say the reimbursement opportunity comes from. I've talked at length about where the volume growth is going to come from and what's going to drive it. And again, it's the NCCN, the payer contracts, metastatic, and just fantastic execution by our sales team, quite frankly.

Got it. And then moving to Afirma, do you see the competitive landscape as essentially set? Or do you anticipate new competitors entering the space? How high is the barrier of entry to enter thyroid cancer testing?

I think it would be very difficult for new entrants to enter at this stage with the level of share and penetration and performance of the tests that we have and most importantly, the level of evidence behind them, including recent meta-analysis that we had that really shows the performance of Afirma in a real-world setting even outperformed our own clinical validation. We actually just got word that was one of the most cited articles last year in the publication. So I think that in and of itself, we've always maintained this is actually at the heart of the Veracyte Diagnostics platform we talk about that just generating the evidence, which comes from the data and then having more data generates more evidence is really a significant barrier to entry that shouldn't be underestimated. And it's how Afirma has not only maintained, but is also growing its share and how Decipher has become the #1 test with the high level of guidelines that it has.

Marc, we can't hear you. You might be on mute. Yes. All right. Great. And I apologize if this was covered already. But just could you talk about the Afirma and Decipher growth rates that we ought to be thinking within the context of the guide? And I have a quick follow-up after that.

Yes. To recap, our testing in the first quarter grew 25%. Decipher's revenue increased by 36%. We have guided testing to grow by 15% to 18%, indicating an increase. Decipher is the primary driver of this growth, while Afirma, although smaller, is also growing significantly. Overall, testing is surpassing our expectations, which is why we adjusted our guidance for the company. We are still facing challenges in the product and biopharma sectors at the moment, but testing is performing exceptionally well.

Got it. That's helpful. If I could ask about the AUA, you had several presentations there, which is an important conference for you. Is there anything you would highlight as a significant driver for 2025? Also, could you take a couple of minutes to discuss how we should view the upcoming data sets that may be released in the second half of 2024 or in 2025 regarding other assays you have or even Decipher?

Thank you for bringing up the AUA. We had a strong presence with numerous abstracts and presentations. The key highlight was certainly the NCCN guidelines, which generated a lot of excitement, especially regarding metastatic coverage. This is an area to keep an eye on, and we hope to have clarity by the end of this year or early next year, potentially making it a growth driver for 2025. Additionally, I believe Decipher, across all indications and markets, has the potential to drive growth for several years ahead. Outside of that, we are working on data related to muscle invasive bladder cancer and the MRD test, along with the completion of NIGHTINGALE and additional support for it. I have mentioned our IVD strategy before, and currently, we are developing three products, two of which will be completed in 2025 and one in 2026. While these may not directly generate revenue in the timeframe you asked about, they indicate our commitment to accomplishing the milestones we have set.

I'm showing no further questions at this time. I would like to now turn it back to Marc for closing remarks.

Thank you, Lauren. I appreciate it. So in closing, as you can tell, I'm excited about our strong start to 2024 and the positive signals we're seeing in our core testing business, which bolster our confidence in the growth trajectory of Veracyte both this year and going forward. We're making progress towards our goal of 80% penetration in the critical markets that Decipher and Afirma serve and expect to drive significant revenue from these tests over the next few years, bridging us nicely to our numerous and exciting long-term growth drivers. I want to thank the entire Veracyte team for the work they do every day for the patients we serve all over the world. Their tireless efforts have enabled us to grow and scale our company to accommodate the significant growth that we are experiencing in our business. So thank you.

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