Veracyte, Inc. Q3 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Veracyte Third Quarter 2024 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 of Investor Relations. Sheila, you have the floor.

Good afternoon, everyone, and thank you for joining us today for a discussion of our third 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 third quarter 2024 financial results. This release and a business and financial presentation are available in the Investor Relations section of our website at veracyte.com. Before we begin, I'd like to remind you that various statements we 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. Additionally, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte filed with the Securities and Exchange Commission, including Veracyte's most recent Forms 10-Q and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly-comparable GAAP financial measures are included in today's earnings release accessible from the IR section of Veracyte's website. I will now turn the call over to Marc Stapley, Veracyte's CEO.

Thank you, Shayla, and thanks everyone for joining us today. Q3 marked another record quarter for Veracyte. I couldn't be more proud of our team and of their hard work on behalf of the patients we serve. Q3 revenue totaled $115.9 million, growing 29% year-over-year. This was fueled by testing revenue, which grew an incredibly robust 34% compared to the prior year period, driven by strong volume and ASP improvements, both of which continued to outpace our expectations. Q3 represents our ninth consecutive quarter of 25% or greater testing revenue growth, demonstrating clearly the durability of our testing portfolio. Throughout this year, we have shared our confidence that Afirma and Decipher will continue to deliver outsized revenue growth over the next number of years, bridging to our long-term strategic growth drivers, and the trends we observed this quarter reinforce that we are on a solid trajectory. Starting with Decipher, we delivered a record 21,250 tests during the third-quarter, up 36% year-over-year with growth across all NCCN localized risk categories. With the updated NCCN guidelines in place, our incredibly productive urology sales force consisting of around 50 reps is driving adoption through awareness and education on the test utility and market leading clinical evidence. Decipher's clinical validity in utility has already been demonstrated in approximately 85 clinical studies and over 120 additional publications have focused on data from Decipher GRID, our research-use-only platform. In the third-quarter alone, there were 14 publications, abstracts and presentations utilizing Decipher prostate or data from GRID. Generating clinical evidence for Decipher remains a top priority for us to drive further guideline inclusion, durable reimbursement, and increased test differentiation in this underpenetrated market. To that end, in early October, new data was presented at ASTRO 2024 the Annual Meeting of the American Society for Radiation Oncology from the VANDAAM trial. Data from this prospective clinical trial shows that the Decipher Prostate genomic classifier accurately predicts aggressive prostate cancer among African-American men with early-stage disease. This population is over 70% more likely to be diagnosed with prostate cancer are more than twice as likely to die of the disease compared to non-African American men, according to the American Cancer Society. Despite this, few prospective studies have specifically sought to examine the disease at a genomic level in such patients. The VANDAAM findings confirm that use of the genomic test in this population could potentially enable better treatment decisions and outcomes, helping to reduce outcome disparities, something the industry needs to embrace. Enrolling diverse patients in our clinical trials is key to this effort and we proactively try and ensure the inclusion of often underrepresented populations, which is something we are passionate about. We look forward to sharing more on our philosophy and approach in our ESG report, which we plan to publish later this year. Another important study was recently presented at the ESMO 2024 Congress in Barcelona, where new data from STAMPEDE, a Phase 3 randomized multi-center, multi-arm clinical trial supported by Cancer Research UK was shared. This study was focused on the metastatic population, an incidence group that has risen by about 5% each year since 2014. Studies have shown that adding the chemotherapy docetaxel to standard-of-care androgen deprivation therapy can improve outcomes for some patients with metastatic prostate cancer. However, the benefit varies from patient to patient and docetaxel could negatively impact quality-of-life for many patients. Today, physicians can use tumor volume as a blunt tool to identify who will likely benefit from the drug. The STAMPEDE findings demonstrated quite profoundly that Decipher may be a more precise tool to distinguish patients who will receive the greatest benefit from docetaxel and those who won't. This could help patients avoid unnecessary toxicity while helping to determine the best treatment path for those who will benefit the most. This is the first major study highlighting the significant utility of Decipher as the only predictive gene expression biomarker for metastatic patients that could positively impact care and quality-of-life for men living with advanced disease. With the recently finalized LCD covering Decipher's use in the metastatic setting, we believe we have the only prognostic gene expression test able to address the entire prostate market, including metastatic patients. We are currently underway with the next step of enabling Medicare reimbursement for this additional indication by following the technical assessment process, which we expect will be finalized in late 2024 or early 2025. With sales training planned for Q1, we are excited about metastatic as a potential growth driver for 2025 and beyond as we expect to see revenue for this indication start to ramp in the back half of next year. With the expansion of Decipher into this broader patient population as well as significant greenfield opportunity ahead for our test in localized disease, we expect to see continued meaningful growth for the foreseeable future, driven by both market penetration and share expansion. Moving to Afirma. Volume growth continues to be impressively strong. During Q3, we delivered close to 15,100 tests, up 12% from the prior year period. Our endocrinology sales force of close to 50 reps has done a tremendous job of driving the durable adoption of Afirma. By sharing the differentiated level of evidence for the performance of the test alongside the ease-of-use for physicians, we've made strides in both share and penetration into the long-tail of physicians who did not use a molecular diagnostic previously. Also this quarter, the expanded LCD for Afirma went into effect, adding reimbursement for Medicare and Medicare Advantage patients with thyroid nodules or those that are suspicious to cancer. This is an immensely helpful outcome for this patient population and further supports our continued leadership in the field. While the impact to revenue this quarter was minimal given the end of July effective date, we expect this to be a moderate ASP tailwind in 2025. Taking into account the momentum we have driven in 2024 as well as the expanded indication, we expect Afirma to continue to demonstrate strong growth of high-single-digits next year. With unwavering demand for Decipher and Afirma as well as positively shifting market dynamics, our confidence in delivering robust revenue growth over the course of the near and mid-term has never been stronger, and we couldn't be happier with our execution of the first two of our five strategic imperatives, namely to expand Decipher's market size, penetration, and leadership position and to deliver continued strong Afirma growth. These will, we believe, bridge us through our exciting additional three long-term growth drivers; one, to launch IVD products for patients globally, two, to serve more of the patient journey through our expansion into minimal residual disease testing or MRD and three, to solve new cancer challenges, such as with our novel Percepta Nasal Swab test for patients identified with a lung nodule. Critically, to balance our investment in innovation as detailed by these five strategic imperatives, we also regularly assess the prioritization of projects to ensure the appropriate level of investment while also delivering a differentiated financial profile. As a result of this, we made the difficult decision to pause offering the Envisia CLIA test at the end of this year. While we always aim to put patients first, the low penetration of the test in this uncommon disease category and the lifecycle management it would require, including continued clinical evidence development led us to conclude that we need to focus on our other imperatives for now. Turning to those innovative long-term growth drivers. I'll share an update on our effort to serve more of the patient journey through MRD and recurrence testing. We are progressing well towards our launch of an MRD test in muscle invasive bladder cancer or MIBC in the first half of 2026, including efforts to secure reimbursement through Medicare and readying our laboratory and operational processes. We continue to be very encouraged about the clinical utility of MRD for MIBC using our whole-genome approach. A study recently published in European Urology showed that a WGS-based analysis of cell-free DNA allows for ultra-sensitive CT DNA detection in patients with MIBC. Importantly, the study demonstrated a mean lead-time of over four months between detection of clinical recurrence based on the test compared to radiographic imaging. Such critical time savings has the potential to accelerate time to treatment and improve the current clinical management of patients. We are excited about the opportunities ahead for MRD. As we have said, while patients with MIBC represent our initial intended use population, given our sales channel and the reimbursement pathway, this is not a single product assay; it is a platform. We plan to expand into other indications and you can assume that would include the ones where we already have a presence. In closing, Q3 was another exceptional quarter and there is a long runway of opportunity in front of us. We are primed to continue to deliver robust revenue growth in our core business and we have a number of key catalysts ahead that will expand our care across the patient journey. My sincere thanks to the Veracyte team for their relentless focus on our mission to serve patients. It is their hard work that sets us apart as we continue to transform cancer care for patients around the world. With that, I will now turn to Rebecca, to review our financial results for the third-quarter and our updated outlook for the remainder of 2024.

Thanks, Marc. Q3 was another excellent quarter with $115.9 million of revenue, an increase of 29% over the prior year period. We grew total volume to approximately 39,000 tests, a 20% increase over the same period in 2023. Testing revenue during the quarter was $109.5 million, an increase of 34% year-over-year, driven by Decipher and Afirma revenue growth of 48% and 19%, respectively. Total testing volume was approximately 36,800 tests. Testing ASP was approximately $2,975, which included approximately $3.5 million of prior-period collections. Adjusting for the impact in the quarter, testing ASP would have been approximately $2,875, up 7% compared to the prior year period. As Marc mentioned, we expect to continue to generate strong testing revenue growth in 2025 while absorbing an approximately $6 million headwind given our Envisia portfolio planning decision. Turning to products. Third quarter volume was approximately 2,200 tests and revenue was $3.2 million, down 21% year-over-year as we continue to work through supply challenges. Given we are currently managing demand, our Q4 and 2025 product expectations are muted. Biopharma and other revenue was $3.1 million, down 23% year-over-year. Moving to gross margin and operating expenses, I will highlight our non-GAAP results. Non-GAAP gross margin was 71%, up approximately 130 basis points compared to the prior year period. Testing gross margin was 74%, up approximately 10 basis points compared to the prior year period. Product margin was 44%, up from 39% in the prior year period. Biopharmaceutical and other gross margin was 3%, down year-over-year due to lower fixed-cost absorption. Non-GAAP operating expenses were up 11% year-over-year at $57.6 million. Research and development expenses increased by $3.9 million to $16.1 million given personnel additions from our C2i acquisition and increased costs related to our development projects. Sales and marketing expenses declined by $0.8 million to $20.8 million given the Envisia sales force reduction performed earlier this year, partially offset by hiring across Afirma and Decipher. G&A expenses were up $2.8 million to $20.7 million, driven by infrastructure investments and other personnel costs. Moving to profitability metrics, we continued to demonstrate strong results. We recorded GAAP net income of $15.2 million and delivered adjusted EBITDA of $27.3 million or 24% of revenue. We generated $38 million of cash in the quarter, driven primarily by $30 million of cash from operations and ended Q3 with $274.1 million of cash and cash equivalents. Looking forward, we are excited to raise our 2024 total revenue guidance to $442 million to $445 million from our prior guidance of $432 million to $438 million. This reflects an improvement in our testing business outlook with revenue growth expectations of approximately 28% as compared to the prior guidance of approximately 25% and our original guidance entering this year of 13% to 15%. We are also raising cash guidance and now expect to end 2024 with between $280 million to $285 million in cash, cash equivalents and short-term investments, taking into account approximately $10 million to $15 million in milestone payments and capital expenditures forecasted in the fourth quarter. Additionally, with the profitability we've achieved year-to-date, we now expect full year 2024 adjusted EBITDA margin to be slightly more than 20%. This year has been nothing short of fantastic across our financial metrics. We have delivered incredibly strong testing revenue growth, profitability and cash generation. I look forward to carrying this momentum into 2025 as we work towards our vision of helping cancer patients globally. We'll now turn to the Q&A portion of the call.

Our first question comes from Subbu Nambi with Guggenheim Securities. Subbu, please proceed with your question.

Thank you for taking my question. First, I want to ask a broader question. Marc, you joined Veracyte as CEO three years ago during a challenging time for the company. Since then, you have redefined the leadership team and, along with this team, have successfully led the company into the Diagnostics 2.0 era. You have driven revenue growth through solid science and made progress toward free cash flow and margin expansion. As you consider 2025 and beyond, what are your thoughts on the future? Will it be more of the same, which would certainly be positive, or are there additional opportunities that have yet to be revealed? I have a follow-up question as well.

Thank you for the question and for summarizing the last three years. We built a strong foundation by merging three companies and conducted extensive portfolio analysis and restructuring, which we continue to do, as evidenced by our recent announcements. As you pointed out, we've rebuilt our leadership team along with many layers underneath, although we still have legacy teams from the previous companies. We've concentrated on talent and scaling, having scaled our Decipher lab to handle significantly more volume without compromising turnaround times. I credit our team for this achievement. We brought in outstanding leaders who complement our existing talent, and we have made significant progress since then. I am proud of our consistent revenue growth and our ability to meet our expectations, as well as those we set for ourselves. Importantly, we are positioned to deliver a financial profile consistent with the adjusted EBITDA we've discussed. Looking forward to 2025 and beyond, we will maintain our focus on the portfolio of products that are driving our current revenue growth and profitability. We will continue to invest in the three key strategic initiatives that promise long-term growth. One of those initiatives is our acquisition of C2i during this three-year period, which is part of our major MRD strategy. We aim to sustain the financial profile we have consistently communicated. We are still on our long-term journey and have much more to accomplish within the company, but we are well-equipped to achieve these goals.

Perfect. And on second on the Decipher volume, that seems to be continuing the trend of strong growth this year on the heels of the NCCN Guideline level upgrade. Could you help us understand the underlying adoption growth drivers here? Is it mostly new physicians adopting or is it existing physicians who are increasing order volumes or both?

Yes, that's a great question. Let me start by addressing the various categories of growth we are experiencing. The NCCN risk levels show consistent growth across low, intermediate, and high risk. The biopsy-based part of our business is driving this growth, and we are pleased to see it. The NCCN Guidelines address all these risk categories and their prognosis, which is encouraging existing physicians to increase their use of Decipher across their entire patient population. We are also seeing new physicians adopt Decipher, as it is the only molecular diagnostic test classified as a level 1B RNA-based test. Looking ahead, we have the metastatic indication, which will add approximately 30,000 patients. As I mentioned earlier, we are working on the tech assessment, reimbursement, and launching that initiative, which will begin ramping up at the end of 2025. Ultimately, our goal is that every patient with prostate cancer should have access to a molecular diagnostic, and Decipher is the leading test that they should benefit from.

Perfect. Thank you so much, guys.

Yes, thank you. By the way, I just mention one other driver, which was, as we've talked about before, getting commercial payers for Decipher and we had I think it was Q2 we mentioned it. Maybe it was as earliest Q1 that we had a significant one that added a lot of new covered lives. And we're continuing on that path.

Yes, that was as of middle of the first quarter announced on the first-quarter call-in Q2. All-of-the-above.

Yes. Thanks. Sorry, next question.

Our next question comes from Andrew Brackmann with William Blair. Andrew, go ahead with your question.

Hi, good afternoon. Thanks for taking the questions. Maybe to start here just on testing volume and in particular, how you're thinking about growth there for 2025. I know there's still a couple of months left in the year, but super-high level, I know a lot of large numbers is probably at play here, but any other drivers or headwinds or tailwinds that we should be considering on either Decipher or Afirma next year? Thanks.

Yes, thank you, Andrew. I’ll let Rebecca elaborate as well. We are not prepared to provide specific numbers for 2025 as we are still finalizing our budget and planning. I did mention that Afirma is expected to see high-single-digit growth, which focuses more on revenue rather than volume. I didn’t go into detailed figures. The first of five new initiatives will start to contribute more significantly next year for Afirma, but we need to consider the law of large numbers. Regarding Decipher, we are focusing on metastatic growth and further market penetration. At the start of this year, we were only 35% penetrated in the market. By 2025, we will be able to serve the entire market, including metastatic cases, which I noted will be advantageous in the latter half of next year. We anticipate continuing to increase our market share, particularly given the extensive evidence supporting Decipher from hundreds of studies. As I mentioned, with the STAMPEDE study and the information we shared at ESMO, Decipher is expanding its role in predicting chemotherapy benefits for patients. There are many exciting prospects ahead for Decipher, and we are optimistic about our testing growth not only for 2025 but also looking toward our long-term goals.

Absolutely. Just a couple of things to add there, Andrew, and speaking again more on a revenue than a volume basis. We are seeing these market sizes unfortunately grow from an incidence perspective. So we are seeing kind of a low-to-mid-single-digit growth rate for both the Afirma and Decipher markets. Additionally, on a total revenue basis, I called out the $6 million headwind for Envisia, so that's worth considering. And then also in our prepared remarks, we spoke about product revenue being muted for next year. So take that into account and also think about the biopharma business being one that we have not incrementally invested in. And so you know, that could also be plus or minus a bit next year. We aren't necessarily guiding to that today, but something to it's not something that we're today very we're investing in. But when you sum all that up given the dynamics that Marc shared for Afirma and Decipher, again we are very confident in our ability of those two tests to bridge us to our long-term growth drivers in '25 and beyond. And we feel very confident about a position entering next year and we're quite excited for it.

Terrific. I'll stick on another financial question, this one on the profitability and cash front. I mean you've raised your cash projections or you're finishing end of the year cash projections by about $50 million since the start of the year. I think it was just five months ago where you threw out that 25% adjusted EBITDA margin target and here you post 24%. So what's a reasonable way to think about further leverage in this model going forward? And I guess related to that, how do you sort of intend to deploy cash here over time? Thanks.

The model is clearly effective in the specialty diagnostics sector, where we have approximately 50 sales representatives for Decipher and another 50 for Afirma. We've added a few sales reps this year because our sales team is exceptionally effective. They truly are a best-in-class team in both categories and are performing outstandingly. As we grow, we will continue to see some leverage on the sales and marketing front. I hesitate to provide a specific margin guidance, but I believe a specialty business like ours should ideally generate a sustainable annual margin of around 25%. There will be quarterly fluctuations due to non-linear spending and our strategic choices in investments. We have three significant projects that together account for slightly over half of our $60 million annual R&D expenditure. We will keep investing at a suitable level to ensure timely product launches and, importantly, produce the necessary evidence to support these products. At Veracyte, we believe that developing the product is just the beginning; creating the evidence to support it, drive adoption, influence guidelines, and secure reimbursement is as important, if not more so, than the assay itself. We will adjust our strategies as necessary to ensure we meet our growth expectations.

Yes. I would like to add a few comments to Marc's comprehensive statement. Andrew, you're right. When we attended your conference earlier this year and announced our 25% target, we had recently come off a 15% quarter. Thanks to various factors throughout 2024, we are now guiding for a 700 basis points increase in adjusted EBITDA for this year, which is an impressive achievement that we are very excited about. However, as Marc mentioned, we are approaching this with a balanced perspective moving forward and are fully committed to enhancing and differentiating our financial profile. This process will be more incremental rather than the significant changes we experienced in 2024, as we consider the balance between investing for long-term growth and ensuring profitability. Additionally, we have benefited from prior-period cash collections this year, which will positively impact ASP going forward, though those benefits will typically apply at 100% in any given period. Please keep this in mind for the future.

Thanks, Rebecca. And to your question on deployment, no change in our philosophy around deployment. But there aren't a lot of really attractive opportunities to deploy cash in our space to grow our business in a way that wouldn't require a significant investment in evidence development over multiple years, and we have a lot of that going on ourselves. In fact, we've actually paused some projects that would require us to do that because it's the right thing to do, not just financially. But more importantly from a resourcing and a focus standpoint. Execution is important and we execute well because we're very focused on and the whole company is very focused on what we're trying to accomplish. So we would be clearly very diligent in thinking about how to deploy capital, but more importantly, how to deploy our teams, resources, our management attention and focus and the other assets that we have in the company.

Great color. Thanks so much.

Alright. Our next question comes from Lu Li of UBS. Lu, go ahead with your question.

Great. Thank you so much for taking my questions. I guess like the first one, wanted to going back to Decipher. So you mentioned the metastatic going to benefit in the second half. Any way that you can kind of like quantify the benefit to it and then do you think that they're going to be have some like ASP pressure initially just because it takes time to kind of negotiate with the commercial players?

Yes, that's a great question. I’ll let Rebecca address the ASP part. Regarding the metastatic benefit, you should consider it to be about 10% of the total market. In the U.S., there are around 300,000 cases per year, with about 30,000 being new cases of metastatic cancer. It’s important to focus on new cases rather than the overall population. We are set to launch the test for these 30,000 cases, which we estimate will be roughly two-thirds related to Medicare. This makes the current tech assessment process very significant. You are correct that there will be an increase in commercial payers, but I don't anticipate initial pressure on ASP as we will also be increasing the test volume. The test will expand, similar to what we experienced in the localized setting, where our test has grown along with the addition of more commercial payers.

No, that's exactly right. I completely agree with you. For the Medicare patients, our Medicare Advantage patients, we absolutely should be getting the same ASP as we do on the biopsy and RP side. And then for commercial, we will be building with the same code. So we expect to get some reimbursement there. But it will take some period of time to get this under contract for many of the payers. But not all. Some payers, we do have blanket statements in there that new incremental testing does get paid. So I think it's going to be just like it always is, right. You're going to grind higher on your ASP over time, just like we've shown our ability to do so with Afirma and Decipher and I don't view metastatic to be any different.

Okay. Appreciate that. My second question on the product revenue. It seems like there was an 18% sequential decline. I mean, you mentioned it's a supply chain issue. Do you think it's getting worse in the quarter or is it just taking longer to solve the issue? Just wanted to get a little bit more color on that. Thank you.

Yes, it is, but some of it's intentional. As Rebecca mentioned, we're managing demand, right? We don't want to see our customers impacted and patients impacted. And so part of what we're doing to mitigate supply chain risk is managing the demand. And so that's why Rebecca said the expectation of muted go forward growth next year. I actually think of next year as more of a transition year for the product business. We are developing in parallel multiple tests, including Decipher on PCR and Prosigna on NGS and submitted Prosigna on the can, and we're also developing Nasal Swab. We're going to be managing through these supply chain challenges and then driving reimbursement country by country for our test when we’re ready to launch. So 2025, don't think of it as the product line is a revenue driver next year. In fact, on the contrary, I would think of it as Rebecca said, muted. And hold back expectations there. We've got a lot to do, and we want to make sure we hit the markets right and launch the right test at the right time with the right kind of strength and infrastructure behind it.

Appreciate that.

Our next question comes from Tejas Savant with Morgan Stanley. Tejas, go ahead with your question.

Hello, this is Yuko on the call for Tejas. Thank you for taking our questions. Regarding Decipher, you previously mentioned running an awareness campaign on reimbursement for metastatic prostate cancer. Considering this will be a new population for you and for prostate classifiers in general, how much market building do you think you'll need to do to facilitate the adoption of Decipher in that setting?

There is definitely some market potential, but really the key benefit is that we are largely targeting the same customer base, specifically the urologists. Our efforts will begin with training our sales team early next year. Afterwards, the sales team will engage with their customers in a structured manner about the metastatic setting, including when and how to use the test, as well as how to interpret the test report. It will largely involve continuing our existing strategies for the localized setting, although we will also pursue some new product market development.

And from a spend perspective, I wouldn't think about that as a change in inflection of the curve of sales and marketing spend for next year, just to get that out there as well.

Agreed.

Got it. That was super helpful. Thank you. And then I think you also talked about 5 – representing 5% to 10% of your total Afirma test volume. Is that volume you're already running mostly associated with commercial? Or are you also running Medicare volumes well? I'm trying to understand whether we could see volume uplift in addition to ASP as a result of the LCD?

Yes, that's a good question, Yuko. I consider them related, though not perfectly correlated. The reason is that we do report some aspects of Bethesda V for commercial payers. Generally, it follows the same mix. So, we may see potential benefits on the volume side for Bethesda V and on the ASC side as well. However, this is more about the margins. It's an important opportunity to expand our market population, but it's a small proportion overall. Therefore, while it could provide some support, it won't be a major driving factor. I see it as beneficial, but there are many other execution aspects that the team is focusing on to enhance revenue growth, which is more significant compared to this.

Yes. And just to add to that, and I think Rebecca is exactly right. And the LCD covers the Medicare population, of course, in the Medicare population, it's inverted from the Decipher comparison. It's actually the smallest part of the population in thyroid cancer, so more like roughly a third or so I may be slightly off there, but it's in that zone. So yes, that's the new opportunity that commercial payers has like I said, some are some are already there.

Got it. Thank you so much.

Our next question comes from Sung Ji Nam with Scotiabank. Sung Ji, go ahead with your question.

Hi, thanks for answering the questions and congratulations on the quarter. I have another question about Decipher. It's encouraging to see distinguished clinical studies like STAMPEDE and VANDAAM, particularly for the metastatic population. I'm curious if you need further guideline inclusion to drive growth or if you expect additional guideline inclusion. Specifically regarding the STAMPEDE trial, are there opportunities for Decipher to serve as a companion diagnostic? Additionally, could this trial lead to greater adoption in the U.S. market?

Great questions. On the localized side, we've seen significant traction even without guidelines. Each time new guidelines are released, they highlight the benefits of Decipher, such as the recent guidelines that provide physicians with specific recommendations based on Decipher scores for localized disease. This has led to a notable increase in adoption. I anticipate similar growth in the metastatic side; while guidelines are not needed initially, they are crucial for broader adoption and reaching our goal of 300,000 patients across various disease stages. We will leverage evidence from studies like STAMPEDE, among others, to support the use of Decipher in metastatic settings for both prognostic and predictive capabilities. This evidence generation is fundamental to Veracyte's mission, and we expect it to aid in increasing positive guideline inclusion for both localized and metastatic cases. Regarding companion diagnostics, whether it's used for prediction or determining appropriate treatments, it encourages more physicians to recognize the value of Decipher throughout a patient's treatment journey. The STAMPEDE trial showed that using tumor volume is one method to select patients for docetaxel, but Decipher offers a more precise approach to identify which patients will truly benefit. As more studies incorporate these outcomes, I believe we will see improved adoption and guideline inclusions.

Do you want to comment on the usefulness or utility of STAMPEDE in the U.S. setting?

I apologize for missing that part of your question, Rebecca. Absolutely, I view Decipher as having a global impact, as studies are inherently international. In some U.S. studies, we've collaborated with principal investigators from Europe. This global perspective enhances our excitement around the IVD test, as many key opinion leaders and physicians outside the U.S. are already familiar with Decipher and have participated in studies. Similarly, I believe that the U.S. will find the trials conducted in the U.K. and other European countries to be quite compelling. Whether we need to conduct smaller studies in the U.S. is still to be determined. We also aim to address all populations, including underrepresented and diverse groups. Therefore, if additional clinical trials are necessary to supplement studies, we will pursue that. In terms of our R&D spending that I mentioned, there are strategic drivers, and a significant portion, amounting to several million dollars, is allocated to sustaining ongoing clinical studies to advance Decipher, along with a bit for Afirma as well.

Got it. That's very helpful. I have a quick follow-up. You mentioned hurricanes. Some of your competitors noted that as a factor for the quarter. I'm curious if there were any impacts, and if not, could there be some delayed effects from the disruptions, particularly regarding patient visits and similar events occurring towards the end of the third quarter and the beginning of the fourth quarter?

I think the short answer is no. When you examine the weekly shipment graphs, you observe a minor impact in the areas affected by the hurricanes. Our thoughts are with everyone, including patients and healthcare providers, who were affected by these natural events. However, what we experienced was a minor impact, and I would say we've mostly bounced back from that. Rebecca, would you agree that the effect is less than a day's worth?

Yes, I would say that in any quarter, a day or two in the lab can occur at either end of the quarter. I would categorize this situation similarly. Sung Ji, I would estimate that it's about less than a day's volume that we experienced earlier this month, and there was really nothing significant in the third quarter considering the affected areas.

Standby for our next question. Our next question comes from Thomas DeBourcy with Nephron Research. Thomas, go ahead with your question.

Hi guys. I guess just a couple of cleanup questions here. First one, I guess, just on the NIGHTINGALE study and just I think the last update was you know, maybe a potential completion of enrollment at the end of this year, early next year and just any thoughts there on updated timing?

Thomas, we actually stopped guiding to when we would finish the study. The one thing I've learned over the three years I've been doing this is we're better at forecasting revenue than we are at forecasting clinical studies because so much of it is outside of our control. And then when you add the extra complexity of a lung-based study, which seemed to be impacted more than others in our experience, it just became we were chasing something that we couldn't pin down close enough. So we stopped guiding to it. Continuing to enroll. We have close to 100 sites that are enrolling at a reasonable clip and we'll update you again next when we've completed enrollment.

Got it. And then just one other question. Just the $10 million to $15 million milestone payment in Q4 adding to cash, just is that just kind of, I guess, a biopharma agreement where you hit milestones there or any other context?

Yes, I can provide some context on that, Thomas. It's primarily related to expenses rather than revenue. We have a potential milestone payment that we're likely to make in the fourth quarter, which is about $5 million. We also expect to spend a similar amount on capital expenditures for development projects starting at the beginning of 2025. Lastly, there's some working capital we anticipate needing in the fourth quarter. So, I would say those are the three main areas.

Okay. Thank you very much. Appreciate it.

Stand by for our next question. Our next question comes from Mike Matson with Needham. Mike, go ahead with your question.

Thanks. So just you've had some pretty good pricing this year. I was wondering if you could just talk about what's been driving that and to what degree that would be sustainable into next year?

Sure. I'm happy to discuss that, Mike. Pricing has been a journey over the past couple of years. Looking back to 2021, we transitioned from Afirma to GEC to GSC. In 2022, we faced some challenges, but throughout 2023 and 2024, we have addressed many of those issues and gained benefits from prior-period collections associated with our efforts. This has been one contributing factor. However, a more significant factor has been the success of our managed-care and billing teams. We have established a talented group that is securing numerous contracts and coverage for both Afirma and Decipher. Just when we think we are reaching a plateau, they surprise us with additional successes. Currently, we have made substantial progress, but eventually, this growth rate will need to stabilize. Looking ahead to next year, I cannot confidently predict whether it will completely level off, as prior-period collections have significantly contributed to our performance in terms of cash and margins this year. We are monitoring this closely and anticipate a time when the growth becomes more incremental rather than the substantial leaps we’ve experienced recently. I want to extend my gratitude to both teams for their incredible collaboration and outstanding work. A significant achievement this year was securing a major commercial payer for Decipher in the first quarter, as Marc mentioned earlier. Everything is progressing well, and we aim to continue building on the successes these teams have achieved.

Okay, great. And then just on the MRD tests, so I understand your reluctance to forecast the trial for the Nasal Swab, but in this case I don't think there's a trial. So can you just talk about when you expect to really launch that start generating some meaningful revenue?

Thank you for the question. It's not a full trial or utility study; rather, it's the technical assessment process we need to complete in our lab to prepare for launch. We need to run some samples for validation and related tasks. We've indicated that this will happen in the first half of 2026, and then we'll build on that. As I mentioned earlier, launching our MRD test initially for bladder cancer is strategic for us, aligning with our channels and a quicker path to reimbursement. However, this is just the beginning for MRD. It’s a platform, and we plan to introduce it in other indications as well. The whole-genome aspect is distinctive and aligns well with Veracyte's strategy of gathering more data through whole transcriptome or whole-genome analysis. I referenced some data published in European urology regarding the advantages of our test in detecting residual disease earlier than standard imaging methods can, and we are eager to launch this test across various indications over the coming years, starting with bladder cancer as our proof-of-concept.

Okay. Got it. Thanks.

Our next question comes from Puneet Souda with Leerink Partners. Puneet, go ahead with your question.

Yes, Hi guys. Thanks for the questions here. So first one on Decipher. I don't know if this was covered in the question earlier, what is the growth rate you were expecting for Decipher sort of going-forward into '25? I mean, you have NCCN Level 1B and I'm just wondering sort of the tailwinds to that, the metastatic side, what could contribute to the volume growth? So just trying to understand what's the right way to think about the growth rate in this business now from an elevated volume level?

Well, Puneet, I believe you've highlighted the main factors driving us forward. I would just add that acquiring more commercial payers is crucial. The NCCN guidelines you mentioned, along with the metastatic indication, are expected to start ramping up in the latter half of next year and beyond. Coming into this year, Decipher has performed significantly better than we expected. The primary reasons for this strong revenue growth are the NCCN guidelines and commercial payers. We are not prepared to provide guidance for next year yet as we are still analyzing that. However, when considering Decipher and Afirma together, we are very optimistic about our testing growth moving forward, even though we aren't ready to specify a number. I did mention a projection for Afirma in the high-single digits for next year, but we’re not ready to provide similar guidance for Decipher just yet.

That's helpful. Recently, one of your peers faced commercial pressures from a large payer in pharmacogenomics. While that's a different test from the classifier test you have for cancer, can you elaborate on what you're observing in the marketplace regarding commercial payers? Additionally, what portion of your volume today for Afirma and Decipher is contracted with these payers, and what is the level of stability? The key question is that if payers begin seeking savings, they might consider some diagnostic companies. Thank you.

Yes, that's a great question, Puneet. There are significant differences in this area. From what I understand, the decision was influenced by the perceived lack of evidence for those tests. In contrast, we have a wealth of evidence for both Decipher and Afirma, including retrospective, prospective, and real-world data, along with ongoing studies. Decipher is even included in the NCCN guidelines. This demonstrates the robust evidence supporting both tests. In fact, we're experiencing the opposite trend, as we are increasing the number of contracts with payers. Regarding the proportion of our business, Decipher is approximately 60% Medicare and Medicare Advantage, with the remainder being commercial. We've onboarded additional commercial payers, covering over 200 million lives. Afirma, on the other hand, represents about a third of our business from Medicare, with a larger share from commercial payers and has been servicing over 270 million lives for a substantial period. We're not observing any decline from commercial payers; in fact, we are successfully expanding our contracts with them.

Got it. That's helpful. Thanks, guys.

Our next question comes from Mason Carrico with Stephens. Mason, go ahead with your question.

Hi, this is Ben on for Mason. Thanks for taking the questions today. I was hoping as it relates to your sales force, could you help us understand where you see those teams growing over time and then as you solely add reps over time, can you remind us how long it typically takes for those reps to be fully productive really by your standards?

Yes, that's a great question. Let me break it down into three areas: Decipher, Afirma, and IVD. On the Decipher side, we currently have about 50 representatives, and similarly for Afirma. In both cases, we've added a few representatives over the past year, and I don't expect that to change moving forward. The addition of sales team members is a gradual process in relation to revenue and volume growth. From our experience, it's essential to carefully plan how territories are divided, created, and how new representatives are integrated. Our team is quite skilled in this area. To address your question, it typically takes about six months for sales representatives to fully acclimate to their new territory and region. Fortunately, we haven't experienced significant turnover, which means we haven't had to frequently go through this process. However, when we do add new reps, that timeline holds true. On the IVD side, the situation is different since we are selling to laboratories. We can ramp up sales on a country-by-country basis. It's important to note that we already have some commercial teams in certain countries selling Prosigna. Once we introduce more tests, we can gradually expand our efforts as we see reimbursement for our tests in those countries. This approach is very deliberate and measured; we don't need to build out a substantial commercial presence based on anticipated volume. Instead, we can align our team growth directly with the revenue opportunities as they arise.

Okay, great. Thank you. And then sort of diving into IVD, I was wondering if you'd be able to provide any update there on those products under development. Are there any timelines that we're sort of able to look towards in the future? Thank you again for taking the questions.

Yes, no major update. I said earlier, we're developing several products during 2025, and so I think of that as a transition year. Decipher PCR and Prosigna NGS are the first ones that we expect to have ready for launch next year and then Nasal Swab following that. And so that's kind of the timelines we've talked about so far. As I said, we're dealing with some on the Prosigna side. We're dealing with some challenges that's more on the nCounter product, but we want to make sure that the supply chain is fully ready for PCR and NGS when we're ready to launch those tests as well.

This concludes the question-and-answer session. I would now like to turn it back to Marc Stapley for closing remarks.

Thanks very much, Stacy. So I'm incredibly proud of our execution this quarter with our team delivering outstanding revenue growth of 34% and the adjusted EBITDA margin of 24%. As you can clearly see, we continue to have a best-in-class financial profile for a specialty diagnostics company and are closing in on our previously stated goal of achieving a sustainable 25% adjusted EBITDA margin annually. Additionally, I want to take this opportunity to announce an important change to my leadership team and that Keith Gligorich has been promoted to SVP Global Operations. Keith's deep expertise managing our Clear labs as VP ClearOps for the last 18 months has enabled us to scale with our growing revenue and we're in an excellent position to meet our future demand. I look forward to his continued contributions as we further build out our organization for scale. I also want to take this opportunity to thank Rebecca for her outstanding leadership over our Clear operations for the last two years in addition to her CFO responsibilities. Finally, I want to again thank our incredible team at Veracyte for their tireless work to make a difference in the lives of the patients we serve. We look forward to updating you all again on our 2024 performance and expectations for 2025 in the new year. Thanks.

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