Good afternoon, ladies and gentlemen, and welcome to the Veracyte Fourth Quarter and Full Year 2019 Financial Results Conference Call. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Keith Kennedy, Veracyte's Chief Operating Officer and Chief Financial Officer. You may begin.

Good afternoon, everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 2019 financial results. With me today are Bonnie Anderson, Veracyte's Chairman and Chief Executive Officer; Dr. Giulia Kennedy, our Chief Scientific and Medical Officer; and John Hanna, our Chief Commercial Officer. 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 include those regarding our future plans, prospects and strategy, financial goals and guidance, product attributes and pipeline, drivers of growth, expectations regarding reimbursement and other statements that are not historical fact. Management's assumptions, expectations and opinions reflected in these forward-looking statements are subject to risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements. And the company can give no assurance that they will prove to be correct and will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. Please refer to the company's February 25, 2020, press release and the risk factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. Prior to this call, we announced our fourth quarter and full year 2019 results, which are available on our website at veracyte.com under Press Releases in the Investor Relations section. We also published a financial presentation, which I will reference during my remarks. This presentation is also available on our website under Events & Presentations in the Investor Relations section. Before turning the call over to Bonnie, I would like to explain some changes in our new GAAP reporting structure. With the expansion of our strategic partnerships and the acquisition of the nCounter diagnostic platform rights and products from NanoString, we expanded our revenue reporting to distinguish between testing, product, biopharma and collaboration revenue. Testing revenue includes our centralized CLIA testing services, which currently includes Afirma, Percepta, Envisia and cytopathology. Product revenue includes the sale of kits and instruments, which currently includes Prosigna and nCounter FLEX System sales. Together, testing and product represents our global diagnostics business. Revenue resulting from our strategic agreements for research and development and/or commercialization services is comprised of either biopharmaceutical revenue, including the sale of services or data and other services for fixed consideration; or collaboration revenue, including revenue recognized for the achievement of milestones and contingent or variable consideration earned during a period. Together, biopharma and collaborations represents our biopharma strategic agreements. I will now turn the call over to Bonnie Anderson, Veracyte's Chairman and CEO.

Thanks, Keith, and thanks, everyone, for joining us today as we discuss our 2019 fourth quarter and full year results and provide you with our outlook for 2020. Veracyte had an exceptional and transformational year in 2019. We drove impressive revenue and genomic test volume growth; advanced our first-of-its-kind noninvasive nasal swab test for early lung cancer detection; and made a strategic acquisition that positions us for global expansion on our own world-class distributed platform and has added 2 new oncology indications to our portfolio. We have tremendous momentum entering 2020. This afternoon, we reported total revenue in 2019 of $120.4 million, a 31% increase over 2018; and genomic test volume growth that grew to nearly 40,000, an increase of 25% over the prior year. Our net cash used in operations was $3.2 million for 2019, and I am delighted to report that in the fourth quarter, as predicted, we achieved positive cash flow from operations of $1.8 million, a milestone achieved by few companies in our space. We are guiding 2020 total revenue in the range of $138 million to $142 million for the full year. Excluding biopharma and collaboration revenue, which we estimated approximately $4 million, plus or minus $1 million, this represents approximately 25% growth in our testing and product revenue at the midpoint of the range. We believe this revenue growth will be fueled by the increased adoption of our 4 revenue-generating products. We are also guiding full year 2020 net cash used in operating activities of $8 million to $12 million. This reflects our intention to invest strategically as we position ourselves to offer multiple and mixed genomic tests to physicians and their patients internationally on our distributed platform starting in 2021. Now to our 2019 highlights. Our first metric for 2019 was revenue growth.…

Thank you, Bonnie. As I mentioned earlier, our fourth quarter and full year 2019 financial presentation is available under Events & Presentations in the Investor Relations section of our website. This afternoon, I plan to introduce our expanded revenue disclosures, speak to our fourth quarter and full year 2019 results and conclude with remarks regarding our 2020 guidance. As I mentioned at the outset of these prepared remarks, the table and footnotes on Slide 3, along with the details in our SEC filings, further explains how we recognize and report revenue under U.S. GAAP. For discussion purposes, we may combine testing and product revenue to describe our diagnostic testing business, and biopharma and collaboration revenue to describe our strategic arrangements. Turning to Page 4 of the presentation. Our performance against 6 key performance indicators or KPIs for each quarter and the full year 2019 compared to the prior year quarter and full year results are as follows. For the fourth quarter 2019, total revenue of $29.7 million increased $4 million or 15%. Gross margin remained flat at 66%. Operating expenses, excluding cost of revenue, increased $7.7 million. Net loss of $7.5 million increased $4.4 million. And cash flow from operations of $1.8 million improved $3 million. And genomic volume increased 18%. Cash at December 31, 2019, was $159 million. For the full year 2019, total revenue of $120.4 million increased $28.4 million or 31%. Gross margin increased to 70% from 64%. Operating expenses, excluding cost of revenue, increased $17.8 million. Net loss of $12.6 million declined $10.4 million. Cash used in operations of $3.2 million improved $10.3 million. And genomic volume increased 25%. The next page, Page 5, shows the revenue breakdown by quarter and for the full year 2019 against the respective prior year period. We recognized $108 million…

Thanks, Keith. Looking ahead, we believe we are forging an exciting pathway that will help redefine the genomic diagnostic industry, one in which using our own distributed platform we can deliver an expansive menu of advanced genomic tests to physicians and their patients worldwide via local hospitals and laboratories. Until now, this capability has largely been the purview of specialty labs, putting novel genomic tests like ours out of the reach of many patients in international markets. Our strategic acquisition of the nCounter global diagnostic business has positioned us to achieve this vision. Now we must invest wisely to turn our vision into reality. First, we plan to launch our Envisia classifier on the nCounter platform in international markets in 2021, marking the beginning of our menu expansion strategy. Following this, in 2022, we will be -- will be the international launch of our noninvasive nasal swab test for early lung cancer detection, which will help us further access the $40 billion global market opportunity for our tests. These initiatives will be key to us delivering shareholder value from our desired 25% compound annual growth rate over the next decade. Against this backdrop and with our strong momentum, as we move into 2020, I want to highlight the key catalysts that we believe will drive our momentum through 2021. Turning to Page 13 of Keith's presentation, these catalysts fall into 4 key areas of focus: product and testing revenue growth, collaboration revenue, evidence development and pipeline advancement and menu expansions. First is product and testing revenue, which is reflected in our full year 2020 total revenue guidance of $138 million to $142 million. We aim to continue our steady volume growth for the Afirma GSC and Xpression Atlas and to double our pulmonology genomic test volume in 2020. Looking ahead…

[Operator Instructions]. We have one question from the line of Thomas Flaten.

Congrats on the quarter, guys. A couple of questions. Let me start at the back of the presentation. So for the nasal swab tests, are you going to be able to provide us with maybe some more granular guidance on timing? Is it earlier in the year, second half of the year?

Yes. I think as the year goes on, we'll probably tighten that down. But we've been targeting to hit a launch of the first nasal swab test in the U.S. market and what we've said early 2021. So maybe you can plan on that in the first half of the year.

Great. And then there was a mention of the 40 hires on the commercial side. How many of those came from the NanoString acquisition? And could you comment on their distribution U.S. versus global?

We hired under 20 people in the NanoString acquisition. And -- do you want to -- and so I'd say there's 12, 13 of those people are international. And there's 3 or 4 of those in nonsales roles of the 20. The rest of them were -- are revenue-producing.

Yes, Tom, part of the enthusiasm we have for readiness to launch new products into the European market is the strong team that came onboard. It's a mix of 5 country manager level people who sort of manage the overall business in the territories sales, medical affairs and marketing. And so there's a great base and a foundation there as we think about moving Envisia over to the nCounter and doing the market development work we want to do in 2020 and into '21 to prepare for that launch of that product that year. And we're really pleased that they all were able to join us in the acquisition.

Great. And then just one more quick question, if I might. On the Prosigna, the $900,000 that you booked in the fourth quarter, I think you mentioned that was all Prosigna test related. And then if that's the case, that annualizes a number substantially higher than $7 million to $8 million you guided to. Could you provide some thoughts on that?

Yes. I think you -- so it will take some time, but the cadence of this business will certainly be a little bit different than what the cadence of our current business is, where we basically have samples that are collected on the basis of patients being seen in doctors' offices and the predictability of knowing the volume by account and basically having hundreds and hundreds of doctors sending us samples every day. This business is more geared towards shipments that go into laboratories that might buy a month, 2 months even for 6 months' worth of inventory until they place their next order. So I think as we were coming into December, there were probably some prior to the end of the year shipment stockings that did take place, and we were happy to take that $900,000 of revenue. But we don't think that, that means that, that revenue is going to be consistent on a monthly basis going forward. And I think for us, we're -- we've reduced the size of the team, we've made some decisions on distribution channels that were changing. We're obviously new owners of the business, and we want to be prudent and conservative on what we believe is realistic as we carry that business forward. And we'll learn more and be able to update you as the year goes on.

Next question from the line of Sung Ji Nam of BTIG.

I apologize for the background noise here. Congratulations, first of all, on the fantastic year. My first question actually on behalf of an investor who is wondering when will you be in a position to submit for the nasal swab test? When will you be in a position to submit to the Medicare for reimbursement? And when do you expect to generate revenue from the test, given that the data will be coming out? It would be pivotal data as expected in 2021, if you could talk about that.

I think the best way to guide people's thinking around this is to look at the timing that has taken us on our historical products. We'd love to say that you can be lined up to do the pivotal validation, launch the test on the back of that. But we all know that to get to Medicare coverage, you've got to have some basis of clinical utility that's proven once the test is available to patients. So what we'll be focused on is managing a very strategic launch of the product into the right accounts with good experienced users, perhaps those that have already been working with us with Percepta, where we can continue to collect that utility data and package up all of the clinical validation, analytical validation and utility data that will need to be packaged, submitted and accepted for publication to get that Medicare coverage decision. I think we've got a team that's pretty darn good at executing on that. They've done it fairly flawlessly several times now. But it's going to take 18 months to 24 months potentially to get to that point, and it will need to line up the timing of the year around the Medicare MolDX process as well. But it will be a great starting point to do a launch and get into pilot sites where we can start to see the reality of how this test might be able to be used to guide better care around treatment -- patient diagnosis and treatment decisions.

Great. Bonnie, could I ask your question about coronavirus. Obviously, there's no -- it might not be addressed. I understand...

Of course.

And -- but could you maybe talk about your thoughts around that, given just a lot of -- that seems to be, obviously, on everyone's mind right now. Maybe going back to when you had a very severe flu season and as you think about expanding internationally as well, do you know anything like what -- how are you kind of -- I know it's early. I know there are a lot of uncertainties. But could you talk about kind of what you're thinking, so we have some thoughts from you?

Well, I think, one, really kind of focusing in on what are the steps and timing around making the strategic acquisition become the basis of a global growth story. And we're going to take the careful steps one at a time to make sure we focus first on broad menu expansion. We think that the platform, because of its incredibly sophisticated and simplistic design, where you can run these tests from a cartridge with about an hour of hands-on time, 2-day turnaround time, yet have a platform that has over 800 features that you can fill with genomic content, this platform is, I believe and I think we all believe, a world-class design product to do what we're trying to do. So we're going to take the existing tests, Prosigna, LymphMark. We're going to move ours over one at a time very strategically. Envisia was chosen as the first test on purpose. We have experience with thought leaders that Giulia and our R&D team have interacted with over the years that want to see Envisia made available in Europe. And that made sense to start with that. And then it's always nice to take a test that's already been developed and proof of development on our sequencing platform and then move that to the nCounter platform. So coronavirus will probably run its course, like many of these other things we've seen over the years. It will hit a point and probably not become the major threat it is today. I think that our planning is going to spread over the next 2, 3 years to really execute well in this menu expansion. And I don't expect that the issues of today in the coronavirus in travel is really going to have a major impact on what we're trying to do. We're not planning to be in China anytime soon. We don't currently have distribution there. And while certainly there are threats in other parts of the world, we have 1 to 2 people in each of these markets, looking after the maintenance and growth of Prosigna, while we focus our investments on building out this menu. So I think we have a very targeted plan. And it won't happen overnight, but it's a pretty exciting pathway forward to see where we're going to be in 2, 3 years.

And I'd say for our testing -- our existing testing business, we don't have as much visibility into what's happening in terms of patients visiting facilities, whether or not the fear is distributed among the population and people going to the doctor less. We generally see a slower first quarter in our U.S. genomic testing business. So that can be down 300 to 400 samples sequentially over the fourth quarter, for example. But it's not as -- we don't see a major impact from that currently. But it is obviously possible that if this thing were to continue with the coronavirus in the United States, that people would react and not go see their doctors. We have not forecasted that in our numbers at this point.

Okay, great. And then if I could squeeze one more question for Keith, would you be able to break out your biopharma collaboration revenue? Obviously, it's too early to talk about pacing. But will there be a step-up with the Loxo-Lilly collaboration this year? Or is the majority of that coming from the AstraZeneca collaboration?

Yes. So Bonnie, you can probably talk about...

We're assessing continuation and stability right now in Loxo, and the remainder of that is anticipated from our new collaboration.

And I'll just reiterate what Bonnie said in her prepared remarks. The J&J, the $9 million in remaining milestones that we have under our agreement, we do not have any of that in our forecast for 2020. We have that lined up with the achievement of milestones that Bonnie laid out for 2021.

Next question from the line of Brian Weinstein from William Blair.

As it relates to 2020, can you help us out with a little bit of detail on your expectations on the molecular testing side, just more specifically on price versus volume that you expect there? And as a corollary to that, you're adding over -- it sounds like you've just over 20 reps to the field this side of the business. So why couldn't this growth be higher than what we've seen in the past? I know 20% is certainly very, very solid. But with the added reps there, is it possible that, that number could be a little bit better?

Sure. Yes, it is obviously possible, and we don't guide to the Street exactly what we're going to pay John Hanna for. But we're definitely pressing our commercial organization, and we hope to deliver on what we say we're going to do. In terms of genomic volume, we expect to do implied in our revenue guidance here of $120 million for testing, excluding cytopathology, about 48,000 tests, and that would be around 2,500 hours for that 48,000 tests. And that gets you to $120 million. Probably do an incremental 5,000 in Afirma. Again, I'm not giving guidance, I'm just trying to help you sort of think through the math of how you build your models. So there's about 41,000 tests in Afirma. Our lung products would do probably combined 7,000. On Afirma, the 41,000 genomic volume, it's probably about $26.50, net of how much we accrue. So we accrued between 2,800, and 2,900, and we accrue about 90% to 95% of those. So the math of that is around $26.50. And that rate has been consistent throughout the whole year. So I'd say it's 41,000 times $26.50 gets you to about $108 million, $109 million in revenue for Afirma. Long would be about 7,000 tests at about 1,600. That's up a couple of hundred dollars versus prior year, and that gets you about $11 million in revenue over $5 million. So you take on, call it, $109 million plus $11 million and you get to $120 million in revenue for the molecular side. And in terms of the pacing, I would expect that we do somewhere in the sort of 10,300 tests in the first quarter, somewhere in that area. And then we'd step up as we do in the second quarter and then a small step up, maybe 500 tests, from Q2 to Q3 over the Q2 number. And then we have a step-up in Q4 to get to the 41,000 tests.

All right. And Bonnie, one for you. Just talking about like the strategic value of the partnerships here, can you just refresh us on that strategic value, what they're really adding for you today and in the future? And then what's the likelihood of you guys doing additional -- signing additional strategic partnerships in 2020? Do you have a pretty full pipeline of things that are relatively [indiscernible]? Obviously, you wouldn't put them in guidance, because they're not signed. But is that something that we should be expecting to hear more about from you in 2020?

So there are a couple of things. I think, first, we never wanted to build the nucleus of our growth story and foundational core of the business around pharmaceutical collaborations, because they can come and go, right? So what we focused on was really building out our engines, especially our R&D engines with our clinical biorepositories are very deep and broad genomic content and our capabilities in machine learning. And what we've learned over the course of the last couple of years is that when we have a leading position commercially in an indication and we have the foundational biorepositories, the richest data you can collect, and all of that data generated from thousands of patient samples that we're testing in our lab, there are opportunities to leverage that position and create more value for Veracyte out of what we're already doing or what we've already done. So I think what is really cool about our collaborations to date is that we are getting paid for value that we have either already generated or that we would be generating anyway. And we're just getting paid and building more value in Veracyte, because that data and information is valuable to someone else. I think with the move to take this nCounter platform and think about globalizing the local distribution of testing, what happens is we open up a new avenue for collaborations with companies that want to be able to pick partners, where testing for either clinical trial enrollment or for other purposes can be done in local markets around the world. And I do think that we are set up quite nicely to be able to continue to expand these collaborations. And our first focus will be on indications that we're already in as a business. So we've done that with thyroid cancer. We've now done that in the area of lymphoma. We've done it in lung cancer in a big way with J&J. I think we have the potential to expand those collaborations, but certainly have the potential to bring on more as well.

And I just want to go back, and Brian, one of the things we've talked about in the past is our intangible. We've always -- we did the Allegro deal. We had about $14 million of intangible. And when we did the deal now with NanoString, we had about $65 million. And I think as everybody is thinking about our amortization going forward, that number is going to be about $5 million a year. So we're going to have an incremental $4 million of noncash charges associated with that. So again, it's going from $1 million to $5 million per year around the intangibles.

Next question from the line of Paul Knight of Janney.

On the 7,000 tests you're guiding to on the lung, is -- can you give us any color on IPF versus Percepta on which kind of getting into the strength behind each?

Yes, we think both doing really well. John, maybe you want to talk a little bit about how those two are working together commercially.

Yes. Thanks, Bonnie. I think we've really unlocked the synergy here between two pulmonary products, where we have really a common call point within the institution. And between our territory specialists, our pulmonary specialists, we're able to drive a significant amount of adoption among those products within a single institution that are treating both patients with pulmonary nodules and interstitial lung disease. And as we talked about earlier, we've really ramped up here, over the course of 2019, the number of sites submitting Envisia samples to be fivefold what it was at the beginning of the year. Due to that synergy where we already had the installed base of the Percepta product being utilized in those institutions, we had approval through the value analysis committee to be offering our testing services. And so we're able to bring Envisia straight in and provide immediate value in terms of the management of patients in those practices. So we see both of the products growing really nicely throughout 2020 and a doubling of the overall pulmonary volume.

Thanks, John.

Yes. With Envisia, it just seemed like there is less embedded doctor practice. Are you finding that market more expecting of the test than perhaps lung cancer?

Go ahead.

No. We think the interest and adoption of the product is consistent across both. And I think what you see in lung cancer is the diagnosis of the disease is relatively concentrated in few pulmonologists that do bronchoscopy procedure, whereas with interstitial lung disease, general pulmonologists, pulmonologists that don't do advanced bronchoscopy procedures still treat and manage interstitial lung disease. So it's a broader number of clinicians within that practice that are treating the disease, but still the commonality within a pulmonary practice of doing both lung cancer and ILD is pretty common everywhere we go.

Next question from the line of Puneet Souda of SVB.

This is actually Westley on for Puneet. Most of what I had has been asked. But I wanted to follow back up on the genomic volume growth cadence throughout the year. I know in 2019, we still posted a solid -- very good 25% growth for the year, but saw some sequential step down in growth throughout the year. Just wondering the kind of the puts and takes between -- or that you experienced throughout the year and how we can expect this to play out heading into 2020?

Wes, great question. We -- 2018, you almost have to go back and you look at '19 and look at what happened in '18, because you're comparing -- you guys were ramping these kind of things. Recall, we only had essentially one test in the first quarter of '18. And so by the time we get to sort of the second and third quarter of '19, it became significant comparative quarters, because we had a lot of ramp in the second half of '18. And so even though it appears to be -- looks like it's coming down in terms of the percentage, the numbers are going up dramatically. And so we -- what we've seen is just around 5,000 incremental tests in Afirma. So what I was trying to build to you pretty earlier is we'll probably go about 5,200 tests up to about 41,000 this year and probably start around 10 -- probably 9,000 in the first quarter, about 10,000, 10,500, 11,500 kind of thing for Afirma throughout the year to get you to 41,000. And our lung will sort of start out at 1,300, go to 1,600, 1,900, 2,200 kind of thing throughout the year, sort of pace up. And so you just -- those percentages just work out how they fall out. But what we're really trying to figure out is how do you build Afirm of 5,000-plus a year. You keep the rate at $26.50. We're building long volume at 80% growth implied. At 7,000 long test incremental this year over last year is an 80% growth in volume. And if we can take the rate up 200, and then Giulia and the team are working on the publications and the coverage with John what'll happen is you'll install a big base. And as you get Aetna, United, Cigna and Blues, our revenue -- we're leaving half our revenue on the table on those products, right? So there's -- I understand from people's point of view that they feel like that's not maybe growing fast enough, but the volume you want to embed and see that in the market and then the revenue tailwind will happen, just like what we saw on Afirma, so we're pretty happy with it.

Yes. I think just looking at the numbers and key stack, the first quarter genomic volume of 9,100 going to 9,600, 9,900 and 10,800, that's exactly the kind of layering effect. And in 2018, it was the year that we introduced the GSC for Afirma and then a couple of months after the year started the Xpression Atlas. So the beginning part of that year was pretty low performance to -- compared to in early '19. And because of those new product introductions, we had an acceleration of that in '18 and then with the new lung products coming off. So we're actually very pleased. I think we've been talking about an Afirma cadence of 5,000 additional tests a year. We delivered 5,500 in '19. So we've been very pleased with the product with its time on the marketplace, having that level of continued growth is really, really great.

Great. And then just one more quick one on the physician base. Can you just provide a little color on whether you've been seeing more growth from existing physicians or from new physicians? And how do you expect that to play out with the sales force expansion?

Yes. John?

Yes. I think -- are you referring to Afirma or to the pulmonary products?

Yes. Sorry, Afirma, sorry.

Yes. For Afirma, it's a mix of both. As Giulia and R&D team and our clinical affairs team continue to publish evidence around Afirma and demonstrate its efficacy in new areas like the Hürthle cell modules, the value of our Xpression Atlas assay to provide insights on both surgical selection as well as targeted therapies. We see greater adoption within existing accounts of the product for additional patients that they previously perhaps didn't test with the assay. And then we have, through the demonstration of the value of the extension of the product, picked up new accounts along the way that for whatever reason perhaps didn't use Afirma in the past, used a local homegrown solution and then decided to switch over to the Afirma assay. And so we're having lot of success in both areas in a very targeted way.

For the last question from Brian Weinstein of William Blair.

Already asked. I'm good.

Okay, yes. Brian, I thought you were coming in for another take. Thank you.

And there are no further questions at this time. Please continue.

You can now conclude the call.

Thank you, everyone.

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