Earnings Labs

Veracyte, Inc. (VCYT)

Q1 2020 Earnings Call· Sat, May 9, 2020

$33.41

-1.30%

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Transcript

Operator

Operator

Good afternoon, ladies and gentlemen, and welcome to Veracyte's First Quarter 2020 Financial Results Conference Call. As a reminder, today's conference call is being recorded. I'd now like to turn the conference over to Tracy Morris, Veracyte's Vice President of Corporate Communications and Investor Relations. You may begin.

Tracy Morris

Management

Thank you, Sydney. Good afternoon, everyone, and thanks for joining us today for a discussion of our first quarter 2020 financial results. With me today are Bonnie Anderson, Veracyte's Chairman and Chief Executive Officer; Keith Kennedy, our Chief Operating Officer and Chief Financial Officer; and John Hanna, our Chief Commercial Officer. Before we begin, I'd like to remind you that various statements that we 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. It also includes statements regarding the potential impacts to our business resulting from the COVID-19 pandemic and the potential timing for a recovery of our business. 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 May 6, 2020 press release and the risk factors included in the Company's filings with the Securities and Exchange Commission for 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 first quarter 2020 results, which are available on our website at veracyte.com under Press Releases in the Investor Relations section. We also published a business and financial presentation, which we will reference during our remarks. This presentation is also available on our website under Events & Presentations in the Investor Relations section. I will now turn the call over to Bonnie Anderson, Veracyte's Chairman and CEO.

Bonnie Anderson

Management

Thanks, Tracy, and thanks, everyone, for joining us today as we discuss our first quarter 2020 results and provide you with an update on our business during this challenging time. I'd like to take a moment to welcome Tracy Morris to the Veracyte team as she joins us for her first financial results call as Veracyte's Vice President of Corporate Communications and Investor Relations. Our call will be structured a bit differently from our typical quarterly financial results calls. I will start with a brief overview of the quarter and the impact of the COVID-19 pandemic on our business along with our response. Keith will follow with detailed financials for the quarter. I will then discuss why we believe we are well positioned to emerge strong over the long term. We will both be referring to our first quarter business and financial presentation, which, as Tracy mentioned, is available under Events & Presentations in the Investors section of our website. We delivered solid results for the quarter despite the rapid onset of the COVID-19 pandemic and shelter-in-place orders, which began to negatively impact our business in mid-March. We grew our genomic testing and product revenue to $30.4 million in the quarter, a 20% increase compared to the first quarter of 2019. Including biopharmaceutical collaboration revenue, our total revenue for the quarter was $31.5 million. We increased genomic testing volume for Afirma, Percepta and Envisia during the quarter by 15% to 10,559 tests. And despite the pandemic headwinds, we have continued to make significant advances in our core diagnostics business as well as progress with our pipeline and strategic growth opportunities. This includes forging new biopharmaceutical collaborations that provide us with strategic leverage in and enable us to extract additional value from our current clinical indications where we are helping to…

Keith Kennedy

Management

Thank you, Bonnie. I'll also refer to our business and financial presentation as I discuss our first quarter 2020 results. Turning to Page 5. The table and footnotes shown here, along with the details in our SEC filings, further explain 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. As a reminder, net sales of data or other services to our customers are classified under biopharmaceutical revenue. And all other non-customer revenue such as milestones are classified under collaboration revenue in our consolidated statements of operations and comprehensive loss. Turning to Page 6 of the presentation. Our performance against 6 key performance indicators, or KPIs, for the first quarter of 2020 compared to the prior year quarter is as follows. As Bonnie mentioned, we grew our genomic testing and product revenue to $30.4 million, a $5 million or 20% increase compared to the prior year quarter. Total revenue of $31.1 million increased $1.6 million or 5%. Biopharmaceutical and collaboration revenue of $0.7 million declined $3.4 million, principally from the sale in the prior year quarter of data to Johnson & Johnson for $3.8 million, which contributed 4% to our gross margin in that quarter. Gross margins were 61%. In the first quarter of 2020, due to the expected impact of the COVID-19 global pandemic on our expected test volumes, we recognized a $1.1 million write-down of supplies that we recorded in cost of revenue. This write-down resulted in an approximate 350 basis points reduction in our gross margin. As I just mentioned, the $3.8 million sale of data to Johnson & Johnson in the first quarter of 2019 contributed approximately 4% to gross margin…

Bonnie Anderson

Management

Thanks, Keith. Looking ahead, we are confident in the fundamental strength of our business and our strategic positioning. Let me explain why, leaving you with these five points. First, our core genomic diagnostic business is strong. We have high-performing commercialized genomic tests that informed diagnosis and treatment decisions in four clinical indications, major cancers and serious lung diseases, helping patients avoid risky, costly procedures and quickening time to appropriate treatment. We believe these qualities are more essential than ever to the needs of our health care system. All of our commercial tests are reimbursed by Medicare and private payers and adopted by physicians. Second, we believe we are poised for robust global expansion. With our exclusive global access to the nCounter, a best-in-class diagnostic instrument platform that we obtained from NanoString in December 2019, we believe we are well positioned to deliver a growing menu of advanced genomic tests to patients worldwide through laboratories and hospitals that can perform them locally. We estimate the global market opportunity for our tests to be over $40 billion. Third, we have a significant pipeline. We currently remain on track to launch three novel products in 2021. These comprise the first noninvasive nasal swab test for early lung cancer detection, which we believe will help patients with a high risk of cancer to get diagnosed and treated sooner, while enabling low-risk patients to avoid invasive diagnostic procedures. Following the test launch in the United States in our CLIA lab in 2021, we plan to launch it internationally on our nCounter platform in 2022. Our Percepta Atlas, which will provide physicians with important genomic alteration data at the time of lung cancer diagnosis to inform treatment decisions, remains on track for a 2021 launch. With the enthusiasm we have seen with the novel, extensive whole-transcriptome…

Operator

Operator

Thank you. [Operator Instructions] And our first question comes from the line of Tom Flaten with Lake Street Capital. Your line is open.

Thomas Flaten

Analyst

Great. Hi, guys. Thanks so much for taking the question. Just going back to COVID, when you did your pre-release in mid-April, you had also used the 50% plus reduction in testing volumes. Did that stay pretty steady in the second half of April? Or was there further deterioration, because I know 50% plus can mean a lot of things. I'm just curious if you – if that was kind of a trough or if you saw a further deterioration?

Bonnie Anderson

Management

Thank you, Tom, for joining us today. No, that number pretty much continued through the period of April.

Thomas Flaten

Analyst

Great. And then one more with respect to your rebound – your recovery framework, the temporary furlough that you instituted earlier in April, is that – do you think the totality of if we stay within your U-shape scenario or do you think there will be additional furloughing as long as we stay within that U-shape scenario that you're working from?

Bonnie Anderson

Management

Yes. I think that's why we put out the framework. I think that early on, a lot of people were thinking this would be a 'V' reaction. We go down deep and then boom, everything's going to pop back. On the other end of the spectrum, there's still questions about maybe it's just a very, very long recovery. I think in looking at all aspects of that and all the analytics and data that we have that we're kind of rerunning every day and have lots of people out there in the field giving us data as well, we're fairly comfortable that that preparing and planning for a U-shape recovery gave us the benefit of getting the cost savings, but the flexibility to respond to either a more rapid recovery that might echo the shape of the V-curve or whether a longer recovery, such as indicated in that longer-term chart. So I think we're comfortable that the steps we've taken give us the cash preservation we need to weather it. And we have the easy ability to flex and respond more quickly, if we need. And the furling gives us the ability, we hope to rebound and bring people back, hopefully, quicker than we're planning for.

Thomas Flaten

Analyst

Okay. And then just one final one, could you give us maybe some insight in what we might expect to see over the balance of this year from nasal swab or is – or are any data releases are going to be in 2021?

Bonnie Anderson

Management

Yes. So we did put our catalyst slide in the deck. And as anyone who has seen this slide before will note, we've sort of pulled the implications around growth, because pulling our guidance we really don't know what that growth will look like. But fortunately, because of the stage of these products and where we have been at already having clinical cohorts built, a lot of the pre-investment that has been done over the last couple of years, the collaborations with J&J, augmenting that, we are not at the time, expecting to have any significant impact to any of our pipeline products. So the nasal swab test is predicted to launch in 2021. Typically, final validation data comes out close to that launch timing. So I don't think we would expect to see any kind of final validation data yet this year. But we typically do have interim sets of data that as we come into some of the organizational meetings, which are all virtual this year, we hopefully will have an opportunity to share some of the interim data as that algorithm development moves forward. But we are very excited and very pleased that our pipeline is strong. It remains on track. And 2021 is going to be a busy year of commercializing three products, one of those going to the international markets for the first time.

Thomas Flaten

Analyst

That's great. Thanks so much for taking the questions and congrats on everything.

Bonnie Anderson

Management

Thanks, Tom. Appreciate you joining us today.

Operator

Operator

Thank you. And our next question comes from Sung Ji Nam with BTIG. Your line is open.

Sung Ji Nam

Analyst · BTIG. Your line is open.

Hi. Thanks for taking the questions. Bonnie and Keith obviously a very strong quarter despite COVID headwinds towards the end of the quarter. I was wondering if you may be able to parse out what the COVID impact may have been. And if you are pacing ahead of expectations in terms of your core genomic testing volume, I was curious if there are any surprises that you might be able to highlight?

Keith Kennedy

Management

I think in our core Afirma business, we felt really good about that. We ramped our commercial team at the end of the year, and we're really on path to do great things on the testing side of the business. Our lung business did very well. We had about $2 million in revenue just in lung alone in the quarter. And then our product business did $3.4 million. I mean, I'm only chuckling, but this $3.4 million, I think is the best quarter Prosigna has ever had. And I think we – even the people that sold it to us were, like "How do you all do that?" So we believe the product business has done very well. We think our products have in network status. They're all Medicare covered. We have a great sales team that really understands the products. They're leading test in the market – in each of their markets. So there's just a lot of great things that were happening pre-pandemic. And I think what John Hanna has done on the commercial team to sort of get everybody engaged and retraining and getting in front of doctors and writing notes to doctors and things that just have a personal touch, that business will come back, and we feel good about that business coming back. And we feel good about the fact that our test essentially try to keep people from having invasive procedures. And we think that people are more and more understanding what diagnostics are and all the things we've been talking about where we've been positioning the company. So we think that's really great. And then our biopharma collaboration business, as Bonnie said, that's probably not going to be impacted as much by this, because we already have the cohorts and a lot of the investments made, and we can continue to progress that throughout all this. So there's just a lot of things we feel very hopeful for. We obviously, this is a struggle for a lot of people across the country, and a lot of people that are out of work or physicians that aren't getting money in, they can't pay nurses and things like that. So we feel for people across that business, and we feel for our employees that we've had to furlough, but we feel like there is a really good chance here that this thing gets back and we recover.

Bonnie Anderson

Management

Yes. I think just to close that out, in the biopharma collaboration area we ended up booking revenue from all three of the clinical collaborations this quarter, which wasn't anticipated. So anyway, I think Keith said it well, very strong quarter for us.

Sung Ji Nam

Analyst · BTIG. Your line is open.

Great. That's very helpful. And then also thank you for the recovery framework thinking through that for us, it's very helpful. I was curious though, if you're expecting kind of in more normalized levels in the first, second quarter of next year, what do you think are the implications for the target patient populations in terms of patients delaying their diagnosis or treatment options? Do you think there will be pent-up demand or catching-up demand heading into next year? And are you prepared to accommodate or address potential? I don't know if there might be a spike or a significant ramp in terms of demand early on in the recovery phase.

Bonnie Anderson

Management

So I mean, first of all, I'll just start by saying quite frankly, we don't know. I mean, I think anyone that thinks they do know what's going to happen next year in the first and second quarter. I want to hire them as my adviser, especially if they're right. So we don't know, but I think that we chose the level of furloughing to kind of hit that balance of not going – I mean, obviously, as Keith pointed out, we had a lot of commercial hiring in the very end of the year as we brought on the NanoString team. Keep in mind, part of that sales and marketing expense that we carried into Q1 included both John's hiring here in the U.S. to ramp up for three products growing through the year. But in addition to that, we did have the NanoString and the European group that we brought over and wanted to keep in place. So I think we went deep enough with the recovery plan to have a substantial cost savings from it, but not too deep that we can't – we believe, turn on a dime to get back in there to any site that our reps have access to. And maybe it's a good time to let John kind of walk through some of the steps that they've taken to kind of change the organizational readiness and a few other things that he's done not only to take advantage of this slow time, but also to be even more ready to do business in what we believe may be a little bit different paradigm when things return. John, why don't you just walk through that?

John Hanna

Analyst · BTIG. Your line is open.

Yes. Sure. I'm happy to and thanks for the question. Bonnie and Keith both touched on this in their prepared remarks in different places, but there are really three things we've been very focused on ever since the initial shelter-in-place policies were put out there. They are organizational readiness, really emphasizing the value proposition behind our products, and the third is digitizing customer engagement. And so from a readiness perspective, we for some time now as we've been ramping our multi-product selling structure in the U.S., have invested and put in place a really strong virtual training platform for our field team members. And we were able to leverage this to double down on clinical knowledge, product knowledge and selling skills across the country with our team members to really ensure that they are prepared as soon as the shelter-in-place policies lift to get back out into the field and sell and move the business rapidly. The second is focusing on our value proposition, really emphasizing the value of our products in this COVID era around helping patients avoid unnecessary procedures that are at low risk of cancer or of disease and then informing upon those patients that are at higher risk that need to be prioritized for invasive procedures, as Bonnie talked about, such as the Afirma Xpression Atlas in thyroid cancer. And then thirdly is digitizing engagement. So as Bonnie said, we took a balanced approach here of furloughing what we believe are the appropriate number of individuals to enable us to have cash savings, but we don't think this in any way inhibits our ability to service our customers. Given that like many other companies, we have put in place travel restrictions, both for the safety of our employees, but also for that of the office staff and physicians that they service. And so we focused on enabling our employees to digitally engage with customers, whether that be by e-mail, text, phone, video, web conference, and we're seeing a really high level of engagement in peer-to-peer virtual programs in all of the specialties we service. So we feel like we've taken the appropriate steps as an organization. We have a high degree of engagement with customers today as they come back online and they've really prepared the team to support those customers in the field in any way that they need to service their patients.

Sung Ji Nam

Analyst · BTIG. Your line is open.

Great. Helpful. Thanks – I'll just back in the queue. Thank you.

Bonnie Anderson

Management

Okay. Thank, Sung Ji, joining us today.

Operator

Operator

Thank you. And our next question comes from Puneet Souda with SVB Leerink. Your line is open.

Westley Dupray

Analyst · SVB Leerink. Your line is open.

Hi, guys. It's Westley on for Puneet today.

Keith Kennedy

Management

Hi, Westley.

Bonnie Anderson

Management

Hi, Westley. Thanks for your question.

Westley Dupray

Analyst · SVB Leerink. Your line is open.

Hey. I wanted to follow-up on an earlier question about the product segment. I mean it came in above our expectations as well. And I believe on the 4Q call, you guys had suggested $7 million to $9 million for the year. Obviously, that's been – looks strong at this point, but I mean a strong start to the year for the segment. And I guess maybe just kind of can you explain a little bit more on just, I guess what's worked well to start the year? And I guess the impact in the near term that we can expect with the ongoing disruption and moving forward through the rest of the year.

Bonnie Anderson

Management

Yes. So I think that, obviously with a $3.4 million quarter that $8 million that we had predicted actually could be in line of sight, right? We don't know for sure, but there isn't a huge leap of faith to be able to do that. I think we just got the year kicked off strong, bring in tremendous focus. And really just the enthusiasm of getting everybody truly excited about not just that product, but what we're going to be able to do in the diagnostic global marketplace with access to this new platform and beginning very early on as early as December at the Breast Cancer meeting in San Antonio as well as other meetings virtually with key opinion leaders in Europe being able to tell the vision of this isn't just going to be a story of Prosigna, but a story of a portfolio of oncology products. And then I think also, a lot of the momentum coming into the year was driven by a lot of the posters and presentations and data on that product that emerged at the San Antonio Breast Cancer Conference in December. And I mentioned it briefly in my talking – in my prepared remarks. But in particular, what we are seeing just a lot of enthusiasm around with the product is its ability to report intrinsic subtypes for breast cancer. And this is really over and above reporting of information that can literally guide treatment decisions and choices beyond just a risk of recurrent score that is the predominant answer given by other products on the market. And so we've seen a whole emergence of thought leaders wanting to engage, continue to do studies and really lean into some of this very exciting data coming out on intrinsic subtypes. And I think…

Westley Dupray

Analyst · SVB Leerink. Your line is open.

That's great. Thank you. Actually answered a number of my questions there as well.

Bonnie Anderson

Management

Great.

Westley Dupray

Analyst · SVB Leerink. Your line is open.

But if I could just ask one quick follow-up on states that are starting to reopen already, I know it's still very early, but any high-level commentary you could provide on if trends have started to tick back up or if we're still sitting in that kind of 50% year-over-year reduction? Thanks.

Bonnie Anderson

Management

Overall, you don't see the rounding errors, but John does run data at every rep level, which is very state and every territory. And John will probably say there's a few of those rural areas out there where we are seeing some reemergence, is that right?

John Hanna

Analyst · SVB Leerink. Your line is open.

Yes. I think Bonnie stated it the best we can say, which is in the community endocrinology practice segment, we're seeing a slight rebound. But in general, the business remains down at that 50% reduction year-over-year, and we're not prepared to change that estimate at this time.

Westley Dupray

Analyst · SVB Leerink. Your line is open.

Great. Thank you. Appreciate it.

Bonnie Anderson

Management

Thank you for joining us. You bet.

Operator

Operator

Thank you. [Operator Instructions] And our next question comes from Paul Knight with Janney. Your line is open.

Paul Knight

Analyst · Janney. Your line is open.

Bonnie, can you hear me?

Bonnie Anderson

Management

I can. Thanks for joining us.

Paul Knight

Analyst · Janney. Your line is open.

Some of us on the East Coast were dropped about 10 minutes ago, we're all back live now, so...

Bonnie Anderson

Management

Yes, that's we've heard that from a few. Sorry to hear that.

Paul Knight

Analyst · Janney. Your line is open.

Must be the range.

Bonnie Anderson

Management

Must be.

Paul Knight

Analyst · Janney. Your line is open.

Regarding the volumes on Afirma, I know that that's been, put it this way, they were below the corporate average on volume growth. Could you give us a little color on lung cancer diagnostics, specifically with Percepta? What the continuing comment out of docs is on Percepta?

Bonnie Anderson

Management

I think that Percepta is being received very well, and we kind of group those into our lung volume altogether. As Keith pointed out earlier, we actually booked over $2 million of revenue in lung, which was about 138% growth over prior year. And we're seeing both of those products really complement each other in the sales process because it's a very – it's a common call point, common setting within the hospital that these two products are collected. So we're pleased with where that business came in, in the first quarter, and Afirma was pretty much right on target with where we thought that would be as well, even in light of the last couple weeks of the quarter declining.

Paul Knight

Analyst · Janney. Your line is open.

Yes. And then collaborations are a target for you to increase your revenue and relationships in that market. Can you talk about how that's going? And is it less difficult than clinical testing in this COVID world we are in?

Bonnie Anderson

Management

Well, I want to just – certainly, I just want to clarify, like what we're doing with biopharma collaborations, because we have not turned on a new channel to the company searching for biopharma business. We were not entering deals with someone doing a pancreatic test that they want us to do because we're not in that. What we're doing is very aligned with what we're doing in the clinical business. And I believe gives us a tremendous amount of strategic leverage to help drive the success of the diagnostic or prognostic tests while we're building the value creation lever of the biopharma partner, which is not only adding value through revenue and milestones, et cetera, but it's being done in a clinical indication where we are driving our clinical assays. And I think that is a little bit unique in the way that we, at Veracyte, have pulled that off. And as I said, we don't have it in the investor deck we put up today, but in our corporate deck, we have a really nice illustration of this where just a year or so ago, we were a company with an Afirma thyroid product, a Percepta product and an Envisia product, all answering diagnostic questions. We've extended our thyroid product now to inform on variants infusions across an entire array of whole transcriptome data. We call this platform Xpression Atlas, and we are now extending collaborations that are bringing additional value to us in thyroid cancer on the back of Xpression Atlas. And we're also seeing a lot of enthusiasm in the field as these new drugs come along and there is an attempt to find rare patients that could benefit that would not maybe respond to the typical radioactive treatments. We did the same thing in lung…

Paul Knight

Analyst · Janney. Your line is open.

Thank you, Bonnie.

Bonnie Anderson

Management

You bet. Thanks for being on the call Paul.

Operator

Operator

Thank you. Ladies and gentlemen, I'm not showing any further questions at this time. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.