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

Thank you, Alex. Good afternoon, everyone and thanks for joining us today for a discussion of our fourth quarter and full year 2020 financial results. With me today are Bonnie Anderson, Veracyte’s Chairman and Chief Executive Officer and Keith Kennedy, our Chief Operating Officer and Chief Financial Officer. Before we begin, I would 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, among others, statements regarding Veracyte’s anticipated timing of launches of new products in 2021, Veracyte’s plans, objectives, expectations, financial and otherwise, or intentions with respect to the anticipated acquisition of Decipher, the expected timing for Veracyte’s completion of the Decipher acquisition and its expected benefits, availability of Veracyte’s testing internationally, Veracyte’s total addressable market, the current and future impacts of COVID-19 on Veracyte’s business, actions Veracyte has taken or will take in response to COVID-19, potential timing for a recovery of Veracyte’s business, the catalyst to drive momentum through 2021 and Veracyte’s long-term outlook. 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 17, 2021, 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 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 and Presentations in the Investor Relations section. I will now turn the call over to Bonnie Anderson, Veracyte’s Chairman and CEO.

Thanks, Tracy and thanks everyone for joining us today. Despite the pandemic headwinds, we closed 2020 with strong momentum across the business and are on track to launch multiple products in 2021, including our noninvasive nasal swab test and Percepta Genomic Atlas in lung cancer, and we now have a new general manager base structure in place to drive our business forward. Earlier this month, we hit the accelerator with our agreement to acquire Decipher Biosciences, a world-class precision oncology diagnostics company, whose market-leading tests in urologic cancers will expand our presence into 7 of the 10 most common cancers, further solidifying our global genomic diagnostics leadership and significantly accelerating our revenue growth. We delivered strong revenue of $34.5 million in the fourth quarter, an increase of 11% over the prior sequential quarter and 16% over the fourth quarter of 2019, reflecting a strong rebound from the pandemic. Our genomic testing and product volume was 13,130 tests in the quarter, an increase of 12% over the third quarter of 2020 and 14% and over the prior year. Pending the final acquisition of Decipher, which is assumed to occur by April 1, 2021, we are guiding a 2021 combined revenue target of approximately $190 million to $200 million, which represents approximately 65% growth over 2020 at the midpoint of the range. We anticipate this growth will be fueled by the increased adoption of our 4 revenue-generating products in lung cancer, breast cancer, thyroid cancer and interstitial lung diseases as well as by Decipher’s tests in prostate cancer. While relatively new to the market, Decipher’s tests have gained rapid commercial traction. Now let’s cover the highlights of the fourth quarter and the full year 2020 results. I will start with commercial growth, our first measure of success. Our business has continued to…

Thank you, Bonnie. I will refer to our business and financial presentation which Tracy mentioned earlier and which is available on our website. In her prepared remarks, Bonnie covers the list of Q4 2020 key highlights. Our key takeaways illustrated on Slide 3 as well as content on Slides 4 and 5. I would refer you to Slide 6, where the table and footnote 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 are classified under collaboration revenue and our consolidated statements of operations and comprehensive loss. Post close, we expect to include Decipher’s test and testing services. Turning to Slide 7, we generated 2020 revenue of $117.5 million. Despite the impact of COVID-19, our testing and product business grew 3%. Pending the completion of the acquisition of Decipher Biosciences, which is assumed to occur by April 1, 2021, we expect total combined revenue in 2021 to be approximately $190 million to $200 million, representing growth of approximately 65% over 2020 at the midpoint of the range. Turning to Slide 8, we present our quarterly revenue results to show that the business has proven resilient through the global pandemic and that the U-shape recovery appears to be playing out. Slide 9 shows our performance against six key performance indicators, or KPIs, for the fourth quarter and full year 2020 compared to the prior year period. Our revenue, gross margins, cash flow and volume recovered nicely off the second quarter…

Thanks, Keith. Turning to the beginning of the presentation that Keith reviewed, Slide 3 lays out the key takeaways from our prepared remarks. I will next point you to Slide 4, which showcases our strategic growth pathway and demonstrates how the various facets of our business all fit so well together. This slide also shows the key role we believe Decipher will play in advancing our business. Looking ahead, we believe 2021 is going to be another transformative year for Veracyte. As we integrate Decipher, launch multiple new products and build out our vision of offering a comprehensive menu of tests along the care continuum in cancer and other diseases for physicians and their patients around the world. We believe our new general management base structure, along with key new hires that will further strengthen our marketing team, will help drive strong growth across our products in 2021. Upon finalizing our acquisition of Decipher, we will focus on ensuring a smooth transition of integration into our business with Dr. Tina Nova, Decipher’s President and CEO, remaining at the helm as our new GM of urologic cancers. As I mentioned earlier, we are guiding our full year 2021 total revenue of approximately $190 million to $200 million. This anticipates 3 quarters of revenue from Decipher’s prostate cancer franchise and reflects our expectations of continued strong momentum with Afirma in thyroid cancer, and Prosigna in breast cancer. We expect our pulmonology business to further recover as the COVID vaccine rollout results in hospitals increasingly performing bronchoscopies. With three pulmonology products scheduled to launch this year along with the anticipated near-term opportunity in the large untapped bladder cancer market, we intend to reprioritize our work in the smaller lymphoma market to focus solely on our LymphMark efforts with Acerta Pharma in 2021. We…

[Operator Instructions] Your first question comes from the line of Puneet Souda from SVB Leerink. Your line is now open.

Yes, hi, Bonnie, Keith. Thanks for taking the questions. So the first one I have here is on guide. I just want to clarify and maybe I think it’s just a matter of clarification that, I mean, you are projecting $195 million at the midpoint of the guide, you just did $117.5 million. And if we look at what Decipher did and we look at $39 million that they just did and take a pro forma number for the year, about $157 million in my calculation. We are looking at about a 25% pro forma increase here for growth here for the combined company. That is a bit lower than the projected 30% CAGR that you have had in the past and maybe it’s just a function of not including the first quarter, but I just want to clarify that point and get a clarification at where that delta is coming from?

Yes, I think you are right. We are assuming in our guidance that we closed the acquisition on April 1 and their results are for three quarters, not four. I can walk you through how I get – we are giving top line guidance. But for those building a model, we typically – all the analysts have looked at sort of volume times price to get to revenue, so not to be indicative of guidance. But let me – given that we are going to pro forma this in starting April 1 in terms of models, let me walk you through sort of how to get to the midpoint of 65% growth. Again, this could – any one of these parts move around, so we are only guiding the top line, but this will help with the modeling exercise. So Afirma, we have – we did 33,787 tests in 2020. If we go to 41,000 tests in 2021, that’s 21% growth in volume. Our price is around $2,600 in 2020 per test. So I am looking at revenue for Afirma divided by volume. So, it’s $2,600 for 2020. If we achieved $2,700 per reported test, so it take $2,700 times 41,000 tests, we get to a little just around $111 million on Afirma. Our cytopathology, we think that will be flat, around $7.5 million from 2020 to 2021. On the lung portfolio, we did 3,614 tests in 2020. And as you all are seeing, the lung portfolio during COVID right now, there’s less procedures on there. So we’re flat on our volume into 3,700. I think that will ramp up throughout the year as vaccines come into – I think we’re at like 60 million, 70 million people vaccinated at this point. So we have a ways to go. But…

Got it. Yes, that’s super helpful. And really...

You are clearly going to have to read the transcript after this.

That’s the most detailed...

It’s probably not to me. More questions.

No, I really appreciate it, Keith. That’s the most detailed diagnostics CFO answer ever, but this is great. Thanks for clarifying all that. And I really don’t have any questions beyond that, except that – just if I could just ask one broad question as to – as you shifted towards nCounter, could you give us a sense of sort of how many of the tests have truly shifted to nCounter and sort of how that progression is going to play out throughout 2021? Thank you so much.

Yes. Right now, the only second test that’s planned to be introduced on the nCounter this year is the Envisia test at the very end of the year. And then we are going to be taking a look at how we line up to accelerate menu expansion on the nCounter, especially with our Decipher acquisition. Prostate cancer is an important testing area around the world. And the thesis of that whole strategy is building menu and so we will keep you posted on what the future plans look like. Thank you. Thanks for joining.

Thank you, Puneet.

Your next question comes from the line of Brian Weinstein from William Blair. Your line is now open.

Hey, guys. Thanks for taking the questions.

Hi, Brian.

Thanks for joining, Brian.

Of course. So, just one question as a follow-up to the soliloquy just from Keith, on Decipher, I thought that ASP was kind of trending closer to 2,800 in the fourth quarter there. Am I wrong on that? Because I think I heard you say 2,500 for all of next year. Is my assumption wrong on the 2,800 in the fourth quarter? And if it’s not, were you just being conservative there?

Well, they have – they recognize they are not at the full reimbursement journey that we are with their history. So a little bit over half of their revenue is accrued and the other half is based on cash collections, and that can be lumpy. So sometimes when you’re looking at one quarter, I’m trying – on a blended basis, that’s what it works out.

Okay, got it. Okay. And then also on the guidance, I didn’t hear anything, just to make sure, nothing really from new product contribution. Obviously, these things are coming at the end of the year, but there’s really nothing kind of factored in for NasaRISK, for Envisia, on nCounter, and I’m forgetting – and on Percepta Atlas, nothing really in there, right?

Yes. So we’re...

That’s correct. We’re expecting to get lined up to get a Medicare coverage decision. And as you know, that takes a while. So yes, we don’t point to revenue in the first year of products introduced.

If that changes throughout the year, we’ll update you.

Yes.

Yes. Okay. And then it’s a broader question then. You put that GM strategy in place now. Can you just talk a little bit more about how you think that helps drive revenue? And can you please also review kind of the sales and marketing structure that’s now in place? And what your plans are for that sales and marketing structure over the next year?

Yes. We – in November, we announced the restructuring of sales and marketing and managed care and then lining up some of the operational support functions underneath that by clinical indications. So what it’s going to do for us is bring focus to the two mature products where the market and reimbursement is already in place, lining up our endocrinology and breast cancer business under one GM that includes sales, marketing, managed care, support services, etcetera. And then pulling all of our pulmonology programs under one GM for the same reason, going really deep in clinical understanding and are building the relationship with pulmonologists, which will be the call point for the entire portfolio. That team, of course, has the challenge of launching three new products this year: our nasal swab test, our Percepta Genomic Atlas, and of course [indiscernible] nCounter. So we have a lot of investment going into that area, but we wanted to put a team together that would have ultimate focus in pulmonology. We think that’s the right way to do that. I mean early on, we had that with Afirma because it was our only product, right? And we could get the leverage across three indications. But when we got to 5, it – quite frankly, we needed to do something to bring that focus back, which is what we’ve done. And with the acquisition of Decipher into this new structure, it works perfectly because Dr. Tina Nova is going to stay on and be the GM for urologic cancer. So we now have the business setup in the way that we can drive both focus and growth with this new structure.

Yes. Okay, great. Thank you guys so much for taking the questions.

Thank you.

Thanks, Brian.

Next question is from Sung Ji Nam from BTIG. Your line is now open.

Hi, thanks for taking the questions. I just have a couple of clarification questions. On the prostate cancer, the Decipher prostate expanded Medicare indication. Is that the LCD bowing into effect last year, at the end of last year or is that something new?

They did get an expanded indication toward the end of last year for sure. And there are a couple of new expanded indications going through this year. Smaller opportunities to get coverage and then the bigger decision this year, of course, will be on the bladder cancer test, which already has a draft, and we expect to get to final later this year.

Got it. And then just on the Percepta and Envisia commercial coverage expansion next year – or this year, I guess. Just given the headwinds on the pulmonology franchise last year, just kind of curious what would be driving the expanded commercial coverage, the progress there?

Yes. It’s all the new data – it’s all the new evidence that came out showing really great clinical utility and even though the pulmonology suites have been somewhat suppressed in terms of the number of patients they can put through those suites, obviously, there is still a lot of interest and the data continues to emerge. And it’s really the data that will drive the coverage decisions.

Okay. Thank you. That’s it for me. Thank you.

You bet. Thank you.

Next question is from Tejas Savant from Morgan Stanley. Your line is now open.

This is [indiscernible] on for Tejas. Thank you for taking my questions. Would you talk about the cadence for commercial channel spending as you prepare for NasaRISK and other launches, including bladder cancer test from Decipher?

Sure.

And then on a related note, at what point would you begin to scale up investment to expand the sales force for nCounter? Could this come second half of this year or should we expect that to be a ‘22 event?

That will be a ‘22 and ‘23 event. We will be – have already begun some of the market-shaping activities in Europe for the launch of the expanded menu on nCounter. But much of the early access is going to be sites that have already made the investment in the instrument, and we’re bringing the menu to them, which is a great way to have an intro into that market as we bring more menu on to the nCounter, that’s the point when we will start to accelerate the expansion of installed base. But it’s really not prudent to do that too quickly still with just one or two menu items on the nCounter. So that’s how that will work. And we really have built into our plan through the year, and Keith can kind of give you a little bit of an indication around that, a relatively modest increase because the test being launched is typically taken to the market in a pilot fashion. And until we get Medicare coverage, we won’t really accelerate the efforts around driving growth. That’s always the way we’ve done this with this new – with this type of business. And with the bladder, it’s sort of unique because what we love about Decipher’s urologic cancer franchise is it’s all the same call point. So they will begin to accelerate on the back of a final Medicare coverage decision that comes later this year with the same sales team and the same physician client. So you get a lot of leverage there, kind of like we do in pulmonology. So Keith, do you want to give a little bit of indication on how the spend is expected to go through the year?

Yes. So we – the first quarter is typically, for people that are new to the story, is our slowest quarter. Premiums reset, people tend to go get procedures done at the end of the year. We have COVID cases and things peaking in the first part, we have weather here. So we probably do – we did $31 million last year. Through January, I say, we’re slightly up to last year. February last year, we had a really good month. March, we had a really good month. So we do $31 million, $32 million in the first quarter. We do Decipher in the second quarter, that adds and builds. We generally have a 10% pop in our business from Q1 to Q2, to relatively flat Q2 to Q3, and then we usually get a 10% increase, as you saw this past quarter from Q3 to Q4. So we will have seasonality in the business. In terms of sales and marketing, we’re around, excluding Decipher, around 115 people in the field for U.S. and international. We got about 14 people internationally, 15 people internationally. We will build that where we’ve been between 35%, 40% of revenue on sales and marketing costs. And so we like to – we’re targeting long-term 35% of revenue. Decipher is around that number as well. So we would like to stay, even though we’re launching multiple products, sub-50 and then scale back down to 35% of revenue on sales and marketing. So that’s how we sort of think about it. We burned less than $10 million of cash in 2020. We generated positive cash flow of $4 million in the second half of the year. So the first half of the year is where the burn is. We generally have our burn in the first quarter, there is burn. In the second quarter, that ameliorates and it gets less and then we pick up in the third and fourth quarter. We expect similar trends this year. We will have transaction expenses around the deal, as said, up to $15 million. So I will come back and identify that separately when we file and tell you that’s – where that expense is hitting in our financial statements. And then we – when we spend $600 million to acquire this business, the GAAP accounting is any – their stock is accelerating. So any expense associated with the acceleration, it wasn’t contemplated in anticipation of the deal. We will have to book that expense into our financial statements on day 1, but that will be part of the $600 million. So $700 million to $600 million or a majority of that will actually get capitalized on our financial statements, but a portion of that will hit as a P&L expense for the acceleration of stock. We have not gotten to what that number is. But when we do, we will highlight that number when we close the transaction.

Thank you. That was super helpful. And then just a quick question, would you help us think about the progress around the finalization of algorithm for NasaRISK? I know you mentioned the second half launch but is it fair to expect validation data on the finalized algorithm in the 3Q timeframe?

Yes. That will come out in advance of the launch of the product, for sure. There is a lot of analytical work and assay optimization and testing that has to happen once we lock the classifier to prepare the laboratory and show the robustness in the assay in advance of unlocking the validation data. That usually happens kind of the last testing that is done before we wrap up and then go to market. But at this point, we are – you develop a tremendous confidence based on all of the data and all the subtype analysis that you look at. And so we’re in the mode now of lock and verification testing and moving towards that launch.

Okay. Thank you.

You bet. Thank you.

Next question is from Thomas Flaten from Lake Street Capital. Your line is now open.

Good afternoon, guys. Thanks for taking the questions. Just a quick clarification on the Decipher field team, I know there was a plan in place there to add about thirds to that field force. Is that plan still a go or is that on hold pending the integration?

No. We actually – we are in agreement to go ahead and add. I think it was in addition – maybe five additional hires coming into this year and that’s lined up to plan for the bladder test coverage decision as well. So that will happen, but it’s relatively modest when you consider.

Yes. And then, Keith, is there – are there potentials for synergies in the middle of the P&L, maybe, most specifically, the G&A line or is this – should we just think about stapling their numbers onto yours as a preliminary step from a modeling perspective?

Yes. I’d staple the numbers on. They are running really well and lean as a private company, and we’re focused on helping them remain successful in accelerating their volume. And they have no plan to start the business or make any changes that would risk that.

Yes. And then just one final one, with respect to the U-shape recovery, I think that kind of panned out really well, particularly on the Afirma side and a few quarters ahead of where we thought we might be. Could you give some more color around what you’re seeing with respect to the pulmonology suites, how slow are they relatively speaking? And are they providing any intelligence to your field team about when volumes might recover, etcetera?

Yes. Our field team’s plugged in. I can tell you there has been a ton of interaction, medical education, everything like that has continued to unfold. The challenge is that, first, these pulmonologists are the same pulmonologists that are caring for COVID patients. So in ICUs, those segregated in the ward, and all of that. As Keith pointed out in his prepared remarks, January was a really high infection rate. So pulmonologists have been yanked in to help with the pandemic because that is their specialty. So that’s part of it. And then the second part of it is until patients get vaccinated, there is still an uncomfort of going into a hospital and undergoing a procedure to get worked up for either early detection of nodules. And there is less screening going on to find those nodules just like there is less mammograms going on to find breast cancer patients, right. So it’s kind of the downhill effect of just the overall impact of the pandemic. The reason our Afirma business rebounded much quicker, which is what we anticipated, by the way, is because about half that market is in the community doctor office market, and those doctors quickly maneuvered to not put patients into the waiting room, to set them up with text messages so they can wait in their car, come in one at a time. And even though volume going through the doctor’s office still isn’t what it may have been a couple of years ago, the doctors maneuvered around the safety factors and got back to business of seeing patients. So we think the pulmonology products will rebound. Afirma kind of was ahead of the curve and the pulm products are about where we thought they would be with the U curve, so, no big surprises there.

Great. I appreciate that. Thanks so much, guys.

Thank you.

Next question is from Mike Matson from Needham & Company. Your line is now open.

Hi, thanks for taking my questions. I guess I just – I appreciated the comments on the kind of OpEx outlook. But I was wondering if you could maybe comment on gross margin outlook for 2021. It sounds like you are expecting a little bit of a benefit there from Decipher.

Yes. We are targeting 64% to 66% gross margins as we layer in products.

Okay, thanks. And then from a share count perspective, post this latest stock offering seems like it should be around 66 million approximately. Does that sound right?

Yes. We had 58 million and I think we issued 8.5 million.

Okay, thanks.

Yes.

Alright. That’s all I have.

Thank you.

Next question is from Sandy Draper from Truist Securities. Your line is now open.

Thank you so much. Not a whole lot left to ask here, so maybe two quick ones on nCounter. I think Keith, you said 30% growth. Just trying to be – clearly, you guys have turned that around and is going well. Is that growth mostly just over COVID comps? Or maybe talk to what you’re doing that’s driving that business because right now, you’re not expanding the nCounter panel, why is it getting better? And then the second follow-up probably for Bonnie, sort of – so leave a comment. It sounds like with Decipher, you may be reshuffling your thoughts on what the next 1 or 2 products are on nCounter. And am I reading that right? And I’m not expecting you to show me the card, but just think – it sounded like you were suggesting now you’ve got two more areas, you’re going to sort of rethink the strategy of what’s next. Thanks.

Yes. I mean – yes thanks for the question. First of all, yes, Prosigna is going very well. I think in our hands, the team is just highly focused. We’ve got a lot of good clinical support people and dedication and now a very well-trained team leading it. There has been some great data come out on Prosigna in last year. We’ve made a few really great hires, especially in Europe, to lead new market segments and businesses as country managers. And we just got a Germany coverage decision, which is really going to fuel some nice light into that as well. So we’re seeing the Prosigna business go really strong. We’re very, very pleased with that under our attention. And then, yes, I think when you are sitting here with a portfolio of tests that address 7 of the 10 top cancers by incident, it makes sense to rethink what is the best priority of moving tests onto the nCounter. And I think what we’ll be doing is maybe thinking out of the box on how we might be able to accelerate that down the road. And we’ve had a very good success sort of optimizing the Envisia classifier, the test, the assay and the algorithm onto the nCounter platform. It’s gone extremely well. So we think that we’re in a position to maybe accelerate some of those over the next few years, won’t happen overnight. But prostate is obviously a really big market to go after. If we end up with breast cancer, prostate cancer, lung cancer, IPF, I mean that begins to build out a menu that you can take anywhere in the world.

Thanks, Bonnie.

You bet. Thank you.

Your last question comes from the line of Paul Knight from KeyBanc. Your line is now open.

Hey, guys. Last question, but I promise it will be pretty good. The nCounter historically was good at taking less-than-optimal samples and delivering good results. Are you seeing increased sensitivity and specificity with the nCounter at this juncture?

It’s a fantastic design instrument. And I think that the elements that make it a really, really great design to do what we’re doing for using it as a distributed platform for building menu for global markets is that the sophistication of the technology, being able to measure protein DNA, RNA, being able to put 800 features of genomic content into a given test. That capability is rich, yet the complexity is built into the cartridge design and the instrument itself is very simple. And that combination made it really ideal for us. So love the platform. We love being able to be in a position now to build out menu and achieve what our vision was just a couple of short years ago and it’s now underway.

Yes. And then is there any change in the cadence in the schedule on LCD – CMS meetings and their coverage decisions based on COVID or any structural changes that’s undergoing there?

No. They have maintained a pretty good process. It’s pretty clear now what data they want, what to put into your technical assessment. I mean we’ve been through this now numerous times. So we’re going to be lining up with the new products coming to market, trying to accelerate getting the submission of the publications that are needed and then getting those publications out so that they can be submitted as part of the technical dossier and to MolDX. And that’s a real priority. In fact, we have some corporate goals built around that effort. Because it’s not just getting the product to market, it’s getting the evidence published so that it can be used to accelerate Medicare coverage. And then on the back of Medicare coverage is when we can expand volume growth and get the revenue resulting from that.

Okay, thank you.

Alright. Thank you.

You don’t have any more questions at this time, presenters.

You can go ahead and close the call.

Alright. Ladies and gentlemen, that concludes today’s conference call. Thank you for your participation. You may now all disconnect.