Veracyte, Inc. (VCYT) Q2 2021 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen. Thank you for standing by. And welcome to the Veracyte's Second Quarter 2021 Financial Results Conference Call. At this time all participants are in a listen-only mode. After the speaker presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I'd now like to hand the conference over to your speaker Ms. Tracy Morris, Veracyte's Vice President of Corporate Communications and Investor Relations. Please go ahead.

Thank you, Sherry. Good afternoon everyone and thanks for joining us today for a discussion of our second quarter 2021 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; Rebecca Chambers, our Chief Financial Officer; and Bonnie Anderson, our Executive Chairwoman. Veracyte issued a press release earlier this afternoon detailing our second quarter financial results. This news release along with a business and financial presentation are available in the investor relations section of our website at veracyte.com. 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 are subject to risks and uncertainties and the company can give no assurance that they will prove to be correct. Further, 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. I will now turn the call over to Marc Stapley, Veracyte's CEO.

Thank you, Tracy. And thanks everyone for joining us today. Before jumping into our strong quarterly results, I would like to acknowledge and thank our outgoing CEO, and incoming Executive Chairwoman, Bonnie Anderson. Bonnie grew Veracyte from just a concept into a global genomic diagnostics company with a remarkable track record for bringing highly differentiated and clinically impactful test to market that improve outcomes for patients all over the world at every step of their journey. I have enjoyed working closely with Bonnie over the last few months. And I'm very excited to continue to partner with her and the team to grow Veracyte into a global cancer diagnostics leader. This has been a very encouraging first quarter for me. Our team delivered outstanding growth as we continue to execute on our compelling strategic vision. We reported second quarter revenue of $55.1 million, an increase of 166% over prior year and 50% sequentially. Our total genomic volume at approximately 21,000 tests was up 215% compared to the same period last year and up 44% sequentially. This impressive outcome was driven primarily by our urology and thyroid businesses where strong commercial execution was bolstered by increased access to our physician customers. We believe that our accomplishments during Q2 set us up nicely for the second half of 2021 and beyond. I would like to share an update on our progress during the quarter to drive commercial growth, evidence development, pipeline advancement and global expansion, including the integration of the Decipher and HalioDx businesses. These are key areas that we are focused on as we build one global company under the Veracyte brand. Beginning with commercial growth, and specifically Afirma, our commercialization efforts have centered on driving this product to become the standard of care in thyroid cancer diagnosis. We estimate that the test has helped over 100,000 patients avoid unnecessary thyroid surgery since its introduction in 2011. We continue to see strong Afirma testing growth in Q2 with an approximately 120% revenue increase year-over-year, as the business recovered relatively quickly from the pandemic effects and a nearly 10% sequentially increase driven by customer growth and patient engagement. Adoption of the Decipher Prostate test has been propelled by new Medicare coverage decisions received in late 2020. These managed care wins led in part to Decipher Prostate revenue of more than $18 million in the quarter, a record for this product line. Additionally, in late Q2, we signed a new contract with a major national health plan to make the Decipher Prostate test and in network covered benefits to eligible patients among the plans approximately 20 million members nationwide. Our pulmonology business also gained momentum in Q2. We added a number of new accounts including several large institutions for the Envisia Genomic Classifier, which is used to improve diagnosis of interstitial lung disease, including idiopathic pulmonary fibrosis. Percepta testing continues to recover, although more slowly, with our physicians still performing fewer lung cancer diagnostic bronchoscopies from prior to the COVID-19 pandemic. Our Prosigna breast cancer business continues to improve as well. We were pleased that Germany recently began reimbursing for Prosigna and optimistic that other EU countries will similarly adopt coverage policies. The test reports intrinsic breast cancer subtypes in the EU, which can further inform treatment decision making. Additionally, its ability to be performed locally means the barters do not need to send patient samples overseas. Our next strategic growth driver is evidence development, where we also made significant progress across our portfolio of products. Highlights include the presentation of five Envisia abstracts at the American Thoracic Society or ATS Annual Meeting in May, from prominent institutions such as UCLA. These abstracts demonstrated the test performance and clinical utility while also reflecting the test growing traction among interstitial lung disease ILD thought leaders. At the ASCO meeting, researchers shared new data on the Decipher Prostate test further demonstrating this prognostic information can help physicians tailor treatment decisions for men with prostate cancer. These included an oral presentation describing findings from the ongoing prospective VANDAAM study. Results confirmed that our test predicts aggressive prostate cancer better than standard clinical risk factors and with the same accuracy in African-American men as non-African-American men. This is an important finding given previous data has shown African-American men to be more susceptible to aggressive forms of the disease. Additionally, in July, a retrospective analysis of patients in the SPARTAN study was published in JAMA Oncology, suggesting that the Decipher Prostate test can identify those patients with locally advanced prostate cancer, who are most likely to benefit from apalutamide, a second-generation androgen receptor signaling inhibitor in addition to androgen-deprivation therapy or ADT. This is a population which consists of an estimated 165,000 men worldwide for whom physicians have previously lacked genomic biomarkers. The Decipher Prostate Genomic Classifier is currently being investigated in seven NCI sponsored Phase III prospective randomized controlled clinical trials, as well as 13 additional prospective trials, many of which require Decipher Prostate testing for study inclusion. This prominence in clinical trials is driven by the quality of the Decipher Prostate test and the massive amount of genomic data we collect on every sample in our grid by repository. Moving to activities to advance our pipeline, our third strategic growth driver, we made good progress in the quarter and remain focused on the launch of key new products. We are very excited to soon launch our Percepta Nasal Swab test to improve the early assessment of lung cancer, as we believe this is a large unserved market. Today, physicians lack objective tools to confidently guide care for patients with suspicious lung nodules. We were very pleased to present pivotal multicenter clinical validation data at the ASCO meeting in June, showing that all non-invasive Percepta Nasal Swab test will enable doctors to tell their patients with suspicious nodules that they are low risk for cancer and can likely avoid further workup with very high certainty that they have not missed a cancer. At the same time, physicians can be confident in guiding patients who are high risk for cancer to further diagnostic procedures, while those classified as intermediate risk will remain a candidate for current standard of care. We believe this test has the potential to be a game changer in lung cancer early detection, particularly among the approximately 15 million people in the US who are now eligible for annual screening. We plan to begin making the Percepta Nasal Swab test available to a limited number of sites in the fourth quarter, which will enable us to assemble the data needed to secure Medicare and private payer coverage, which we believe will be granted 12 to 24 months post launch. Another key product in our pipeline is the Percepta Genomic Atlas, which is intended to help physicians make informed treatment decisions for the approximately 350,000 patients eligible for comprehensive genomic profiling each year. At the recent ATS and ASCO meetings, we presented data demonstrating this test accurately detects known lung cancer gene variants using the same small biopsy samples that are used for diagnosis. This ability can simplify the physicians' workflow and accelerate time to appropriate treatment compared to other genomic profiling tests with few samples acquired post diagnosis. We plan to finalize the Percepta Genomic Atlas in our CLIA lab by the end of the year with the commercial launch shortly thereafter, and anticipate receiving Medicare and commercial coverage of this test within six to 12 months post launch. We will offer our Percepta Genomic Atlas as part of our comprehensive lung cancer portfolio, which will also include the Nasal Swab and Genomic Sequencing Classifier. Our next new product is the Decipher Bladder test, a genomic sub typing tool that helps physicians manage treatment decisions for patients with bladder cancer. We recently received final Medicare coverage policies through the MolDX program, including from Meridian Healthcare Solutions, which administers Medicare payments for our CLIA lab. This decision ensures Decipher Bladder is a covered benefit for the nation's more than 62 million Medicare beneficiaries. In the United States, more than 80,000 individuals are diagnosed with bladder cancer annually, approximately 44,000 of which will have the type of disease indicated in these policies. The test is available to order and we plan to methodically drive the commercial launch during the third quarter now that Medicare reimbursement is fully in place. We're also working on the Envisia Genomic Classifier enabled on the nCounter instrument for use in international markets. We unbelt data at the ATS meeting showing the clinical performance of the classifier currently running our CLIA lab on our RNA sequencing platform is maintained when the test is adopted for the nCounter analysis system. Given our pending HalioDx acquisition, we are revisiting our end count to launch priorities, focusing first on the manufacturing transition, while in parallel we begin to advance other future products such as the Percepta Nasal Swab and Decipher Prostate test in the same way that we have advanced Envisia. As you know, we believe that our HalioDx acquisition and our key management hires have solidified the foundation for scaling our business globally. With HalioDx, we expect to gain IVD test development and manufacturing operations in Europe, giving us end-to-end control of our IVD product business. Further with the addition of the Immunoscore colon cancer test, we will expand our scientific expertise into the emerging immuno oncology field, as well as our reach into eight of the top 10 cancers as defined by US incidents. Bonnie is leading the acquisition and the team has been diligently working on the integration planning, which is progressing well. We look forward to soon welcoming the talented HalioDx team to the Veracyte family. We also made key hires to further strengthen our executive leadership team and position the company to scale globally. Rebecca Chambers joined us this month, the CFO, Rob Brainin, the CBO and Bill Zondler as CIO. With these key appointments augmenting the existing talented executive leadership team and in addition to the experienced leaders from HalioDx, we are primed to advance our exciting global strategic vision. We are building a leading global diagnostics company that transforms care at every step of the patient's journey from the early detection of cancer and other diseases to diagnosis and treatment. And with our strong second quarter results, we are well on our way. I'll now turn the call over to Rebecca to provide a detailed overview of our results.

Thanks Marc. As Marc mentioned, we are very pleased with our second quarter performance. We generated 55.1 million in total revenue, an increase of 166% over the prior year quarter. Testing revenue equaled 50.8 million with average testing ASPs of approximately $2700 per test, roughly flat sequentially. Product revenue contributed 2.7 million and biopharmaceutical partnership revenue equaled 1.6 million. These results were primarily due to strong commercial execution from our thyroid and urology businesses. Moving to genomic testing volume, we reported nearly 21,000 tests across our portfolio in the second quarter. Afirma, Envisia and Percepta GSC approached 12,000 tests in total, an increase of 123% compared to the second quarter of 2020 and 12% sequentially. While Decipher contributed approximately 7000 tests of the quarter. Prosigna product volume was approximately 1900 tests or 50% growth year-over-year and a 12% sequential decline as we experienced typical seasonality given Q1 stocking orders. Gross margin equaled 68%, an increase of approximately 200 basis points sequentially, primarily due to a lower cost per test driven by fixed cost absorption tied to higher testing volume. Operating expenses, excluding the cost of revenue decreased 25 million sequentially, equaled $45.1 million. R&D expenses grew $900,000 sequentially to 6.2 million, driven primarily by the full quarter impact of the Decipher R&D organization. Sales and marketing expenses grew $3.4 million to approximately 20 million, again, driven primarily by the full quarter impact of Decipher. G&A expenses were $15.5 million, including approximately $3.4 million of HalioDx and Decipher acquisition related expenses. We recorded a net loss of $9 million. Additionally, the company generated $2 million of cash from operating activities, and we ended the quarter with $328 million of cash and cash equivalents on hand. Turning now to our 2021 guidance, we are increasing our revenue expectations to $200 million to $208 million, representing 69% to 76% growth over the prior year. This guidance reflects our strong Q2 results, as well as our expectation for continued momentum in the Decipher and Afirma businesses. Additionally, we expect to experience typical summer seasonality and as a result of forecasting third quarter revenue that is flat to slightly higher sequentially. In all, we are very pleased with the quarter and remain confident in our position and ability to execute on our plans as we build on our success through 2021 and beyond. Thank you for your time. I will now turn the call over to Bonnie to say a few words.

Thank you, Rebecca and welcome to Veracyte. It's great to have you here. I would like to take a moment to thank the Veracyte team for their incredible focus that led to tremendous accomplishments in Q2. I am so proud of the team and could not be more pleased now to have Marc at the helm of Veracyte. Under his leadership with our existing team and the new leaders we brought to Veracyte, I can't imagine the company being better positioned to deliver on the global vision that we put in place a number of years ago. That vision comes together with the final strategic puzzle piece, the HalioDx acquisition. And I'm pleased to be working with that amazing team to complete the acquisition and plan the integration. I look forward to working with Marc and a thoughtful and deliberate transition of the company's leadership to achieve Veracyte's full potential as a global cancer diagnostics leader. And with that, I'll turn the call back to Tracy.

Thank you, Bonnie. We will now go into the Q&A section of the call. Operator, please open the lines.

Thank you. [Operator Instructions] Our first question will come from Brian Weinstein with William Blair. Please go ahead.

Hey guys, thanks for taking the question and welcome to all the new people and Bonnie good to hear your voice as well. So I guess, just stand out here, obviously, is Decipher in the quarter. You highlighted some of the things that were going on there. But can you just give us a little bit more detail on the growth drivers there? I know there's some sales force additions. Obviously, you talked about some of the reimbursement stuff, but anything else that you can kind of point to? And then within that Decipher business, as you think about your full year guidance, how much of that is made up of Decipher? How should we be thinking about that ramping through the year?

Yeah, thanks, Brian. So Decipher, as you can clearly see, had some good momentum. And yeah, we kind of go back to the decision we made to acquire the business. It was the perfect time to do that. The coverage decisions the team was able to get late last year and then the expanded indications, and then the continual publications based on the strong clinical data they amass really leads to good momentum in that business that I think helps drive it on a go-forward basis, which is why we acquired it. If you think more specifically about the momentum right now, clearly, the Decipher has recovered very well from the early hits from the pandemic. A lot of that work is done in physicians' offices, which are community based. And those procedures are continuing to take place, those consults are happening. And so we're getting access clearly to those offices. So that's helping to create a little bit of a tailwind for our business. But other than that, it's a phenomenal test with good momentum. And I think all of those factors lead into the strong performance that we've seen so far this year. In terms of what's in the guidance, as Rebecca said, the two key elements of what's driving our increase in our guidance is really Afirma and our Decipher Prostate businesses.

And just one thing to add to that Brian, I would expect the Decipher business to follow the same seasonality trends that we're projecting for the entire portfolio of products. So call it roughly flat to slightly up sequentially in the third quarter and then some growth from there in the fourth.

And then maybe one more thing to add Brian, I mean, it's not - it covers Decipher, but it really covers our entire business. The one thing that we've thought about here a lot is what's going on with the COVID situation and the Delta variant. And we were assuming, generally, that continues as it is right now. But of course, if that has a significant impact it affects everybody's business in the future.

Yeah. And I was going to kind of ask something around that. So obviously, yesterday Exact had some comments about access to clinician offices. And that being kind of a factor in how they're thinking about the back half of the year. How are you factoring in access that your sales reps are having across your different call points? And can you give us any idea what that access - kind of by call point looks like today?

Yeah, I think it makes sense to really go business by business, because there are some situations where there is an impact and somewhere it's not. So if you - like we just talked about the Decipher business, the prostate business that's been very resilient. The Afirma business thyroid has also been extremely resilient and recovered quite quickly, and we're getting good access. Again, a lot of community based physician work there. I'd say on the breast side, starting to come back quite nicely. But where we're still seeing a significant impact is on the lung side. And that's not really surprising, given really two factors. One, it is a lot of hospital based procedures, obviously, with the bronchoscopies. And secondly, the physicians involved are the physicians who are also very involved in the COVID cases and dealing with patients. Plus, yeah, I think one of the other factors is in terms of hospitals opening back up and patients returning themselves. Some of them are more reticent to do that, especially as we see what's going on right now. So our guidance has assumed that that business continues to be impacted by COVID. But the other businesses continue as they are, as I said, if the Delta variant causes changes in access more generally, then that could affect the parts of our business that are resilient right now.

Okay, great. I have lots of other questions, but I we'll certainly let others jump in and then we'll get you on the follow up call later tonight. Thank you, guys.

Thank you.

Thanks Brian.

Thank you. Our next question will come from Puneet Souda with SVB Leerink. Please go ahead.

Hey, great guys, thanks. So Marc, first question to start, tying it all together with a number of tests you obviously have, Decipher is growing, Afirma is recovering. And so just putting it all together is it safe to say that prior to the pandemic Veracyte was growing approximately 30 - slightly over 30% as a top line grower. Is that a profile that we ought to think or maybe even better going further out into sort of 2022 and beyond? Is that a right way to look at the profile both Decipher, Afirma and a number of other growth drivers that you have.

But one thing - I'll start and Rebecca can add on. But one thing I would say is obviously, we're not out of the pandemic yet. Plus, I haven't been here very long and Rebecca even less time and one thing that we haven't done yet is continue to build upon the long-term plan. What I would say is, we're not changing the strategy, we love the strategy, and that's what we're executing on. So that's not changed. But like I say, we're not at the pandemic, and we haven't really had too much time to build on that yet. Rebecca, do you have anything to add?

No, I think you covered it well.

Okay, and then on the Nasal Swab, just trying to understand the sort of the trajectory that you're expecting here. This is an - obviously, an important assay in the marketplace. I'm just trying to understand whether should we look at Afirma as an example that where a trajectory that can potentially grow to, but just given the market opportunity should it grow faster? And are you assuming any large scale trials here in order to drive adoption, both US and globally?

Puneet, sorry, I missed a part that you said, should it grow faster than what?

And will it hold the same trajectory that Afirma followed back at that launch.

It's a good question and of course, Afirma was launched many years ago, and has been very successful, has significant coverage at this point and penetration. But what I would say on the Nasal Swab, by the way, firstly, it's an incredible test and we're really excited about it. It opens up a significant market. But more importantly, it really helps physicians, and it really helps patients. There's a lot of uncertainty today for lung cancer patients. And this really does help with the classification. Our launch of this test is very deliberate and methodical. We're going to launch it in a limited number of sites. And that will help us gather the evidence that we need to drive reimbursement as you would expect. That can take a while. It could take 12 to 24 months post launch to get reimbursement. So the way I think about the Nasal Swab is this is - we're building a portfolio here and layering all these different businesses on top of each other that have - that are at different stages of their lifecycle like Afirma that is very advanced, Decipher that's now taking off and then the obviously the Nasal Swab several years and multiple years into the future. So I would think of it like that. It's a revenue driver much later than these other businesses that will continue to drive over the next couple of years.

And if I could just squeeze in one more, in terms of the gross margin outlook, Rebecca, just wanted to make sure what you're baking in for this year and longer term when nCounter kits come in to the picture with the HalioDx manufacturing and ultimately, manufacturing of the instrument itself. Where do you think those gross margins could be? And then more importantly, if you could just lay out for us the timeline for the nCounter kits and potentially the instrument manufacturing as well? Thank you.

Yeah, I would be happy Puneet. So on the back half of this year, obviously, we had some very solid gross margin performance in the second quarter. At a very high level, not - we didn't give formal guidance to this end, but I would expect gross margins in the mid to high 60s for the back half of this year given the mix of business that we're currently projecting. Going forward specifically with nCounter, obviously, the benefit of HalioDx is that it will, as we transfer manufacturing over to that facility in the future, that will benefit the gross margin profile of the nCounter placement in kits. That being said, as Marc just referenced, we're not ready to give long-term guidance or even color at this point in time with regard to the trajectory of gross margins beyond where we are in the second half of this year. On the timeline for getting all of that accomplished, I'll defer to mark. But you know, I think, as we highlighted in the script, step one is completing the requisition and that will be done this quarter. And I think we're being as proactive as is allowed for from an integration standpoint and that's also going very well. So we are on our way to meeting the timelines that Marc will share shortly. But at this point in time that's also still news that we'll be excited to share with you at the appropriate point in time.

Yeah. Thanks, Rebecca. Let me add to that. So very happy with the progress that's been made on the HalioDx integration, one of those key words streams as you can imagine is manufacturing transition, as Rebecca said, already gives us some control of our supply chain and gives us opportunities in gross margin in the future. Of course, yeah, those opportunities come to light when you've launched a lot of menu and you place a lot of instruments and you're driving a lot of testing, so that's going to be the key. The manufacturing transition is something we want to move as quickly as possible on and Bonnie is leading that. And Bonnie I don't know, if you want to say a few words about that in a moment, but it's something that is really important to us as a priority, and then getting that menu go by completing the development work and then the commercialization work of tests on that platform is next.

I'll just say that, in the early work is integration, what we're excited about is learning that we've picked a company with a team that's got tremendous experience going there. They're lined up around the test, the timelines and execution plan and I think we'll have a lot of success getting it done.

Thanks Bonnie.

Okay, thanks, guys.

Thanks Puneet.

Thank you. Our next question will come from Sung Ji Nam with BTIG. Please go ahead.

Hi, thanks for taking the questions and congratulations on the quarter. Just a couple of questions, one on Decipher would love to get your insight in terms of the competitive dynamics there, obviously, very strong growth there in the quarter. And also, obviously, year-to-date, just kind of curious if you're taking share competitively or is it too early to tell?

Yeah, I mean, I think that focus on really how we look at our Decipher Prostate test and its benefits and advantages. One point is, it's a really strong test, in terms of its performance, and that is supported by a lot of the clinical data that's been amass. The fact that I think I mentioned in the script, the number of trials that Decipher is in, in addition to the fact that many of those trials actually require the Decipher test to be run, really demonstrate the performance of that test and gets it in the mind share of key opinion leaders and physicians. So we're very excited about the way that's growing. I think it's fair to say, our goal is to penetrate as much of the market as a lot of market is left unpenetrated. And along that journey, that may mean that some physicians move over to that test, and that will be great. But our goal is to put this in the hands of more clinicians and ultimately in the health records and decisions of more patients.

Great, that's super helpful. And then my follow up is just kind of around your pulmonology franchise and especially the new product launches slated for later this year. Given the limited channel access, just kind of curious in terms of how should we think about are there risks in terms of your launch plans, early access plans and whether or not you might have contingency plans in place?

Yeah, so I think there's a few pulmonology tests that are coming out, including the Nasal Swab and the Genomic Atlas. And the way to think about that is, of course COVID itself over the last year and a half has affected our ability to get clinical samples to some degree. But as you saw, not to a degree that it stopped us from being able to publish the data when we needed to and have those tests ready to launch very soon. As I mentioned on the Nasal Swab, we're going to launch in a limited number of sites. And I think it's fair to say we have sites that are excited to join us already. And so I don't see that as being a major barrier to getting that launched on time, which is our plan. And then the same on the Genomic Atlas, the work that we needed to do to get already to launch in our CLIA lab is almost done.

Thank you so much.

You're welcome, thanks.

Thank you. Our next question will come from Matt Sykes with Goldman Sachs. Please go ahead.

Hey, guys, this is Dave Delahunt on for Matt. Welcome, Rebecca. Congrats on the fantastic quarter. Great to see you guys are having a strong pass of the baton. Yeah. So you presented great data on Percepta at ASCO, really exciting. Could you tell us a bit more about the limited number of sites that you'll make it available to? How many subjects are you looking to reach to get enough data to submit to CNS? And longer term how are you thinking about getting into guidelines at some point?

Yeah, so I'll start by saying the specific number of participants that we need to send out the planning that we're still working on. In terms of the number of sites, it's really more about the - probably 50 to 100 is what we said before, I know on probably the smaller end of that, and we're looking at a diverse set of sites across the board here. What we want to make sure with this rollout is that are all cross section of physicians' offices are able to run the tests in the bronchoscopy suite or outside and ensure the whole end-to-end process works really, really well. And that is the best way to ensure ultimately reimbursement and success of the test. This is one of the things that I think I've said before that has always impressed me and really impresses me, now I'm here at Veracyte a site about the company is the muscles that we've built around reimbursement and how to do these clinical utility studies and launch a product are really strong. And so we know how to do that. So there's people in our organization that are way smarter than me on that who have done an amazing job. And that's what they're going to do with the Nasal Swab.

Great and so you guys have been really successful at corporate development. Could you tell us more about how you're thinking about build versus buy right now and what you're seeing in the market currently?

Yeah, I think that's what is - to talk about that is, look we're trying to - our strategy is to grow our business in three dimensions geographically, which were really kick starting into a very high gear with their HalioDx acquisition. Across the care continuum, where I think products like the Nasal Swab really do help advance that by moving into earlier detection. And then across indications, now with HalioDx, we'll have eight of the top 10 indications. So as far as that strategy is concerned, every one of those dimensions is moving forward at a rapid pace and execution on that is our key focus. Then in terms of going forward, build versus buy, we will consider opportunities, I wouldn't say we're actively going out looking to do more, but we'll consider opportunities and if they achieve one of those three objectives geographic, advance our menu or the care continuum, then it might be something that's worth considering, but not an immediate priority.

Yeah, as Marc mentioned, right now, we're very much focused on the integrations at hand more so than anything else.

Great. Congrats on the quarter.

Thank you. Thanks Dave.

Thank you. Our next question will come from Thomas Flaten with Lake Street Capital. Please go ahead.

Good afternoon, guys. Thanks for taking the questions. Just one on how we should be thinking about cash flow. There was some - right at the end of '19 I think there was a lot of excitement around going cash flow positive on the operating line. And there's been some up and down since then. How should we think about that going forward? Are you guys feel pretty comfortable you're in a position to drive positive operating cash flow going forward or any thoughts on that?

Yeah, thanks for the question. And obviously, we are very pleased with this quarter. I think what - as you look at the back half of the year, traditionally, that is when the company has had the ability to generate cash flow from ops and in a positive way and we would expect this year to be no different. On a go forward basis, I think we need to go through the 2022 planning and beyond. But I think our intention is to have the financial discipline to achieve that obviously, barring any one time investments here or there. So that is our intention, probably not willing to sign up fully today, given we're still kind of digging through the strap plan. But our intention is to continue to torture financial discipline and absolutely have an eye toward cash generation over the longer term.

And then reflecting back on the fact that Nasal Swab will launch here pretty soon and going back to the original kind of key objectives when the J&J deal was signed a few years back was to get Percepta on the market or the GSC and then to get the Nasal Swab on the market. How do we - how should we think about the J&J collaboration going forward?

Yeah. I think, really a couple of things. Firstly, we're building a long portfolio here of products. You just mentioned to them, as well as the Genomic Atlas. And we put those together plus, of course, our Envisia portfolio in lung as well. We put all that together, we have a very strong, lung portfolio across the care continuum. A lot of that has come from the company we've acquired and the work we've done with J&J. And that collaboration has gone extremely well. The lung business is clearly important to them as it is to us and opportunities to collaborate further like we already are on future clinical trials is something that we're really going to focus on with them.

Excellent. Congrats on the quarter guys, Thanks for taking the questions.

Thank you.

Thank you.

Thank you. Our next question will come from Tejas Savant with Morgan Stanley. Please go ahead.

Hey, guys. Good evening. Rebecca. It's good to be working with you again after all these years. Marc, maybe I'll start with you on the volume recovery here, good strength in the quarter. Can you pass out for us the degree to which it was catch up related to folks who had just pushed out visiting the physician and how do you see that sort of trending forward?

I would say, in general, it's very hard to do that, specifically, as you can probably imagine. But I would say there's a few indicators, I mean, one is, you look at the - there was some data recently around the number of prostate cancers that are expected in the United States is I think it was 248,000, which is something like a 30% year-over-year growth. And that has been attributed in some papers in some journals to the effects of COVID and people not being able to have access or not going to the physician. So I think that that could be an element of that. I believe there's an element of that around pulmonology too due to incidences of lung cancer clearly ongoing away. And there are probably a backlog of visits that need to happen and will happen at some point. So hard to give you any kind of quantitative specific data on it, but anecdotally, it feels like there's some element of that. But once we stabilize post-COVID, at some point, then it just settles to the normal growth. And at that point, it's really more about us driving our tests into those physician offices versus any macro things that are outside of our control.

Got it. Fair enough. And then I have a couple of questions on nasal risk here. You spoke that 12 to 24 months timeline to get reimbursed? Is there anything you can do to accelerate that timeframe? And in terms of just further data releases on the assay, in terms of things like correlating performance with nodule size and length of smoking history, et cetera, that's something I believe Giulia had spoken about when the data dropped and I'm just curious as to whether you have a timeline to share with us today around when that will happen going into the back half of this year and early next year perhaps.

Yeah, on the second part of your question Tejas, I mean, we've mentioned before we've looked at other attributes, for example, like nodule size, and so on and stage of cancer. We've obviously been gathering data on that and that'll come out at the appropriate time when that's finalized on that one. What was the first part again?

Anything you can accelerate with regard to 12 to 24 months.

Yeah, back to - obviously, in 12 to 18 months, what I'd like to do is be at the short end of that. But there's so much of the processes outside of our control. So what we're really focused on is what things we control, let's get those done and get them done right, get them done in the most optimal way, move as quickly as we can on that. And we won't be shy about putting whatever resources we need to do on that because this is an important product to get out there. And then we're in the hands of the reimbursement process. Like I said earlier, we've got the muscles to work through that. But there's so much of this is outside of our control.

Fair enough and one final math question for Rebecca, I think you mentioned Rebecca, that 3Q was expected to be flat to slightly up sequentially. And so if I do the math at the midpoint of the outlook, you're essentially calling for a flat to down sort of fourth quarter. And I'm just curious as to why the conservatism? What are the offsets that you're trying to sort of budget for here? And as a related follow up, is there anything embedded in the guide for either the bladder test or perhaps the HalioDx close or not yet?

Yeah, so let me take the last part of that first. The answer to both of those is effectively no. So you don't have to worry about that and the puts and takes. But effectively Tejas, I think we are seeing the momentum in the Decipher and Afirma businesses as cited. We did give the range as, as we have of 200 to 208, really to try and put some sort of range in there with regard to COVID outcomes. Obviously, we can't perfectly control what COVID's going to look like in the second half. And I'm not saying even if it's awful that's within the guidance range. But our thought is given where we are, given what the outlook looks like for COVID, we wanted to make sure at least a little bit of that quote unquote COVID impact was baked into that guidance range so that we didn't have folks wondering what the business is going to look like assuming the Delta variant gets slightly worse. Now, if the Delta variant gets way worse. That's obviously going to be a different scenario. But I think what you're looking at here is a midpoint to a high end that is reflective of the momentum of the business as well as some kind of error bars if you will for COVID.

Got it. Fair enough. Thank you so much.

My pleasure.

Thank you. Our next question will come from Mike Matson with Needham & Co. Please go ahead.

Yeah. Good afternoon. Thanks for taking my questions. Just a couple financial questions, so looking at your OpEx, it was around 45 million in the quarter, should we expect it to kind of stay at that level through the remainder of the year? And then R&D was around 11% of sales a little lower than what we've been modeling and then sales and marketing like 36% of sales, roughly.

Yeah, thanks for the question Mike. So with the impact of around 3.4 million of acquisition related costs in the second quarter for Halio and Decipher, if you take out that impact, you could expect that to be roughly equivalent to what we'll be spending in the back half, obviously, with an asterisk that will have incremental expenses tied to Halio. And we're not ready to quantify what those will be today. Obviously, we don't have Halio anywhere in the P&L in our guidance for the reasons that the acquisition is not yet done. And timing is such an important contributor to what that ends up being, so with the caveat, if you strip out acquisition from Q2 and don't include it in the back half plus or minus a bit. I think that's roughly fair.

Okay. All right. Thanks. And then just as far as M&A goes, I heard Bonnie say something along the lines of HalioDx and sort of the final puzzle piece. So I take that to mean that we shouldn't expect any, at least larger deals nearer term.

Yeah, I think the way to think about it is that's correct. And the final strategic puzzle piece means the strategy that was put in place that we're executing on really started in 2017, we've moved it through over the last multiple years, it'll be completed in two years with the manufacturing transition. So that vision that is the six years in the making is completed with the HalioDx transition. We've got a lot to deal with and we're doing that really well. I'm very impressed with the performance this quarter, which clearly shows that we're able to continue to focus and deliver on the things that we've committed to deliver, in spite of all the things that we've got to do. And in some cases, partly because of all the things that we've taken on that are very, very positive. So our priority is not to go out looking for major acquisitions at this time. As I said earlier in the call, if there are opportunities that come our way, we of course, would - we would consider them but we've got plenty to deliver on with this strategy.

Okay, got it. Thank you.

Thanks.

Thank you. And our next question comes from Sandy Draper with Truist Securities. Please go ahead.

Hey, Sandy.

Hey, how are you? Thanks very much and a lot of my questions have been asked and answered. But first just congrats on strong quarter. And welcome to all the new team. And this question is probably for Rebecca. When I think about - when I look at sort of revenue per test, it's been generally pretty stable approximately say $2700 plus or minus a little bit. With the growth in Decipher and the prostate and getting reimbursement there the offset, bringing on nCounter, there are other puts and takes, is there anything meaningful that we should be thinking about that it's going to either drive up because of better reimbursement as you get it or down because you're going to be pushing out tests that you're not likely to be able to build for yet. Anything notable, we should be thinking about over the next 12 to 20 - well, probably 12 months or so.

Yeah, great question Sandy. And at this point in time, I don't think there is anything that meaningful one way or the other. Obviously, depending on the mix of the portfolio in any given quarter, you're going to have puts and takes, depending on commercial payer rates, you're going to have put and takes, but as we sit here now, specifically for the back half, I mean, I don't see anything that would change that trend in the first half of next year. It's going to be plus or minus a bit.

Okay, great. That was my only question. Thanks.

Thank you.

Thank you. I'm showing no further questions in the queue at this time. I would now like to turn the call back over to Chief Executive Officer, Mr. Marc Stapley for any closing remarks.

Thank you. Before closing, I would like to add my thanks to the Veracyte team for an outstanding quarter. I have been extremely impressed with the progress made in a very short period and in the team that has been assembled. Bonnie has built an incredible culture at Veracyte one that is steeped in innovation, scientific rigor, collaboration and accomplishment. These core values resonate deeply with me. As we bounce our vision and scale the business globally across indications in the patient care continuum, I am committed to upholding them. I look forward to updating you on our progress and our full strategic growth drivers on our next quarterly update. Thank you.

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