Veracyte, Inc. (VCYT) Q2 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Veracyte Second Quarter 2022 Financial Results Conference Call [Operator Instructions]. Please be advised at today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shayla Gorman, Director of Investor Relations.

Good afternoon, everyone. And thanks for joining us today for a discussion of our second quarter 2022 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; Rebecca Chambers, our Chief Financial Officer; Dr. Tina Nova, President of our us CLIA Business; and Dr. Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer. Veracyte issued a press release earlier this afternoon detailing our second quarter 2022 financial results. This news release, along with a business and financial presentation, is available in the Investor Relations section of our Web site at Veracyte.com. Before we begin, I'd like to remind you that various statements that we may make during this call will include forward-looking statements as defined under the applicable securities laws. Forward-looking statements are subject to risks and uncertainties and the company can give no assurance. They will prove to be correct. 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. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release, accessible from the IR section of Veracyte's Web site. I will now turn the call over to Marc Stapley, Veracyte, CEO.

Thanks, Shayla and thanks everyone for joining us today. I'm pleased to provide an update on our second quarter financial results, as well as our key growth drivers. As you saw in today's earnings release, our strong execution during the quarter resulted in impressive Q2 growth of 32% versus the prior year with revenue equalling $72.9 million. I was particularly proud of our endocrinology and pulmonology commercial teams who worked tirelessly in the wake of an unexpected supply chain issue to ensure that our patients were taken care of and had access to our tests, more on that later. The largest contributor to our second quarter revenue was our Decipher Prostate product with growth of close to 1,200 tests as compared to last quarter, we saw the largest sequential increase in this product to date. Adoption is growing nicely, yet, we still estimate that market penetration for this class of tests is currently less than 30%. This gives us confidence that there remains ample room for growth and for penetration to continue to meaningfully increase for a number of years. Decipher Prostate's adoption has been propelled in part by the growing body of literature, demonstrating the test ability to guide treatment decisions for men with localized prostate cancer. Last month, we announced findings from a multicenter randomized Phase 3 trial, which were published online in Annals of Oncology. This study demonstrated that the Decipher Prostate test can help identify patients who are at highest risk of cancer progression following prostatectomy, and who would benefit from earlier more intensive treatment. In May, we were delighted the American Neurological Association and the American Society for Radiation Oncology issued an updated clinical guideline that is favorable toward genomic testing, including the Decipher Prostate test to help guide care for men with localized prostate cancer. The guideline author specifically cited extensive evidence, including from multiple Phase 3 clinical trials, which demonstrated that the Decipher Prostate genomic risk score is strongly associated with prostate cancer outcomes. We believe this additional clinical data as well as posted guidelines will augment the already extensive body of evidence we have generated in support of our prostate tests. Moving to Afirma. Fortifying and building our endocrinology business remains a key strategic imperative. As a result, our investment in the product and associated clinical evidence continued during the quarter, a new meta analysis presented the ENDO 2022 annual conference showed that the Afirma GSCs real world performance is consistent with and even stronger in some cases than the test clinical validation study findings. Additionally, a new study published in thyroid demonstrated the accuracy of our Afirma medullary thyroid cancer classifier in identifying MTC, a rare but aggressive form of thyroid cancer in preoperative samples. This classifier is already part of our Afirma GSC test. We believe that clinical evidence such as this combined with our continued investment in product enhancements and the customer experience will support Afirma growth of next year of mid to high single digits. Regarding firm's Q2 results, we saw slightly lower volume growth than we expected. During the quarter, we were surprised by a key vendor that underwent to floor ERP transition significantly impacting their ability to process our customer orders on a timely basis. Our team mobilized quickly to identify and prioritize critical orders to locate and assemble key components and to transact thousands of shipments in-house, while working with the vendor to optimize their activities for our customers. Through what I would only describe as heroics of our team, we were able to meaningfully minimize the impact to those customers and most importantly, their patients. We believe that in the end very few patient procedures were delayed. And while the true in call to impact to Afirma is difficult to quantify, we estimate that this situation lowered volume by approximately 4% compared to the prior year and our expectations At this point, the vendor's internal issues are now largely resolved and we are back to a near normal level and timing of shipments from them with our team continuing to supplement as needed. Another standout in the quarter was our biopharma business, which generated key data as well as strong quarterly revenue. An oral presentation at ASCO detailed that our Immunoscore immune checkpoint or IC assay can identify patients who are likely to benefit from immune checkpoint inhibitors or ICIs in metastatic non-small cell lung cancer. Further, a publication in the Lancet Oncology also demonstrated similar results in metastatic colorectal cancer. These findings are important, because, while immune checkpoint inhibitors have revolutionized therapeutic management of patients in a number of cancers, current biomarkers are limited for identifying the patients who will benefit. We believe that the Immunoscore IC assay could help biopharmaceutical companies select the right patients for their immune therapies and help improve the success rate of their clinical trials. Notably in combination trials, including ICIs. We look forward to additional future publications incorporating our immuno-oncology assays. These exciting findings reinforce our confidence that immuno-oncology will continue to be an important part of Veracyte's long term strategy. Going forward, we are particularly focused on our multiomic biopharma offerings as we believe we have a differentiated asset. At the same time and after thorough analysis of our immuno-oncology portfolio, we have decided to pause our commercial efforts for the Immunoscore colon cancer diagnostic test. Given the breadth of investment opportunities in front of us with early stage products at various phases of being launched or developed, paired with our acute sense of fiscal responsibility, we are prioritizing our focus and resources accordingly. Moving now to our long term growth drivers. We were pleased to share additional performance data on our Percepta Nasal Swab test at the recent ATS meeting. These data demonstrated that our test could accurately determine lung cancer risk across a range of tobacco related exposures, ensuring that it can be used reliably in people whose lung nodules were found incidentally or through screening. With respect to broad commercialization of Nasal Swab, we remain focused on securing a clear path to reimbursement prior to driving high volume growth and generating clinical utility data to ensure commercial success, including finalizing patient enrollment in our Nightingale Study by the end of next year. Activation of sites is progressing well. And while patient enrollment is lagging our expectations by about a quarter, we are starting to see momentum build. Early signs from the test and treatment results that we have on a small number of patients are encouraging as we're already seeing a positive impact on treatment decision making. Of course, we don't yet have the ultimate patient diagnosis, but our robust clinical validity data, which we have already shared gives us confidence in the outcomes that we expect to see when we do. We are monitoring the data as it is generated and plans to take advantage of opportunities to publish favorable interim clinical utility results in an effort to drive the earliest reimbursement decision possible. We're excited to witness the positive impact Percepta Nasal Swab will have on patients and providers. Another key long term growth driver is the transition of our test onto the nCounter Analysis System to fuel our global expansion. We believe the menu of IVD stests in development are exclusive diagnostic rights to a best in class instrument, and the team's extensive track record of developing IVD tests positions us extremely well to succeed in global markets. We already offer the Prosigna breast cancer test and are on track with our development submission timeline for our broader menu as previously detailed. With that, I will now turn the call over to Rebecca to discuss our financial results in more detail.

Thanks Marc. As Marc said, our continued focus on execution drove strong quarterly revenue of $72.9 million, an increase of 32% over the prior year. We grew total volume to over 24,900 tests, a 19% increase over the same period in 2021 and a 7% increase compared to the prior quarter. We delivered testing revenue of $59.7 million, an increase of 18% versus the prior year quarter. Testing ASP was approximately $2,650 per test, roughly flat sequentially. As expected, ASP was again impacted by the 2021 Afirma billing code change. Despite this, our confidence has grown that this is a temporal impact, which should abate next year. Testing volume was approximately 22,600 tests with strong Decipher urology growth driving approximately 10,000 tests. Afirma volume grew 3% as compared to the prior year. However, we estimate volume growth would have been approximately 7% without the vendor driven supply disruption Marc mentioned. Second quarter product volume was approximately 2,300 tests resulting in revenue of $3.1 million, up 16% compared to Q2 2021 despite a currency headwind [Technical Difficulty]. Moving to gross margin and operating expenses. I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets and other acquisition related expenses, but do include routine stock based compensation. Non-GAAP gross margin was 66%, an increase of approximately 50 basis points sequentially, driven primarily by higher biopharmaceutical and other margin. Testing gross margin was 69% and product gross margin was 47%, both flat compared to the prior quarter. Biopharmaceutical and other gross margin was 53%, an increase of approximately 350 basis points sequentially due to project mix. Non-GAAP operating expenses excluding cost of revenue declined by $0.1 million sequentially to $49 million as lower benefit expenses were partially offset by ramping clinical trial and project expense. Research and development expense increased by $0.6 million to $9.1 million and sales and marketing expenses grew $0.6 million to approximately $23.1 million driven by personal expense. General and administrative expenses were down $1.2 million to $16.8 million, primarily due to lower professional fees compared with the first quarter. Non-GAAP cost of revenue and operating expenses included $6 million of stock based compensation. We recorded a GAAP net loss of $9.5 million, which included a $3.3 million intangible asset impairment resulting from the Immunoscore colon diagnostic test commercialization decision. Net cash provided by operating activities was $0.7 million, and we ended the quarter with approximately $164 million of cash, cash equivalents and short term investments. Turning to our updated 2022 guidance. We expect revenue of $272 million to $280 million or 24% to 28% growth versus the prior year on a reported basis. This range compared to our previous guidance of $265 million to $275 million reflects our strong performance in the second quarter, continued outperformance of our urology business, Afirma revenue growth of low to mid single digits and current currency rates. Q3 revenue is expected to be lower sequentially due to the impact of summer holidays on our testing biopharma and contract IVD businesses, as well as the large Q2 contract IVD order. For Q4, we are forecasting quarter-over-quarter growth. For the second half of 2022, we expect to see an increase in operating expenses, driven primarily by higher R&D expenses. With the current inflationary environment and recession concerns on the horizon, we believe our diagnostic testing business, which makes up the vast majority of our revenue, will remain resilient. With this in mind, we are confident that we have adequate cash on hand to ultimately take the business to profitability, [barring] M&A. We believe this positions us to invest in our long term growth drivers while ensuring that our cash profile is suitable for the foreseeable future. In closing, we are pleased with our performance this quarter and remain focused on making the necessary decisions to drive long term growth with a clear path of profitability. I will now turn the call back to Shayla.

Thank you, Rebecca. We'll now go into the Q&A portion of the call, and Tina Nova, President of our CLIA U.S. business; and Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer will join us. Operator, please open the lines.

[Operator Instructions] Our first question comes from a line of Brian Weinstein with William Blair.

This is [Griffin] on for Brian. Maybe just to start on Decipher. Could you just talk a little bit more about that growth outlook and runway in terms of ASPs and units, it's a growing part of the story? And then as we think about layering on bladder, could you just talk about what if any impact there was from bladder in the second quarter and how you're thinking about that in the second half?

I'll start and I'll invite Tina, Rebecca as needed. But you saw again another quarter here of strong performance by the Decipher Prostate business in particular, and cited a lot of reasons for that, including the continued evidence development, which we just got a really good steady drumbeat here, and the penetration is a key factor. We said in the script that less than 30% penetration of these types of tests in the market of which we believe Decipher Prostate has significant share, majority share. And so we expect to continue to drive incremental penetration of this market with our test. And you know we are on a good momentum here, there is no reason that we see ahead of us honestly for that momentum to slow down. So very excited about where prostate could go. And Tina, anything you wanna add to that and feel free to talk about the bladder, which was the second part, the bladder test and the second part of Chris' question.

I think we really saw fantastic performance by our sales team in the last quarter. They continue to do a terrific job out in field. And also I think that the amount of data that we continue to release and show physicians that shows that our test is really makes a difference in the risk of progression after surgery. We just had an increase in some guidelines from the AUA and the American Society of the Radiation Oncology update, that shows that our risk score is strongly associated with outcomes and independent showing some data that came from SEER, where we looked at 10,528 patients and showed the correlation between outcomes and what was predicted by Decipher. So that data continues to really help. Bladder is a much, much smaller market. The test has a much smaller indication. And so, although, it's just starting out in the marketplace, it's not at the same level as the prostate test.

And with regard to what's implied in our guidance and what was recognized in the second quarter. Griffin, I would effectively view that as a rounding error at this point in time. Obviously, to Tina's point, this is an exciting opportunity ahead of us. But just like other early stage products, it takes quarters and years to really generate the incremental evidence and demand for this product. And importantly, given how wonderful the Decipher urology franchises is operating at this point in time, we are very cautious to disrupt that through incremental bladder efforts. And so, right now we want to make sure we are really focusing on biopsy and radical prostatectomy, because it's really what's driving the growth here. So bladder is exciting over a three to five year period. In the next couple of quarters, it's not where I'd focus my attention. I'd really personally focus it on radical prostatectomy and biopsy.

And then just second on biopharma growing part and I've signed to that IVD contract payment here, but it's such a fundamentally different business post HalioDx. So can you just -- the nature -- talk a little bit more about the nature of those revenues? And when you talk about those growing faster than the corporate average understanding it's just a portion of the total biopharma revenues, but would love to just get more color on that.

The biopharma business, we have obviously put the three parts of the biopharma businesses together and they are somewhat different, but there is a lot of overlap and commonality there too. And the reason we put them together is we can drive a lot of improved access to markets in the us for the tests that came or the capabilities that came out of our HalioDx acquisition, for example and vice versa. What a lot of the revenue that is focused on purely the biopharma line is coming from today is really our immuno-oncology assets, which is why I talked about those as being a key growth driver, key strategic investment for us in the future. And I'd like to see more of that penetrating our us customer base, which we should expect to see in the future. And then, similarly the incredible amount of data that we've generated on both the Afirma side and the Decipher side and the lung side as well, being able to leverage those globally with our existing customer base is pretty strong in Europe as well. So whether it's clinically relevant biomarker identification, enhancing our customers' clinical trials through biomarkers or companion diagnostics work, there is opportunity globally to do a lot with the assets that we've gotten acquired here. On the IVD services side of the business, it's continuing to leverage the capabilities that that team has that we're actually deploying internally right now to develop our own assays but also for third parties.

And on that last point, I would just add, our goal is not necessarily to grow the IVD services business, it’s really to ensure that that business is enabling our long term opportunity with the nCounter instrument and product on a global basis. So that business is much more -- we're much more keen to work on the manufacturing transfer than we are to really drive revenue growth through that line. Griffin, you mentioned the growth rate of the biopharma business, biopharma and other business. And I just wanted to clarify that we haven't necessarily given a long term growth rate for that business and we aren't going to be in the habit of doing so today. If you look at 2022 though, this is a human capital business and we did call out some timing impacts on the first half of the year. So I would take those into account. And as a result of that timing, those timing impacts, we expect the second half to be sequentially lower, if you will, than the first half in terms of revenue, bigger than that. Additionally, the seasonality of both of the businesses in the biopharma line, given their human capital dependence, is obviously, as I stated on the call, pretty acute in the third quarter. And in aggregate, we do think about this much more on an annual basis, on a quarterly basis given it's a lumpier business than the testing or product business. So hopefully that helps with the modeling over the long term basis as well as 2022.

Our next question comes from Puneet Souda with SVB Securities.

So first one, just maybe on -- can you just update us the latest on the hospital access that you have for Afirma and the pulmonary franchises? I mean, in terms of the sales reps, sort of where do you stand in terms of face to face interactions, and do you still have sort of challenges there or just maybe give us the latest on that front.

I would say, we're kind of pretty much back to business as usual here. The level of access that we're seeing across the board is what you would expect, barring anything that any kind of local region by region lockdowns, none of which we've seen as of late. But if that were to happen again then of course that would affect access. But absent that I think our teams -- it feels like our teams are getting access where they need to and it feels almost business as usual too. Tina, I don’t know if you got anything you want to add to that?

No, I think that's exactly right. The one thing we do continue to see is some struggle with staffing, especially in the physician offices rather than the hospitals, and that is still an issue that we see. But except for that we do feel like we've gotten away from COVID this last quarter for the first time.

Yes, staffing was my next question, but maybe just on -- Rebecca, maybe this is for you and obviously look a number of moving parts in the business. You pointed out Afirma challenges that you have this quarter, and looks like you have successfully resolved that going forward. There's maybe a catch up coming from that, Decipher continues to do well, biopharma, colon test, that's getting continued. So maybe just talk to us about how should we piece all of this together to think about sort of the -- is 24% to 28% sort of the growth rate we should be thinking about going forward or maybe it could be better than that?

With regard to the moving pieces in 2022, immunoscore at this point in time, given the amount of investment and size of the commercial organization was not a material revenue driver in 2022. So I wouldn't necessarily take that into account neither here nor there on a go forward basis. Obviously, we won't have that revenue, but again, it will not be that material of a headwind. With regard to Afirma and the impact in the quarter from the supplier issue that Marc mentioned, we don't expect there to be a catch up there, because these patients had to go into their treatment decisions and treatment and paradigms. And so we aren't necessarily, in the low to mid single digit guide that we provided, we are not providing -- that does not include a catch up, because that is not currently what we do expect. Decipher, we are expecting to -- as Marc mentioned, to have continued strong growth over the course of 2022, and already provided kind of the biopharma and other impact in the second half with regard to Griffin's prior question. Looking forward to 2023, we guided to Afirma. Decipher, we are very excited about and expected to continue to grow quite nicely, albeit large numbers, the growth rate declines as the numbers get larger. So I'm not necessarily going to guide to a growth rate there, but just we're early stages in penetration. We're incredibly excited about the continued penetration of this market and the performance vis-a-via its peers. So all good news, just not commenting on the growth rate specifically. And obviously, biopharm and other are going to be lumpy in any given period, but we do expect growth on a year-over-year basis. And the product business is early days as well, so growth. So I'll let you sum all that up and come up with an expectation for 2023 based on it. But I think you have all the puts and takes there accordingly.

And then last one, maybe for Tina. I mean, when you look at the decipher franchise today and the sort of the competitive landscape, obviously, you have a strong position in the marketplace, data continues to be generated. Maybe just give us a sense of sort of thinking about it -- this product longer term. What sort of what sort of position that in the marketplace that you can continue to maintain? Seems to me that it's leading the market. Are there any puts and takes competitively that you would point out where you can continue to gain more and more share in the marketplace, just maybe talk to us about the positioning of the product and how do you see this more longer term, because obviously this is a key important driver for Veracyte.

I think that I'm very proud of the team. I think our sales team is absolute top. And I think that we're good at hiring reps and I think we're really good at training. I think it's very, very important, because the interaction between the sales reps and between physicians is extremely important, because as you know prostate was behind the [April] and sort of getting up to speed using genomics, and so there’s still a lot of training that happens out in the field with the physician on the use of these tests, that has not changed. And I think that because we are still less than 30% penetration, we still have a nice runway in front of us for the future. You have to continue to publish, you have to continue to add new data, you need to continue to have the best service that you can have, ease of ordering, reports, customer service and what have you, all of those play just as much as an important role in the product itself. But I think that we are in very good shape for the future. I feel very good about our strong position right now.

I think the level of publications and then guideline support and the breadth of indications for our Decipher product position us really, really well, in addition to all the things that Tina said. To punctuate one point, I mean, our sales team -- we look at various metrics for our sales team. And it's truly best-in-class in terms of the metrics that they deliver and the sales optimization efficiency and as Tina said, the relationships with physicians. So there is no reason to assume that we can't continue to grow and maintain and gain share as we should given the investments that we're making in this product. And we're not going to slow down. I mean, this is a key focus area for us and will continue to be for quite some -- for a long time.

Our next question comes from Matt Sykes with Goldman Sachs.

Maybe if we could start out just on the issue you have with your vendor with their ERP, it seems very specific to them. But as you kind of experience that and just given the real time nature of some of the decisions your patients need to make and some of the loss revenue that resulted in. Did that cause you to kind of look across your vendor relationships and just kind of better understand what they might be going through? Maybe you understood the ERP implementation, but maybe not the impact of it. Just wondering kind of lessons learned from that particular experience as you manage your vendor relationships.

Everybody has been experiencing supply chain disruption and issues, including ourselves over many years, the last couple of years. And we have been able to deal with those very, very, very effectively and haven't had any impacts. And then this one came along that has nothing to do with global supply chain issues and more to do with a local challenge with a specific vendor. And our team was able to put in place the necessary prioritizations and our own internal processes to make sure that, no customers, no patients were, were left as far as we could tell with procedures that were delayed. Obviously, that's impossible to measure, but that's something that we strove for and that became our priority. That distracts when being out in the field generating new business and spending your time with existing customers in the way that you normally do. And so that really was the effect. So I feel like the effect was less patient impacting. I'm sure there are some examples where you could find that was the case, but really not in the main, and more to do with distraction for our sales team and everybody else who was focused on making sure our patients weren't impacted. So we kind of got it -- we got ourselves into that situation and we found ourselves in that situation, and did a really good job of getting ourselves out of it as best as we could in the quarter. Now to your broader question, any businesses is continuously doing business continuity planning. There are some proprietary vendors -- vendors with proprietary components that you just can't second source, and there is no Plan B, right? And that wasn't the case here. There are some vendors where -- and components where you need to really plan ahead to make sure your Plan B is in place and able to be mobilized when you need it. And we all do that, we're doing that just like anybody else. The third one, which is really where this category -- this one fell into the category was something that we could very quickly stand up internally ourselves to the extent we needed to and mitigate. So those ones fall down lower on the priority list of business continuity planning, because you can mobilize quickly. So of course, we all do that. And I think more importantly though, this one probably has our vendor looking at their own processes and thinking about how do they implement system changes without things like this happening again.

And then just Rebecca, one for you just on the OpEx, the trend has been flattening pretty much. I mean, certainly relative to the first quarter of this year, and continues to come in below our expectations, which makes sense, given sort of the spend that you did last year and the buildup in the sales force. Do you expect that OpEx trends to remain relatively stable over time? I know the G&A costs were some lower spend on professional services. Is that a one off and should resume, or how are you thinking about the different components of OpEx and should we expect that to really stabilize here in terms of the spend as the revenue continues to grow?

And if you recall back to your conference, we did highlight that we are seeing a good amount of leverage through the sales and marketing line, and I do expect that that to continue specifically in the second half. We will have a maybe a small uptick as T&E comes back more than it was in the first half. Aut I think outside of T&E, for the most part, we will see continued leverage through the sales and marketing line. On the research and development line that is the line where we do expect to see relatively meaningful increases. And this is tied to Marc's comments primarily on nasal swab, as well as on the contract -- as well as on the IVD development. So both of those programs are continuing to ramp. We are enrolling our clinical utility study that is obviously critically important for us to increase our spend on. And so to the extent that you do see a meaningful increase in operating expense per my comments in the script in the second half, the majority will be in research and development. On G&A, we do expect to see a slight uptick as well in the second half. We have some key IT projects, which we will have incremental spend primarily, and we've added a little bit of headcount, but that's going to be around the edges. The vast majority of the gains will come from the R&D line.

And just one last quick question for me, just the decision, just continuing Immunoscore colon cancer test. Just maybe some background behind that decision. Was it a competitive landscape, was it just the potential material revenue versus the cost you were putting into? Just want to kind of understand, I'm sure you look across your broad portfolio and make these decisions constantly. But just want to understand a little bit more behind that specific decision to get some color on your strategic thinking.

I mean, we do portfolio planning on a continuous basis and we've, as part of our strategic planning and that's really what led to this rather than anything else. We looked across the level of investment that's needed, the level of development that's going to be required, the building of the sales team and commercial channel and then, yes, of course, you always look at the competitive space as well. Having said that, this is a very novel test. But where we see these capabilities that we have in immuno-oncology having the greatest near term opportunity near to midterm and even long term is in our biopharma business. Now diagnostics may spawn from that over time and probably so. But just the timing of those diagnostics, the launch and the penetration, relative to the investment you need to make is obviously key part of the assessment, the evaluation we go through. And so we did that on this product as we do on every product and reached the conclusion that we did. I mean clearly and I want to acknowledge, I mean, our team especially in Marseille and Richmond put tremendous amount of effort into developing this diagnostic, but they're also putting effort into the assets that build our -- support our biopharma business too. And so none of that work goes to waste, it's all leveraged in that broader opportunity.

Our next question comes from Tejas Savant with Morgan Stanley.

Just a couple of cleanups on the guide here, Rebecca, for you to kick things off. So I know you'd mentioned the rev rec impact from the code switch last year. Is that tracking to plan in terms of what you had baked into the guide? And that slight trimming of the Afirma guide from mid single digit to low mid single digit, is that just related to the vendor issue essentially that you saw in 2Q?

Thanks for the questions, Tejas, taking them one by one on ASP. Yes, that is trending exactly how we had expected. And I think we even gave, as I mentioned in the prepared comments, we gained incremental clarity, if you will and conviction probably is a better word than clarity actually, incremental conviction that that trend is going to abate at the end -- by the end of the year. So we're obviously still working through the bits and pieces there and are reaching out to specific payers. But we have absolute conviction that that will by the end of this year abate, if you will. With regard to the supplier transition and the change in the guide from mid to high to low mid definitively, that is all around the supplier issue. We quantified that for you previous in the prepared remarks as well, and so the only real change in outlook there is the supplier issue.

And then on FX, how material are your international revenues today? I know you added that, that was the incremental line in terms of the guide. And how much of a headwind are you really baking in, in the back half of the year?

Given where rates are today, so international revenue, which is primarily Euro denominated, as you would expect, is around 15% and we've absorbed $2 million of incremental headwind since the last time we guided in the updated guide today.

And then on Decipher Prostate, Marc, have you seen any noticeable shift in momentum since the AUA ASTRO guideline update from May?

I'll ask Tina to respond to that.

We always see, is it meaningful, it's really a combination of small pieces that come together. And so we had that and we had publications as well, and going and participating in all the major meetings this year as well where we had posters and oral presentations. It's hard to just pinpoint one…

And last one for me here, for you Marc. I mean, given some of the restructurings underway at some of your genetic testing peers. How are you thinking about sort of being a little bit opportunistic in terms of adding to your portfolio here? There's some interesting assets, obviously, that are being shopped around. So just curious as to your take and on the landscape.

I'm glad you brought that up. I do want to kind of point out, but we do feel that we are in a very beneficial position relative to the strength of our balance sheet and our P&L, and the work that we have done over the years to ensure that we get a reasonable ASP for our tests and that we are not overspending relative to what we are generating. And so we're very prudent and fiscally responsible in that regard, so that puts us in a good position. And Rebecca talked about cash and the runway that we have ex-M&A. And so we are very focused on the profitability here. And having said that, we of course would be opportunistic in looking at the market and seeing what the opportunities are in the marketplace and thinking about those. But we do that anyway, and we have been -- we do that continuously. So I would never say to you, we are completely ambivalent about that. On the contrary, we’re, as we always are, we are watching what's going on and we're paying attention, but at the same time, we are very, very focused on execution of our business, which is in a good position.

And Tejas, before we move on, just one last thing to add to my comments on FX. Obviously, with the Halio acquisition, we are in a much -- we have a much more natural hedge across the P&L, given while we have a headwind on revenue, the operating expenses are effectively coming in lower than planned given that same change in currency rate. So I just wanted to share that across the P&L not perfectly on a one-for-one basis but pretty darn close we are pretty hedged to rates.

Our next question comes from Andrew Cooper with Raymond James.

A lot’s already been asked, so maybe just tipping a little bit, nothing tremendously new necessarily on the Nasal Swab efforts. But you mentioned wanting to get interim readouts and potentially as soon as possible, and to drive that reimbursement. I guess, can you give us a little bit better sense for what point you need to be at in the study to say, hey, it's time for an interim readout, we've got enough patients enrolled, a long enough kind of timeframe to look at? What are the things you need to see and when, if you could, bracket best case, worst case? Can you give us some guidelines for when we should be thinking about seeing some of that data?

And I'll go ahead and obviously Giulia, if there is anything you want to add on the kind of study design itself. But without getting into too much details here, Andrew, for the study design, of course, we put in place certain milestones along the way where we get to look at the data and we get to see how significantly physicians are changing practice and that's obviously one of the key things you want to measure here. We got an early look at that already and it's a very small set of numbers -- set of patients. But as I said in the prepared remarks, so far the results very encouraging. We'll see as time goes on. So there are multiple points along the way where you take a look. And depending on the results that you are seeing that could help drive earlier publication of some of that data. I don't know, Giulia, there is anything you want to add to that but that's…

I think that's right. I mean, it's still early days. The data are looking encouraging and we do plan on opening up the results at pre-specified times along the course of the study to check-in and see how the data looks. So we will be look looking at it multiple times using a pre-specified protocol.

Our next question comes from Mike Matson with Needham & Company.

So I want to ask one on Decipher, just on the bladder test. Can you remind us what the TAM is there? And then, just thinking about prostate over the next few years, I mean, 30% penetrated large numbers. I mean, that's probably going to start to slow down some but bladder should be kind of ramping up. So is there potential for that to kind of help sustain the growth of the Decipher kind of urology franchise kind of offset some of the slow down in the prostate side maybe over the next few years, or is it just too small to do that?

I wouldn't be thinking about a slow down in the prostate side over the next few years. I mean, where Rebecca was referring to kind of the law of large numbers as denominator grows, but I see the momentum continuing for the foreseeable future here on prostate. On bladder, the market here is about a third of the size or so of prostate. So call it 80,000 patients a year and our current test addresses roughly half of that market. But of course, I would look us to see us do similar things that we've done on the prostate side. And over time you build the indications out until you cover as much as possible, and so we would do that. So yes, of course, I mean, as part of our urology franchise, bladder could be a contributor in the kind of more medium to long term. But as Rebecca said earlier, we're very focused on not disrupting any of the momentum that we have in prostate right now. So it's not a needle mover in the near term.

I would just [Multiple Speakers] the bladder test is much more niche market. But we are looking at other studies that we will be starting over the next few years and looking at expanding that product over time.

And then just given the kind of home run success we've seen with the Decipher Prostate test. Is there any kind of lessons learned from the commercialization strategy that can be applied to your other categories like pulmonology, which seem to be kind of seeing a bit slower ramp, or maybe just earlier stage, it's not apples to apples? Or is there something really unique about kind of the urology specialty or call point that's just allowed it to happen a lot more quickly than something like pulmonology?

I mean, the lessons learned across our entire portfolio go back to our strategy here really and that's always been the same, and it's been done very successfully in a firmer and it's been done very successfully in prostate, and that is you identify a clinical unmet need that fits into the physician's workflow, you generate a lot of evidence, you get KOL support, you get into guidelines, you get reimbursement and you have a very efficient and effective commercial team that drives it, and you can continue to repeat that. Now then you have, in addition of Veracyte, the added layer of being able to take those tests and make them available globally on our nCounter platform as well. So that's really the general lesson learned. And then specific, I would say to prostate, I mean, remember that there have been molecular diagnostics for prostate cancer for quite some time, and Decipher has done a really good job -- the Decipher product and the team has done a really good job of coming into that market where a lot of the groundwork did exist and penetrate that market really, really well and create new groundwork to expand that market beyond where it had currently been penetrated. And then obviously pulmonology is a little bit different in that that groundwork hasn't been laid and we are doing that. And we're not the only ones but we're doing that to a significant degree. So you go indication by indication, unmet need by unmet need and the formula is pretty well understood at this point.

Our next question comes from Mason Carrico with Stephens.

Maybe just starting with Decipher Prostate. On the commercial team, how many reps have you added year-to-date and how many reps are supporting that test currently? And then if you could, could you provide some color on the efficiency of new reps versus some of your more tenured reps? Is there a metric that you could call out? And then how long does it really take for these new reps to get fully ramped and efficient?

So we're at 40-ish around reps right now and obviously, we want to add a handful more. The timing just depends on how things are going, et cetera, across the year. But I think that you just really have to work very hard on hiring, you have to work very hard on training. I've been doing this for a long time and I don't know if there's a secret number, secret formula. I feel like it takes six to nine months for sales reps, no matter what they're selling in this business to really get to a point where they feel comfortable and really start making a difference and paying for themselves, I think that's actually a pretty common timeframe.

And then thinking about ASP at this -- how much room do you still have left to run in terms of penetration of the commercial payer market? Any color in terms of near term opportunities or expectations around incremental coverage, maybe over the next year or two?

Absolutely, that's something we work on all the time. There is still more runway for us to get contracts in for on the commercial side, there's no question about that. It's something we're very, very focused on. And every time we add these new studies, you can bet that we go back to the commercial payers and share that information with them. But yes, this area was just slow on the commercial side, the whole urology area was just very slow on obtaining commercial coverage. But yes, there is more runway and yes, we continue to add new contracts every year.

Our next question comes from Paul Knight with KeyBanc.

Rebecca, on the pricing, I missed the early comments there. But it is it centered around the commercial payers on that ASP?

So Paul, the comment on pricing was specific to Afirma, and specific to the code change made in January or Q1 of last year, and the impact that it’s going to have over the course of 2022 on the Afirma ASP. So nothing new with regard to that. We had commented last quarter that we had expected that impact over the duration of 2022. We are equally confident that it's now under the duration of 2022, and will not go into next year. So I think when it comes down to it, we have worked through this. We now just have to wait for a little bit of time to pass, but we're confident going into ‘23 ASP for Afirma will not necessarily be the headwind tied to the CPT code change. If you look at ASP across the entirety of our testing business, it was roughly flat sequentially. And so obviously there's puts and takes across the board, but you have Afirma detail that we've provided. And we will get through this over the course of this year, and look forward to next year it not being headwind.

You're saying that ex-Afirma, it was pretty.

I'm saying it's flat even with the impact of Afirma, so steady state across the board year-to-date.

That concludes today's question-and-answer session. I'd like to turn the call back to Marc Staley for closing remarks.

Thanks, operator. Appreciate it. In the current challenging environment, I'm incredibly proud of our team's execution and financial discipline in Q2 and to date. We believe that this focus as well as our portfolio of high value tests that address key unmet needs sets us apart in the industry. We remain committed to transforming care for patients across a range of diseases. We are doing this successfully in the US and have a clear pathway and plan to bring our test to patients in global markets. So thank you for joining us today and I look forward to keeping you apprised of our progress.

Ladies and gentlemen, this concludes our conference. You may now disconnect.