Good day, and thank you for standing by. Welcome to the Veracyte Third Quarter 2022 Financial Results Conference Call. At this time all participants’ are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. 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. Please go ahead.

Good afternoon, everyone. And thanks for joining us today for a discussion of our third 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 U.S. CLIA Business; and Dr. Giulia Kennedy, Global Chief Scientific Officer and Chief Medical Officer. Veracyte issued a press release earlier this afternoon detailing our third quarter 2022 financial results. This news release, along with a business and financial presentation, is available in the Investor Relations section of our website 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 website. I will now turn the call over to Marc Stapley, Veracyte, CEO.

Thanks, Shayla, and thanks, everyone, for joining us today. Our first quarter was incredibly strong in all respects and we delivered growth of 25% year-over-year achieving revenue of %75.6 million. With outstanding execution by our team, we continue to realize the potential of our highly valuable CLIA test, while also advancing our long-term growth opportunities and strategic vision. Our testing business, which represents over 85% of our revenue grew 27% this quarter exceeding our expectations. The seasonality we are used to seeing in the third quarter did not play out as anticipated and traction in our core urology and endocrinology market strengthened. We reported over 11,000 Decipher Prostate tests in the quarter, up double-digit sequentially. Our investment in our world-class commercial team coupled with a continuous cycle of clinical evidence resulting in broader reimbursement coverage and guideline expansion is paying off. We believe that we now have clear majority share in a market that is just over 25% penetrated. With the broadest indication coverage of any test and positive guidelines for many of those indications, we continue to have strong conviction that most men with prostate cancer should be receiving decisive testing. We have a proven track record of executing a well understood playback of evidence development fueling market penetration, which will enable us to achieve durable growth for Decipher for many years to come. To this point, during the quarter, key data were released from the Phase 3 multicenter, multinational STAMPEDE trial. These findings suggest that Decipher Prostate may potentially be used to help inform decision-making regarding intensification of therapy in men with advanced prostate cancer. This adds to the body of evidence that we will use to expand reimbursement coverage of the Decipher Prostate test into the metastatic indication, making the test commercially available to even more patients…

Thanks, Mark. As Mark said, we had another stellar quarter with $75.6 million in revenue, an increase of 25% over the prior year. We grew total volume to over 26,000 tests, a 26% increase over the same period in 2021, and despite expectations of typical summer seasonality, a 6% increase sequentially. We delivered testing revenue of $64.6 million, an increase of 27% year-over-year, driven by higher than expected Decipher prostate and Afirma volume with last quarter's Afirma supply chain situation now in the rearview mirror. Testing ASP was up slightly sequentially on volume of approximately 24,000 tests, driven primarily by mix, as well as improved payer contracting across our Afirma and Decipher test. Third quarter product volume was approximately 2,400 tests, resulting in revenue of $3.3 million, up 12% year-over-year, despite a currency headwind of over 10% given prior year rates. Biopharmaceutical and other revenue totaled $7.7 million ahead of expectations with seasonality having a smaller impact than anticipated. The biopharmaceutical business usually contributes about half of the revenue in this line with IVD services and manufacturing making up the remainder and this quarter was no different. Moving to gross margin and operating expenses, I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets, other acquisition-related expenses and restructuring costs, but does include routine stock-based compensation. Non-GAAP gross margin was 66% approximately flat sequentially, testing gross margin was 69%, up 40 basis points compared to the prior quarter. Product gross margin was lower 7% sequentially. Importantly, we've made great progress on our manufacturing transfer as we're now fulfilling Prosigna kits out of France ahead of our year end goal. As with any transition like this, we saw some incremental costs as we set up the process, which led to the lower product gross margins. Biopharmaceutical and other…

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

Thank you. [Operator Instructions] One moment for our first question that comes from Mason Carrico with Stephens. Please proceed.

Hey, guys. This is Jacob on for Mason. Thanks for taking the questions. Maybe just starting with the Afirma and maybe a cleanup here. Was there a carryover of vendor-related issues from that 2Q vendor-related impact on Afirma volumes during the quarter? Or was it more or less back to business as usual throughout the entirety of the quarter?

Yes, I would say and as Rebecca mentioned, that's very much in the rearview mirror for us now. And we think the positive effect if you like about in the third quarter was very muted, very small. Most of the issues that affected us in the second quarter were dealt within that quarter and we were able to get back to normal and that activity with that vendor has been back to normal during the bulk of the third quarter as well, so very much behind us.

And just as a reminder, the third quarter of last year did see a decently large impact for Afirma by Omicron. So that is just something to keep in the back of your mind as well.

Okay, got it. Awesome. So then moving on to your Biopharma business -- recently been talking a lot about the immuno oncology opportunity and the high demand you're seeing from Biopharma. If possible, could you provide some color on just the size of business currently? Maybe just run rating the contribution from this business? And then what are your expectations for the ramp and potential scale of this business over the long-term maybe say next three years or so?

Yes, maybe I'll start and then Rebecca you might want to jump in with some of the quantification, but we're really excited about the immuno oncology business in particular and how our Biopharma team supports customers in that business and partners. We've had a number of really interesting publications over the last several quarters, including with Immunoscore IC in colon and lung cancer. More recently, with a great nature publication in CAR-T Cell, as I mentioned earlier, and so the number of assays we have both, kind of, proprietary ones that we've developed as well as the custom ones that we can develop on demand for our customers. I think really demonstrates for them an opportunity with Veracyte to advance their clinical trial programs to help identify biomarkers [Technical Difficulty]. But then ultimately, at some point, drive towards companion diagnostic development. In terms of the revenue numbers, Rebecca?

Yes, I'd be happy to take that portion. So you can explicitly see the biopharma and other revenue line in the face of our P&L. Approximately half of that revenue line is the Biopharma portion, the other piece is the IVD contract development and manufacturing, about 50-50. Two very different growth dynamics across the two portions of that business purposely. The biopharma and other is sorry, biopharma piece is growing very nicely. That should be accretive to total company growth. On the contract IVD and manufacturing piece of the revenue line, that isn't not necessarily a growth factor for the organization very purposely. The reason for it is effectively we use those same resources for our own IVD development and manufacturing. And as we move towards more and more of that is going to become less of a meaningful contributor to revenue over time. So it's a bit of a tale of two businesses, if you will, and with obviously the more strategic asset from a revenue perspective being biopharma asset and the on track development piece being very important for our R&D efforts and IVD strategy specific to verify.

And maybe one thing I'll add just on the Biopharma side, agreeing with everything Rebecca said, but the revenue itself due to the nature of those contracts and the timing of milestones can be very lumpy quarter-by-quarter just to bear that in mind as well.

Absolutely. And we think about that growth being accretive on a quarterly basis -- I'm sorry, on an annual basis, more so than a quarterly basis.

Okay, got it. Appreciate the color guys. I'll hop back in the queue. Thanks.

Thank you.

Thank you. One moment for our next question, that comes from the line of Andrew Brackmann with William Blair. Please proceed.

Hey, guys. Good afternoon. This is Griffin on for Andrew. Thanks for the questions. Maybe just on the guide here, so beat by about 9.2% versus consensus, raised by 14.5% with most of that beat the quarter from Decipher. You talked about large numbers, I think there was a competitor yesterday that had like mid-teens growth in the competing tests versus something pretty close to 50% for Decipher. Can you just talk about how you think about the durability of prostate longer term maybe next year? I think that's just a big question we get?

Yes, maybe a couple of thoughts on that. By the way, firstly, just seeing, I mean, the beat was driven also by, from our standpoint, the Afirma product as well Afirma had a record quarter in terms of volume and I'm extremely proud of what that team has been able to accomplish and how that product continues to grow the market is over 50% penetrated and we keep demonstrating an ability to both bring on new customers. And also increase the volume at existing customers with -- both of which are driving upside in volume. And then of course, we're working on the ASP. So we've talked about before. On Decipher, kind of, a similar story, but an earlier stage story, Decipher is in a market that is about just over 25% penetrated also represents the majority share. And we've clearly been able to demonstrate through that playbook of [indiscernible] development and guideline, including the NCCN level one guidelines and it's the only genomic expression test that does that, that has that level one guideline. We just keep driving more and more market adoption of Decipher. I'm going to turn to Tina to add any color commentary she wants. I mean, she's driving this business with her team and doing an exceptional job of doing so.

Thank you. It's a great question. And then -- I think if you compare Decipher to Afirma, as we -- Mark just mentioned, Afirma has been on the market for many years, but continues to gain new customers and continues to do very well. And if you compare that to prostate, you would think that on a direct comparison, you would say that prostate is more like year three in its development, because by the time we had coverage for all the different biopsies and for RP that was just a few years ago. So we really believe we have a lot of runway, we're still gaining a lot of new positions every year. We continue to develop on the clinical utility side, we're doing presentations at all the major meetings and not only posters, but also podium presentations by others. And the level one evidence that just came out is really incredible validation of the product.

Yes. And as I think I've said before, I don't see this situation changing for the foreseeable future here. I mean, we've got a lot more room, a lot of headroom in the market for Decipher. As I said in the prepared remarks here, we're at the point where most every man with prostate cancer should be getting a Decipher test. There's very few indications left, but we need to get included. So plenty of opportunity for ongoing growth in the future.

Okay. And then on Afirma just following up on that, so you've reiterated the mid to high single-digit ’23 growth. Just from a pricing volume assumption, can you just maybe quantify the benefit you expect next year following the depressed Afirma ASP that we saw in the second half of that [Technical Difficulty] change?

Yes. So good question, Griffin. And I think that's probably parsing it a little bit more than we're ready to do so here, I think you absolutely identified ASP should be a tailwind. With volume growth that we're seeing, that also should be a tailwind. The puts and takes in any given quarter or they aren't necessarily something we want to get in the habit of guiding to just, because that's highly dependent on the number of variables. The most important thing to know is we are very confident in the mid to high single-digit growth in 2023 for Afirma. ASP will no longer be a headwind it should be a tailwind and volume growth there's plenty of room left in the market to get to penetration levels that support incremental volume growth.

Okay. If I could just sneak one more in the $7 million operating cash flow is pretty unique in the small cap diagnostics plan. How are you thinking about just the M&A appetite, what kind of assets are most appealing right now and anything on that front?

Yes. So firstly, I mean obviously very proud of our team in terms of delivering that strong cash generation in the quarter and obviously ending in the quarter with $170 million of cash up from last quarter is fantastic. In terms of M&A, our situation, our position there hasn't changed. We've always said we're open to M&A, and we never ignore opportunities that presented themselves to us. But the bar is very high and it's not our primary focus right now. Our primary focus is growing business and continuing to execute on what we're doing here, including mid-term and long-term drivers. But given we are very focused on cash in a clear path to profitability. We'd only be interested in significant assets that were at an inflection point, whether it would be accretive in some way to our growth rate and our cash position. Small technology bolt-on type of things would also be possible, but I'm talking about anything of significance there. So no change in our approach there, I will say that we're now -- what do we over a year into our integrations of Decipher and HalioDx and given our team's experience that we developed over the year and prior, we'd be very successful at absorbing acquisitions if we did decide to do them. So some good experiences there. But like I said, it’s at the beginning, more kind of on the watch rather than ways trying to drive anything at this point.

Okay. Thanks guys.

Thank you. One moment for our next question, and it comes from the line of Mike Matson with Needham & Company. Please proceed.

Yes, thanks for taking my questions and congrats on the solid quarter. I guess first I wanted to ask about operating expense. It looks like it grew significantly slower than revenue. And first time, I can remember seeing that, so in a while. So is that something that you can sustain out driving leverage, just growing OpEx. I know you've done some acquisitions and stuff, so that probably was why it was growing a bit faster before, but --

Yes, I mean, I'll start and then Rebecca jump in. But we're very, as you know, we're very focused, Rebecca and I and the whole team on cash generation, fiscal responsibility using our operating expenses in the most effective way for the greatest return both mid-term and long-term. And so I'm happy to have mentioned and talked about the portfolio review work that we went through they've accommodated recently and we've been doing that for over a year. This isn't a reaction or anything, it’s actually just good management. We've been -- we will continue to do it going forward. But as far as where we are today, we've made all the decisions we need to make. And so the investment level that we're making right now and into next year reflects the effect of all of those prudent decisions, Rebecca?

Yes, absolutely. And I completely agree, I think when we look going forward, there are line by line a couple of different factors. On the R&D side, obviously, Nightingale is a critical priority for us. And as that enrollment continues to ramp, you will see expense ramping, but over time, absolutely believe R&D should be a point of leverage. On sales and marketing, we have a very unique structure in that where our specialty sales teams serving the urology, endocrinology and pulmonology markets actually are incredibly productive given we can serve those markets more than anyone from 40 to 50 people and therefore sales and marketing has been an extreme point of leverage for this organization and will continue to be one on a go forward basis, especially with some of the decisions recently made around the pulmonology portfolio. On G&A, absolutely should also be a point of leverage on a go forward basis, especially extra comp, so I think you hit the nail on the head when we look about what our investment areas are in [Technical Diffiuclty] and we've highlighted those all to you all at this point in time. So not saying there'll be 100% dropdown margins or incremental margins that obviously wouldn't be prudent, but you should definitely see incremental margins on a go forward basis out of OpEx.

Okay, thanks. And then just one on nCounter and I know that probably isn't new in terms of like the order or the sequencing of the tests, the IVD tests that you're planning to launch in Europe. But I guess why is Envisia the first one, I mean, given the kind of home run success of the Decipher’s test, I mean, why wouldn't you go with Decipher first?

It's an excellent question and you can imagine one we've pondered a lot when we first started to look at this, and the reason is quite simple. Envisia was very far advanced already in terms of -- before we acquired Decipher, in terms of advancing the code set, and getting the test ready and validating it and being able to demonstrate conformity with our existing lab developed tests. So it is a perfect illustration of the model of clear based -- complex clear based test and then being able to move that over to the nCounter and it was so far along on that journey that it's just the case of getting it ready and submitting it. Decipher prostate needed to go back several steps to be commenced from the beginning forward, right? We had to start that work at the very beginning that we've already done on Envisia. So we looked at this well over a year ago, just as we completed the Halio acquisition and the team came forward with what I thought was an extremely smart and responsible approach of launch Envisia, first use that to prove, get our team to demonstrate the capabilities there. And then Decipher came next because for the great reason you mentioned, there is a big market for prostate testing and an unmet need over there and a pent up demand we believe. So that's why that's the next one on the talk, and then of course nasal swab the year after that.

And then with just Envisia, I mean, do you think that there's enough -- a big enough market there that you could drive, kind of, nCounter placements with that alone? Are you going to need, kind of, a broader menu before it really starts scaling up?

You need more. I mean, Envisia, if you think about in special lung disease, an IPF, it's a rare condition. And so it helps to have that additional test on the menu for sure and our European teams looking forward to having that in their portfolio to be able to sell. But it's going to need the menu and for us to at least add Decipher. I think once we add Decipher prostate, you see a kind of a step function increase in the interest going forward. And then, of course, when you lay a nasal swab on top of that, you get the next big step function.

And in recall, there already is a pretty significant installed base of nCounter instruments in the European market. And so as we look forward to the growth factors of the organization over a long-term timeframe. This is much more about the actual pull through of the kits and the reagents more so than instrument placement.

Yes, okay. Got it. Thank you.

Thank you. One moment for our next question. It comes from Tejas Savant with Morgan Stanley. Your question please.

Hello. This is Hugo on for Tejas. Thank you for taking our questions. You mentioned that you see a lot of room for growth in your prostate Decipher test, but specifically on the recent shift in dynamics and prostate classifier landscape. Do you see this could be a share gain opportunity for you? Do you think this could represent a temporary bump of some of the competitor tests with chance? Or do you view the potential share shift that's sustainable.

When you're referring to the shift in dynamics, are you talking about with respect to Exact and MDX Health?

Yes.

Or something different. Okay, yes, I mean, Tina, I'll pass it over to you. I mean, you're living this every day.

Yes. I think that we feel very good about the markets that we occupy. We feel very good about the customers that we have and how we've penetrated the market and our test is different from that test. They don't have the grid offering that we have, which really is very much used by a lot of our physicians to look at other genes in the RUO setting and think about it very differently than just the test itself and because of our level of evidence and how far ahead we are. And again, back to that level one that just came out for with the NCCN guidelines, that's very, very different than the competition where they're seeing a level three. So I still think that with our market position even with that movements from Exact to MDX that we still have a great position in the marketplace. And I don't feel that's going to make a great difference to us.

Purely great.

Giot it. That was super helpful. And then as a separate follow-up, could you elaborate on the trial design for the Percepta Nasal Swab study Nightingale and have that enrollment for that study caught up and how many patients are you expecting to enroll into the study by year-end? And how does that timeline for the trial readout stack up against timelines for getting that test on nCounter?

Yes. So couple of things there, I mean, in terms of the Nightingale study itself, I'm not going to give any more detail on the trial design. But I reported last quarter that we're about a quarter behind in our enrollment, I'm extremely pleased so far with the progress the team is making, it’s still very early days and very relatively small patient numbers so far, as you would expect, because the ramp comes as you bring on more and more sites. But the site acquisition, the site initiation is very much on track and we're seeing an increase in knee per site patient numbers as well, which is very encouraging at this stage. So it's nice to see that. I think it'll be a couple more quarters before we start to see those numbers get to where it really demonstrates how far along we are. We do still expect based on the work that we're doing and the projections that we've done that we can meet our own internal guideline of getting that done by the end of next quarter -- end of next year, I'm sorry, end of 2023 in terms of the final patient enrollment. Now relative to the nCounter implementation. Again, this goes back to our model and our strategy. Having these tests launched in the U.S. reimbursed in the U.S. and so on certainly helps with our OUS market. But at the same time, we're looking at ways that we can generate even more evidence development and show clinical utility with our partners outside the U.S. And so nothing displayed yet, but that's something that we’re going to be looking at. John Leite just joined us as a GM, our pulmonology business and that's one things he's going to be thinking about is the OUS market. But I would tend to at this stage, I would think about it as being typical model of you launch the test in the U.S. and then the OUS reimbursement comes after that.

Got it. That's super helpful color. Thank you.

Thank you. One moment for our next question please. And it comes from the line of Matthew Sykes with Goldman Sachs. Please proceed.

Hey, guys. Congrats on the quarter. This is Dave on for Matt. You had some good wins on the commercial payer coverage side, could you tell us more about how these discussions went and any expectations for future discussions going forward?

Yes. I mean, I'll start and anyone else from the team can feel free to add in here. But the way these discussions go is typically the way they go. There's a lot of blocking and tackling and a lot of negotiation and a lot of hard work by a very experienced team to get every one of these over the finish line. And even when you do, there are plenty to take a long time to get in some, you don't even never get even for a tester as well, embedded or guided or utilized as both the firmer and the size first. So the team has done a great job just continuing the drumbeat here. We've always got more in the pipe line and it's nice to see so many covered lives now in both of those core testing products. Anything you want to add?

Yes, I would just say that Decipher is still early in it’s progression with the commercial payers. We continue to add every quarter. We did add a few more this quarter as well. And again, as I mentioned previously, I think the addition of the level one evidence by NCCN and the presentations that were done that extend our clinical utility data are very, very helpful in securing these contracts.

Great. And then the manufacturing transition to Marseille, great to hear that the first wave is completed. Any additional color there around next steps what we can look for going forward?

No, I think it was great to see the fulfillment stuff completed and transitioned over to Marseille and the team is doing a really, really nice job over there. The key part of this next day is the actual manufacturing and that will take through as we mentioned before through the end of 2023 to get done. So nothing more to report on that until we -- really until we get to the end of next year, but I don't foresee any problems with that.

Great. Thanks, guys.

Thank you. And with that, I'll conclude the Q&A session. I will turn the call back to Marc Stapley for final remarks.

Thank you. I appreciate it. So as you just heard, we had an excellent quarter and we're on track to finish out the year strong. I'd like to thank our incredibly talented team for their hard work, execution and deep commitment to the patients we ultimately serve. I’d also like to thank our Executive Chairwoman, Veracyte Co-founder, Bonnie Anderson for all of her support during the last 18-months. Bonnie will continue to help us achieve our long-term goals from the vantage point of Board Chair as she transitions fully into that important role from January 1, next year. So I'm really looking forward to continuing to partner with her and the board. Our high value tests are addressing key unmet needs, as you know, delivering insights that enable physicians to provide exceptional care to their patients at moments that matter in the race to diagnose and treat cancer. We have a portfolio of great product a winning formula for commercializing them and a clear pathway for making them available to patients around the world. I couldn't be more excited about our progress to-date in the tremendous opportunities lie ahead for Veracyte. With that, I want to thank you for joining us today and we look forward to keeping you apprised for our progress. Thank you.

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