Veracyte, Inc. (VCYT) Q4 2022 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the Veracyte Fourth Quarter and Full Year 2022 Financial Results Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ms. Shayla Gorman. Ms. Gorman, please begin.

Good afternoon, everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 2022 financial results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; Rebecca Chambers, our Chief Financial Officer; and Dr. Tina Nova. Veracyte issued a press release earlier this afternoon detailing our fourth quarter and full year 2022 financial results. This 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 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 files 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's CEO.

Thanks, Shayla, and thanks everyone for joining us today. I'm pleased to share that we ended 2022 on an incredibly strong note, hitting an important milestone as we delivered our high value test to more than 100,000 patients and their physicians during the year, enabling better diagnostic, prognostic and treatment decisions are pivotal moments in the race against cancer. I'd like to thank the entire Veracyte team for their dedication and hard work in putting patients first. Our fourth quarter results continued our track record of strong execution and high performance as we delivered record revenue of $80 million and positive cash flow from operations of $10 million. Further, our 2022 ending cash balance was slightly higher than the prior year, a result of our philosophy to balance cash generation with investing in our long-term growth drivers. We are extremely proud of our strong financial discipline and profile and the impact we are having on patients lives. Delivering exceptional diagnostics to enable exceptional cancer care has never been more important. The American Cancer Society recently released data showing a 7% increase in prostate cancer incidence versus the prior year. Notably, the greatest increase was among high grade metastatic cancers. The Decipher test is uniquely suited to address these challenges, given it is indicated for over 90% of prostate cancer patients currently, and we and others are building evidence to demonstrate our test clinical utility in metastatic cancer as well. The attainment of Level 1 evidence status for our test in the most recent NCCN guidelines for both biopsy and RP patients further differentiates Decipher Prostate from other gene expression tests. This growing body of evidence for Decipher Prostate led to us delivering over 12,000 test results in the fourth quarter, demonstrating further penetration into a market where we believe that three out of four men with prostate cancer still don't receive a molecular diagnostic test. Our evidence generation efforts are one of the most important and differentiating components of executing our strategy to address the large untapped market. In 2022 alone, there were over 40 scientific abstracts and publications demonstrating the prognostic and predictive value of the Decipher Prostate test. Further, we engaged in 23 Phase 2 and Phase 3 clinical trial collaborations with some of the world's most prominent prostate cancer researchers. Last week, data from three trials of the Cancer Clinical Cooperative Group and RG Oncology were published in the International Journal of Radiation Oncology, Biology, Physics, The Red Journal, suggesting that the Decipher Prostate test provides prognostic information to help personalize treatment decision making. These findings represent the first validation of any gene expression biomarker on pretreatment prostate biopsy samples from prospective randomized trials. Our focus on serving neurologists also includes our Decipher genomic resource for intelligent discovery, or GRID database report, which we share on a Research Use Only basis with physicians who order it alongside the Decipher Prostate Genomic Classifier. We recently introduced an enhanced version of GRID to provide more granular genomic information about a patient's tumor based on whole transcriptome biomarkers that have been broadly evaluated in the diagnosis, prognosis and treatment of prostate cancer. Our approach to running a whole transcriptome on every patient sample uniquely enables this capability. Further, we believe that our Decipher GRID database is helping to advance the science around prostate cancer molecular subtypes, an emerging area of increasing interest for researchers. Among six Decipher-focused abstracts presented at the ASCO GU Cancers Symposium last week, one study's findings suggested that a Decipher GRID-derived signature can enable more personalized prostate cancer treatment decisions for patients based on their molecular subtype. This study demonstrated, for example, that after radical prostatectomy, men with basal immune tumors derived the greatest metastasis-free survival benefit from post operative radiotherapy, while those with other subtypes did not see the same benefit. Additionally, in men with metastatic disease, those with luminal proliferating tumors had the greatest survival benefit from the addition of docetaxel to androgen-deprivation therapy. Looking ahead to 2023, we believe that with our exceptional test, robust clinical evidence, world class sales team and effective marketing programs, we are uniquely positioned to continue driving adoption of our Decipher Prostate test in a growing market that is still only 25% penetrated. Moving to Afirma. Our momentum continued to build in the fourth quarter, which resulted in the new record for tests and revenue delivered. We reported over 12,500 Afirma results with growth driven by new accounts, including competitive wins, and expanding utilization in our existing accounts. As we've said previously, we expect this momentum to continue into 2023, driving Afirma revenue growth in the mid-to-high single digits. Similar to Decipher, we continue to leverage our strong and growing library of clinical evidence to support the continued adoption of Afirma. This included the publication of a meta-analysis of 13 independent studies in the Journal of Clinical Endocrinology & Metabolism, showing that the test real-world performance was similar to and in some cases even better than the original clinical validation results. This study, which covered nearly 2,000 patients with indeterminate thyroid nodules, further demonstrates the clinical utility of Afirma in helping to avoid unnecessary surgery for hundreds of thousands of patients. As we evolve and enhance our test, we believe we will continue to further penetrate this market, especially in areas where we can provide valuable information around personalizing treatment, such as guiding the extent of surgery. We also continue to focus on enhancing the customer experience, including making the test as easy as possible to order and use. Previously mentioned, in Q3 we introduced an online portal to enhance the ability to order test kits, track progress, and see patient test results. Customer adoption has been encouraging on the portal’s uses enabling us to deliver test results to physicians and ultimately to their patients sooner by streamlining the process. We recently published data demonstrating our ability to derive insights from our expansive thyroid nodule database and whole transcriptome sequencing capabilities. This study published in Frontiers in Endocrinology suggests the ability of Afirma testing to help further personalize care for patients with thyroid nodules by informing on TSHR, a rare gene mutation. We believe this is just one example of how the unique whole transcriptome data available from our Afirma test enables insights to help further advance the science around thyroid cancer and potentially enhance the information the test provides to clinicians. Decipher and Afirma adoptions are great illustrations of the proven framework we utilize, which starts with identifying a specific clinical unmet need. Then we develop a test to address that need, along with securing the clinical evidence, reimbursement and guideline inclusion to drive market penetration. This successful approach enables us to invest in our long-term growth drivers, namely our Percepta Nasal Swab in lung cancer and the in vitro diagnostic or IVD versions of our tests for global expansion. During the quarter, we continue to make progress on the NIGHTINGALE clinical study designed to demonstrate clinical utility and support reimbursement for our Percepta Nasal Swab test. This study remains a key focus in 2023, as we aim to complete enrollment around the end of this year. Level of interest from trial sites continues to be high, and we are adding more sites and patients every month. We're excited about the potential of the Percepta Nasal Swab to benefit patients and physicians as a non-invasive test to help guide clinicians next steps for patients with potentially cancerous lung nodules, while also contributing meaningfully to the company's long-term growth. Our strategy to deliver IVD versions of our tests to physicians and their patients outside of the United States is another key long-term growth driver. As I have previously shared, we were aiming to submit our Envisia Genomic Classifier to European regulators in 2023, and I'm pleased to share that we actually achieved this goal in December ahead of schedule. I'd like to congratulate our IVD team and supporting functions for hitting this impressive first milestone. While the commercialization efforts will begin post the completion of the regulatory process, we have initiated premarketing activities in Europe, including training our sales and market access teams and KOL education. Our other IVD development projects remain on track for regulatory submission according to our previously announced schedule, Decipher Prostate in 2024 and Percepta Nasal Swab in 2025. Both projects are progressing very well and hitting their key internal milestones. In addition, the second phase of our transition of our IVD kit manufacturing from NanoString to our facility in Marseille is on schedule to be completed around the end of this year. One of our other long-term growth drivers is our biopharma business. We were pleased to share three abstracts at the Society for Immunotherapy of Cancers annual meeting, highlighting our unique multi-omic immuno-oncology capabilities and offerings. An example abstract was focused on data derived from the PIONeeR project, a large international trial evaluating patient response to immune checkpoint inhibitors. This study suggested that use of Veracyte’s Brightplex technology could help refine the stratification of patients with advanced non-small cell lung cancer, who are more likely to benefit from immune checkpoint inhibitor therapy. In 2022, we added many new pharma customers, expanding our outreach and forging a stronger presence in the U.S. market. While we see significant opportunities to help our partners advance their oncology drug development programs, we also anticipate some near-term unfavorable impact on our biopharma business due to the current macro environment, and have incorporated this in our guidance for the year. Before closing, I would like to share some organizational updates. I am extremely pleased with the strong experienced leadership team that we have assembled, which is as passionate as I am about advancing Veracyte’s global vision. I am delighted to share that we have promoted Annie McGuire, our General Counsel to an expanded role of GC and Chief People Officer. In this role, Annie will not only lead our legal organization, but also our HR team, driving our efforts to embed and grow Veracyte’s unique culture while also attracting and retaining world class talent to ensure our ability to scale the business. In addition, Rebecca Chambers, our CFO, has recently taken on an expanded role as she now also leads our CLIA operations teams, helping to drive continued strong execution and consistency across our three CLIA sites in the U.S. as they deliver our tests to physicians and patients. During 2022, as evidenced in our result, Tina Nova has provided incredible leadership to our CLIA organization and our three businesses of urology, endocrinology and pulmonology in the U.S. Given the progress made and the strength of leadership she has built in our CLIA team, including John Leite as GM of Pulmonology & Market Access; and Brent Vetter as GM of our Afirma business, Tina is asked to continue to support the Decipher franchise while also pursuing other personal interests outside of Veracyte. To enable this, John Leite is now reporting directly to me and is also providing leadership and oversight to the Afirma business supporting Brent, while Tina focuses entirely on urology, also reporting to me. We are delighted that we will continue to benefit from Tina's leadership and experience as we grow our business. Looking forward into 2023, our strategic focus areas are very clear. Number one, continue to fuel near and midterm growth by further penetrating the underserved prostate and endocrinology markets. Two, invest in our long-term growth drivers of nasal swab and IVD products as well as in our business infrastructure to grow and scale. Three, responsibly manage our portfolio with an eye to profitability and cash generation. Four, continue to look for new opportunities to expand our testing menu beyond current indications. It is through this clear focus and alignment that Veracyte is positioned to deliver our exceptional tests to even more patients. I could not be more excited about Veracyte’s future or more grateful to work with our passionate employees in delivering our vision of transforming cancer care for patients all over the world. With that, I will now turn to Rebecca to review our financial results for the quarter and expectations for 2023.

Thanks, Marc. As Marc said, we had a record quarter with 80.3 million in revenue, an increase of 19% over the prior year. We grew total volume to 28,000 tests, a 26% increase over the same period in 2021. Testing revenue during the quarter was 70.3 million, an increase of 32% year-over-year, driven by higher than expected Decipher Prostate and Afirma volume. Total testing volume was approximately 25,500 tests. Testing ASP was $2,700 as we benefited from approximately 1.5 million of better than expected cash receipts, due in part to catch-up Afirma collections. Fourth quarter product volume was approximately 2,300 tests and product revenue was $3.2 million, up 17% year-over-year. Biopharmaceutical and other revenue totaled $6.8 million, down 39% year-over-year, driven by the $4 million milestone received in the fourth quarter of last year. 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 67%, up approximately 50 basis points compared to the prior year. Testing gross margin was 72%, up 300 basis points compared to the prior year, benefiting from higher lab volume and long data collections. Product gross margin was 19% as we continue to be impacted by expenses related to the transfer of the Prosigna manufacturing to our Marseille facility. In 2023, we expect product margins to be back at historical levels. Biopharmaceutical and other gross margin was 30%, down year-over-year due to the milestone recognized in the fourth quarter of 2021. Non-GAAP operating expenses, excluding cost of revenue, were up 11% year-over-year at $51.1 million, driven by ramping clinical trial and project expenses as well as higher personnel costs. Research and development expenses increased $1.5 million to $11.1 million, sales and marketing expenses increased by $2 million to $23.2 million and G&A expenses were up $1.4 million to $16.8 million. We recorded a GAAP net loss of $3.8 million, which included $7 million of stock-based compensation and $6.6 million of depreciation and amortization. Overall, we increased our cash position by 9 million compared to the prior quarter. We ended 2022 with 178.9 million of cash, cash equivalents and short-term investments higher than the balance of 177.4 million at the end of 2021. Turning now to our 2023 guidance. We project total revenue of $325 million to $335 billion, or 10% to 13% growth year-over-year. Our guidance reflects testing and product revenue growth in the mid-teens. Biopharma and other revenue is expected to decline year-over-year given the impact of a sizeable biopharma customer pulling back on planned spending, the current macro environment and the continued transition of our manufacturing resources from our IVD services business to our in-house IVD development. For the first quarter, we are forecasting a sequential decline in revenue given typical seasonality. We expect non-GAAP gross margin, excluding the impact of intangible amortization, to be in the mid 60s for 2023, roughly in line with 2022 as we implement operational efficiencies to help offset rising costs. Moving to our expectations for cash. As always, our comments are barring potential M&A as well as the known impact of prior acquisition-related contingent consideration expenses. In 2023, we anticipate being able to continue to invest in our long-term growth drivers while maintaining a roughly neutral year-end cash balance. We also believe we are fully funded to take the business to profitability. For Q1, we are forecasting a usage of cash given the usual timing of compensation payments, including bonuses and taxes. I'm excited about the momentum we have heading into 2023 and our continued focus on executing against our strategic vision. We will now go into the Q&A portion of the call, and Dr. Tina Nova will join us. Operator, please open the lines.

Thank you. [Operator Instructions]. Our first question will come from Andrew Brackman of William Blair. Your line is open.

Hi. Good afternoon. Thanks for taking the questions. Maybe just to start here on guidance. Rebecca, maybe can you just unpack some of the key assumptions underlying the range here, just trying to sort of better understand the building blocks here between volume assumptions and ASPs? And I guess just relatedly to that, I heard the Q1 commentary on pacing, but anything else that you'd call out here? Thanks.

Yes. Thanks, Andrew, for the question. We were pretty explicit about the assumptions from a testing and product basis in the commentary of mid teens for both, and won't necessarily go into the volume versus ASP assumptions for that broader than saying on the Afirma side, we do expect mid-to-high single digits, and that will be a mixture of the two. And on the Decipher side, we expect ASP to be roughly flat on a year-over-year basis with the growth coming more on the volume side. Product, as mentioned, we said mid teens. And then biopharma and other would be your plug to get to the guidance range. And so that is a decline on a year-over-year basis for the reasons cited in the prepared remarks. Importantly, we are excited about the biopharma business over the longer term and are really being impacted here by one bespoke [ph] customer as well as expectations on the overall macro environment, as well as moving some of our IVD resources around to help satisfy our own development needs, which we are excited about over the longer term as well. And so hopefully, that helps answer your question. But obviously, with the vast majority of revenue coming from Afirma and Decipher, we have a great outlook for both of those products in 2023.

Very helpful there. And then I guess the second question that I had was really around NIGHTINGALE. If I heard you correctly, I think you said that should finish enrollment by the end of the year. Just sort of knowing that, how should we be thinking about timing for readout of that study? And then I guess just relatedly there, a launch to the product following data readout? Thanks.

Yes. Thanks, Andrew. As we've said before, I think the first key milestone is exactly that one that we complete enrollment around the end of this year. And that's the first kind of real, I think, indication here that things are progressing as they should be and as we're expecting them to on the NIGHTINGALE trial. Now after that, of course, we have to take various looks at the data. We have to see what that's telling us. And we have some follow up to do, of course, on patients. You have to follow them for a period. As I've said before, standard of care is two years. But there's some publications and data out there around one year follow ups for benign. So we'll look at that along the way and see what it tells us. And then that will be the next time you'll probably hear more from us on that, and then that will help guide both reimbursement and then the premarketing and commercial activities. Our goal is to do a lot of this in parallel and try and get us to a point where we've got a lot of KOL support for the product. We're heading towards overtime. We want to get to guideline inclusion and things like that. The standard formula that we talked a lot about that we've done successfully on other products. So more to come on that in the future. But as I said, the first key milestone is completing the NIGHTINGALE enrollment.

Okay. Thanks for taking the questions.

Thank you. One moment please for our next question. Next question will come from Matthew Sykes of Goldman Sachs. Your line is open.

Hi, guys. This is Dave Delahunt for Matt. Congrats on a strong quarter. You've been very successful with M&A in the past. As you mentioned, it remains a key pillar of your strategy. You're generating cash. Can you talk about what you're seeing in the market for bolt-ons? Are you hearing about valuations for potential target softening, which could create some opportunities?

Yes, and maybe just kind of take a bit of a step back and just talk about how we grow our business. We talked a lot about where the organic growth comes from. Inorganically, it could be a combination of partnerships and M&A. On both our areas, we continue to and always have looked at. With respect to M&A, I'd put it into two categories. You mentioned one of them. But the first one I'd say is if you think about Decipher and that acquisition, which has been incredibly successful for us, products that are at that stage of commercialization, evidence development is there. It's a case now of generating and contributing to revenue and hopefully cash generation in a fairly reasonable timeframe. Those will be clearly very interesting to us. There's not a great deal of funnel out there. And then the second is bolt-on in technologies and small acquisitions and things like that. Again, similarly, we've always looked at those kinds of things and continue to do so. But we're very focused on preserving our cash and only using it for the most clearly beneficial needs for the company. And so no change in our strategy there around M&A.

Got it. So you've successfully built out portfolio to include most of the top cancer indications. Any other cancer indications that you would not be interested in expanding into?

That's a good question. I wouldn't say -- I'd never say never in terms of indications, but there's a couple of ways that we can expand. We've talked about this internally within our current products that leverage our existing sales force would be expanding within the indications that we currently have, metastatic and prostate cancer is a very good example of that. Bladder is another good example of that where we can leverage our existing sales force. And then beyond that, we'd obviously need to think about that a little differently in other indications where we currently don't have a presence. But all those possibilities, organically and inorganically as well. But I wouldn't say there's any areas where -- specifically within cancer and we've been very clear that our focus is in oncology, where wouldn't be an area that might be of interest to us. But like I say, our core focus right now as a company is those four things I said. And the first couple of those were grow our business based on the indications that we're currently in and continue to invest in these long-term growth drivers that we talk about. Those are substantial, meaningful and take a lot of, as they should, a lot of resources in our company.

Great. Thanks.

Thank you. One moment please for our next question. Our next question will come from Puneet Souda of SVB Securities. Your line is open.

Hi, Marc. Thanks. So first one, if you could clarify on the biopharma revenue sort of what's the momentum here in terms of the number of projects that you have? At some point, you had disclosed what those partnerships were. How should we think about this business longer term, and just maybe help us parse that biopharma piece out for '23.

Yes, I'm happy to do that. And then, Rebecca, you may want to add on here. But the biopharma business, remember is three businesses that we put together. We have assets products in immuno-oncology as well as our vast databases the come from our whole transcriptome work in endocrinology and prostate as well. One of the things that we've been very successful at in that business is driving repeat business, which means we're doing a really good job for the customers that we have and notwithstanding macroeconomic or budget decisions from them, we've been very pleased with the level of follow-on projects. And oftentimes putting these projects start as kind of what I would call small foot in the door projects where we build that relationship and demonstrate our capabilities, and they expand from there. One of the things we've been focused on more recently is also growing that set of customers that we work with. And one of the things we've done this year is we've added a number of new customers, so diversifying and reducing the level of concentration that we have. And so that's one of the reasons why you've heard our guide from Rebecca here around this, which is in the near term, we're conservative about them. We're cautious about the growth there. But it very much continues to be a long-term growth driver for us. We're seeing a lot of success with new customers. We're seeing a lot of success with existing customers. And so we remain excited about it.

And just a few things to add there, Puneet. So I think when you think about the biopharma in the other line, recall that's by -- to Marc's point, that's the biopharma business, but as well the IVD manufacturing and development business. Historically over the course of 2022, those were roughly 50/50 in terms of revenue contribution. As we look ahead, given our focus on our own IVD development, that relationship will change, and it will be more concentrated in the biopharma piece. And last point would be to say that absolutely, we have been very concentrated from a revenue perspective. But actually our number of customers that we have added over the course of 2022 and really diversifying the portfolio is, call it, around 3x more than the number of customers that we have and contributing the vast majority of our revenue. So I think when it comes down to it, we're becoming more and more diversified to Marc's point in that revenue line, and that's going to help us over time have biopharma another revenue that is additive to total corporate growth as opposed to what is happening in 2023.

Maybe just to add one more thing that I thought of as we were talking here, Puneet, is the -- there are three primary areas where we're working with biopharma, and one is in terms of identifying clinically relevant biomarkers, and that's probably the area that gets the most hit in these situations. Two is identifying patients for clinical trials and stratification of the patient population. And then three, which is much smaller and further out is companion diagnostic development. And so, again, we're relatively diversified in terms of how we work with -- and abroad in terms of how we work with biopharma partners.

Okay, that's helpful. And I'm not clear if you provide, and apologize if you provided earlier, but Decipher volume contribution in the 2023 guide, I think you said ASP will be flat. And did I hear it correctly that Tina is transitioning some or all of her duties? And could you outline sort of the transition plan here? Obviously, Tina has been instrumental since the acquisition of Decipher and for the whole franchise of prostate.

Yes, let me let me clarify again and repeat some of what I said in the prepared remarks then open up to Tina, if you have any comments. But Tina has been leading our entire CLIA business. So that includes pulmonology, urology, endocrinology, in terms of those commercial teams as well as our market access in our CLIA lab operations, which includes the labs themselves, billing and customer care. And so if you think about that, that was an incredibly broad scope. If you just look at Decipher alone, a business that since acquisition on a quarterly run rate basis has essentially doubled in that timeframe and grown significantly. And so one of the things that Tina and I agreed was, especially given the talent that she's brought in and grown in the business, we've gotten to a point where a team is able to focus on urology, but also some other things and not have to spend her entire time working on that vast portfolio that I just described to you. Tina, anything you want to add to that?

No, I just -- as you know, Puneet, I love urology and I'm really happy to be focusing on it entirely. And as Marc said, it's grown so fast, and there's so much happening in urology. And so it gives me an opportunity to really spend more time on it, which is I think it needs it and I love it. But we also have an incredibly strong team now that we've brought in and so I feel so much better about having all this help and great people like John and Brent and Rebecca taking over lab ops. And we just really needed to expand that. And the good news is we're having such great growth that we're able to do this, and it's the right thing to do at this point. So I'm excited about it. And you may have seen that the cancer numbers have gone up in prostate, so it’s the one cancer that everyone's really focused on for growth. And so having more attention on it I think is going to be helpful as well.

Totally agree.

And then, Puneet, you did ask if [indiscernible] explicit Decipher growth number and guide and the answer there is, it’s not explicitly given the concentration of our revenue between Afirma and Decipher and the comments made, you can very easily back into what we're assuming though.

Okay, thanks. And thanks for clarifying that. And if I may just ask one question that we've been getting from some investors is the IVD transition often counter, could you update us -- I think you talked about the timing by the end of this year, but could you update us on any additional payments that you need to make to NanoString as part of taking on that manufacturing? What sort of investment is required here from Veracyte’s point of view? Thank you.

Yes, so let me talk about the process. And Rebecca, you can share with respect to those payments of investment. But taking a step back, if you think about it, there are a couple of key milestones we've been tracking here. One is the submission of three products to the notified body, the first being Envisia, the second Decipher Prostate and the third nasal swab. And as I mentioned in the prepared remarks, we actually submitted Envisia in December ahead of the schedule we've talked about, and now we're waiting for that regulatory response and process to play out. So that was fantastic. And again, congratulations to everybody who worked on that. The second part beyond the essay development submission for IVDR is the transition of manufacturing to Marseille so that we are producing the kits ourselves in our own facility. And that's been done in several parts. Part one is behind us is a lot of the fulfillment, but the actual part of getting to the final manufacturing transition is planned for around the end of this year, progressing extremely well. The third part of that is the instrument itself, and TBD on how we proceed with the instrument. Obviously, in the meantime, NanoString is producing that instrument for us. And we're making great progress on that as well. Rebecca, anything you want to --?

Yes, a couple of things to add on the specifics here, Puneet. From a CapEx perspective, there will be some CapEx over the course of 2023 for the transfer, but nothing that will come -- nothing from a materiality perspective, if you will, is they are relatively minor in nature, specific to cash and contingent consideration payments. Recall, just as a reminder, our guidance around cash is excluding the impact of contingent consideration payments, and there's actually two to be aware of. One is the HalioDx contingent consideration, which will hit in the first, third and fourth quarter of this year. And that's around $9 million. And there is an incremental up to $7 million tied to NanoString that may hit also in the back half of 2023. That would be for the launch of two products, one of which hopefully we have Envisia approved over that timeframe, albeit that's out of our control. And then the second for planning purposes more so than discrete information, we have a partnership that has been publicly announced that there's a potential that they will be launching their product commercially on NanoString as well, which would trigger a second milestone payment for their contingent consideration. And so those are the assumptions embedded in the cash guidance as well as what would be the case of payments to NanoString if those products are commercially launched in 2023.

So of course, obviously, hitting those two payments is from a signal standpoint indicating that we're now on the path to a commercial product or commercial products. And so those are good payments that we would be making at that point.

Got it. Helpful, guys. Thanks.

Thank you. One moment please for our next question. Next question will come from Mason Carrico of Stephens, Inc. Your line is open.

Hi, guys. Congrats on the quarter. Maybe just two quick ones here. First, maybe if you could provide some color on maybe a timeline framework for these kitted tests now that Envisia has been submitted? I know you just touched on it a little bit. But how should we think about it from a timeline perspective of getting a regulatory decision and maybe seeing some reimbursement or coverage just as we think about Envisia as well as obviously Decipher and the other products as they roll out?

Yes, it's a really great question. One of the first challenges that we have to get through is the regulatory approval, submitting is the partners within our control and responding to their queries and comments is, to a large degree, within our control, but the actual timeline is not. And so it's also hard to predict right now, because this entire IVDR process which replaced the old IVDD process is somewhat of an unknown quantity, both to them and to us. And so these first few products that go through this process are going to kind of blaze the trail a little bit. So that's the first thing that puts a level of uncertainty around it. Now in the meantime, as I mentioned earlier in the remarks, we can do some parallel activities in terms of KOL, generating KOL support and so on. But to your -- to the other part of your question, if you think about it, getting the regulatory approval is just one important part of the equation, a really important one. While we can do that for the entire European market, that doesn't mean we get reimbursement for the entire European market. That is a country-by-country activity, one that we've experienced that because that's exactly what we've done and are doing with Prosigna on that exact same platform. So yes, again, we still have to go country-by-country and get reimbursement for the test. And then, of course, you have to drive adoption lab-by-lab. So that kind of dictates a lot the timeline that we're going to have to go through there. But again, as I mentioned, it's something that we have the team to do and we have the experience to do. And so we'll take that in our strides somewhat. In terms of the demand, remember, Envisia is a rare disease and there's not an incredible number of instances on an annual basis, even in Europe. Decipher Prostate, on the other hand, is a much greater market with what feels like quite a bit of pent-up demand for that product. And so our belief is by the time we get Decipher launched, then at that point we'd have three products on the menu at least. And that really starts to help inflect adoption more so than Envisia alone where Prosigna would, if that helps.

Got it. Yes, that's helpful. And on that point, for the Decipher submission, given that Envisia was submitted ahead of schedule, any incremental color you can give around when Decipher would be submitted next year, first half, back half, how you're thinking about that?

Yes, and there's no real read through from getting Envisia done earlier in respect to the other two products for the simple reason that all three have been progressing in parallel anyway. And so it doesn't actually accelerate our timeline for Decipher. No more color than we're anticipating to submit Decipher in 2024 and nasal swab in 2025. Obviously, the earlier we can submit Decipher the better. And so that's a key focus for us.

Got it. That's helpful. Thanks.

Thank you. Again, one moment for our next question. Our next question will come from Mike Matson of Needham & Company. Your line is open.

Yes. Thanks. I guess I just have two questions. A lot of my questions are already asked. But just on OpEx, I know you're not giving specific guidance but it looks like consensus is I think around 250 million give or take and implies like 60 million, 65 million in the quarter roughly. Does that seem reasonable?

Are you talking on a GAAP or non-GAAP basis just so I'm answering apples-to-apples?

Yes, good question. I think we're modeling things on a non-GAAP basis.

Okay. Yes, I think that's roughly reasonable, plus or minus a bit. We have a couple of important drivers that we're investing in for next year, which will lend themselves to step up in '23 versus '22, the first of which obviously is NIGHTINGALE, which is an investment we're happy to make given the market size for the nasal swab and the opportunity it presents itself. We're also obviously investing in the IVD products. That is not necessarily a large delta year-over-year outside of the manufacturing transition, which is a slight pickup. And then importantly, as we bring these -- as we continue to progress in building the foundation for long-term growth, we are investing a little bit more in infrastructure to really kind of provide cohesiveness, if you will, across the company and really ensure we can scale for growth. And so that will also impact the G&A line a little bit. Commercial/sales and marketing, I wouldn't necessarily expect to see a ton of incremental investment there outside of a handful of heads here or there to support the continued growth of the urology franchise.

Okay, got it. And then my only other question would just be around the site for the bladder test. I don’t know if you have any sort of updates there.

Yes. Tina, do you want to --?

Yes. So we are working on extending the Decipher franchise further into bladder. As you know, it's a smaller market. And I think there's -- for next year, it's been estimated a little over 62,000 new cases of bladder cancer for 2023, just to give you a percent and 70% of that is in non-muscle and the rest is in muscle invasive. Our current test is in muscle invasive. And as for a small portion of the market, as you know, which is just whether to use chemotherapy prior to a cystectomy. But we're working very hard, gathering more data, working on clinical trials to extend that further into the indication.

Okay, got it. Thank you.

Thank you. One moment please for our next question. Next question will come from the line of Tejas Savant of Morgan Stanley. Your line is open.

Hello. This is Yuko on for call for Tejas. Thank you for taking our questions. Maybe following up on the prior question on Envisia regulatory submission, I know there are many moving pieces. But is it reasonable to assume meaningful contribution for that product could be a '24 event? And how should we think about pace of adoption given there's already a meaningful installed base of encounter systems in Europe?

Yes, I think, again, as I said earlier, to me the real inflection here in terms of our IVD strategy comes from the launch of the test like Decipher Prostate, which has a much larger market than Envisia does. Plus the path in the journey to get Envisia both reimbursements adopted includes guideline support outside of Europe, and the test hasn't been available outside the U.S. in Europe. And so that's a pathway that our team is trying to forge right now. And so no, I don't think you see a major uptick there from getting Envisia approved right away. If you look at the U.S., Envisia, the path to adoption has been slow, again, because of the fact that it's a rare condition and there's a lot of work to do to move an entire market that doesn't use a diagnostic test in interstitial lung disease over to begin to use one like this. And so we're going to have to do that outside the U.S. as well. So I think that -- think about it like it certainly helps and again, we learn a lot from both launching the test on the product and going country-by-country and driving reimbursement adoption that, again, helps us with the Decipher Prostate test and of course also menu. We've talked about this extensively. Having multiple tests on the platform helps drive adoption, which leads to your other point around the installed base. There's a meaningful installed base out there now. And so that's obviously one of the first things that we do and currently are already doing with respect to driving adoption of Prosigna. And so we'll leverage that for Envisia, and then subsequently for Decipher and then at the same time we're working country-by-country and lab-by-lab to increase the installed base and we're making some good progress there.

Great, that was super helpful. And then on Afirma, what drives the growth to high-single digit into the guide versus mid-single digit into the guide? Is this more about how many -- is this about how many new accounts have sign up or more about increased utilization for existing users or new payer wins?

It's actually the first two more so than payer wins in Afirma because Afirma is extremely well covered. It is both driving into new accounts, and we've talked about this before, the long tail of accounts of physicians who haven't yet adopted Afirma or in any other tests that does similar things to Afirma. But it's also within existing accounts driving greater adoption. And we've seen both of those dynamics over the last year, and especially we talked about that a little bit today on the last quarter. So it's continuing to push on that. That's what might drive towards the high end. And anything on --?

No, I was just going to say, obviously, to ensure we get the benefit of a tailwind of ASP for Afirma over the course of 2023, we've worked through the impacts that we have cited previously over the course of 2022 for ASP for Afirma, so we should naturally have at least in that neutral position going into '23, albeit we do expect, as I mentioned earlier, ASP to be more of a tailwind to Afirma than a headwind. And so I think depending on how successful our billing team is in collections, that could vary anywhere from a small to large tailwind as well. So I think between the impact Marc cited as well as the ASP impact, there's varying shades of gray here in terms of the goodness that we're seeing in Afirma. And whether it's mid or high will be highly dependent on how each of those backs up.

Thank you.

Thank you. One moment please for our next question. Our next question will come from Andrew Cooper of Raymond James. Your line is open.

Hi, everybody. Thanks for the question. A lot has been asked, so maybe just one starting on gross margins. And I think you talked about offsetting some of the rising costs. It feels like others have talked about inflation at least being a little bit more stable now relative to where it was in terms of general profit. Just help us think about some of the moving parts there, obviously mix and how that may impact the gross margin trajectory throughout the year?

Yes, happy to. As you think about gross margin and inflationary impact, a good portion of our COGS, at least on the testing line, are related to lab supplies and reagents. And given this is the beginning of the year, our contracts all technically allow for some sort of reset, as you would expect, at this time of year, which is why we're feeling it a little bit more today than we would have been six or seven months ago, when it would have been more wage related. As we look forward over the course of 2023, we did do a number of things over the course of 2022, which we'll see the benefit of to help offset some of those reagent costs increases as well as salary increases that we typically see start at the beginning of the year. And so on testing, we do expect to see testing gross margins in those high 60 type ranges, not necessarily the 72 we saw in the fourth quarter, but back more towards a more normalized level of the high 60s. And then obviously on the product line, we've already given explicit guidance there, so I won't necessarily reiterate it. And then on the biopharma and other line, we do expect gross margins to be more in the low 40-ish range. And that's more dependent on revenue mix or type of revenue in that line in any given period than anything else. And so that can fluctuate probably even more meaningfully than any of our other lines from a gross margin perspective. So when you sum all that up, in any given quarter, I think mid 60s is a good a good estimate. And I'm sure we'll have a little bit of fluctuation, of course, through the year, but that's going to be highly dependent on the timing of different factors and so nothing trend worthy to note.

Okay, that's helpful. And then just -- I want to make sure on the Envisia potential launch, when we think about the manufacturing transition time with that, is NanoString there to support and manufacture at the start or is that something where you need to have that transition kind of in place to make that launch happen? How do we think about how those two pieces really are tied together?

Yes, they're really not in terms of how you think about it. Clearly, there's some things that we have to think about there in terms of the tactics. But if you think about the manufacturing transition today, we're already doing it for the Prosigna kits. So the first kit that we transition over is Prosigna. And then depending on the timing of the launch of Envisia will determine whether or not it's coming straight out of our manufacturing supply chain or it's coming via NanoString. But either way, it doesn't make much difference. The timing of these things, and I think if you think about the regulatory approval from Envisia, it's more likely than not that is going to come out of our own manufacturing supply chain, because it's going to take a while to get the approval and then drive adoption, as I mentioned earlier.

Great. I'll stop there. I appreciate the time.

Thank you.

Thank you. And one moment for our next question. Our next question will come from Sung Ji Nam of Scotiabank. Your line is open.

Hi. Thanks for taking the questions and congratulations on the quarter. So I wonder if this is a moot point at this point, but was wondering kind of what the status might be on the clinician access, the patient access at this point across the different product lines? And also including for the NIGHTINGALE study, if you essentially have full access at this point or is there any potential kind of handicap you guys are working with in terms of staffing shortages and other restricted access at this point?

Yes, and thanks for asking. As we sit here now in the first quarter of '23, we’re really lapping the Omicron situation that we all dealt with a year or so ago. And so now it shows up in the comps. But in terms of in our current business, especially with the testing that we do in Afirma and Decipher, we really don't hear much about access at all. Staffing shortages to a degree, but again in those areas not very much. Where we do hear about staffing shortages, and again this isn't an access problem, it's a staffing problem and I'd call it a second or third order effect coming from COVID is with clinical trials, especially in pulmonology. And so I think that's one of the reasons that we've had to really ramp up the number of sites that we're looking at for NIGHTINGALE, which is one of the actions we've had to date, to drive even greater velocity in our NIGHTINGALE trail. And so we've mitigated those impacts as much as we can in order to stay on track with our own internal timelines.

Great. That's super helpful. And then what's the latest status on the reimbursement side for Decipher? Was wondering if there are any updates there and kind of what's remaining there to do from the payer, especially on the private payer side?

Tina, feel free to jump in here too. But we recently reported close to 200 million --

195 million.

195 million, so very significant progress over the last year or so in commercial payer policy and contracting, still more room to go because that's not the same level we have for Afirma, for example. But that's what we have an entire team dedicated on trying to accomplish. So anything to add?

No, I think it does take time. If you look at any product out in the market in this field, you'll see that it takes a while to get all those commercials on board. But the important thing is we're getting one after another. And the other thing is with getting Level 1 evidence on our chests from NCCN at the end of -- in the fourth quarter of last year it certainly should help in 2023.

Great. Thank you so much.

Thank you.

Thank you. And seeing no further questions in the queue, I will now like to turn the conference back to Marc Stapley for closing remarks.

Thank you, Chris. I appreciate it. So as you can tell, I'm incredibly proud of our entire team for their hard work, talent and passion, which enabled us to achieve these great results in 2022. I'm really pleased with the growth in our core testing business, the progress we're making with our long-term growth drivers both in the U.S. and internationally and our strong financial profile, which sets us up for another year of exceptional execution. I want to congratulate the global Veracyte team for making a difference in over 100,000 patients’ lives in 2022 and to continuing their focus on transforming cancer care in 2023. Thank you.

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