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Edited Transcript of VCYT.OQ earnings conference call or presentation 2-Nov-20 9:30pm GMT

·45 min read

Q3 2020 Veracyte Inc Earnings Call South San Francisco Nov 3, 2020 (Thomson StreetEvents) -- Edited Transcript of Veracyte Inc earnings conference call or presentation Monday, November 2, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bonnie H. Anderson Veracyte, Inc. - Co-Founder, Chairman & CEO * Giulia C. Kennedy Veracyte, Inc. - Chief Scientific & Medical Officer * Keith S. Kennedy Veracyte, Inc. - CFO & COO * Tracy Morris Veracyte, Inc. - VP of Corporate Communications & IR ================================================================================ Conference Call Participants ================================================================================ * Brian David Weinstein William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst * Puneet Souda SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst * Stephen Scott Unger Needham & Company, LLC, Research Division - Senior Analyst * Sung Ji Nam BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst * Thomas Flaten Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst * Yih-Ming Tu Morgan Stanley, Research Division - Research Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon, ladies and gentlemen, and welcome to the Veracyte's Third Quarter 2020 Financial Results Conference Call. (Operator Instructions) I'd now like to turn the conference over to Tracy Morris, Veracyte's Vice President of Corporate Communications and Investor Relations. You may begin. -------------------------------------------------------------------------------- Tracy Morris, Veracyte, Inc. - VP of Corporate Communications & IR [2] -------------------------------------------------------------------------------- Thank you, Sherry. Good afternoon, everyone, and thanks for joining us today for a discussion of our third quarter 2020 financial results. With me today are Bonnie Anderson, Veracyte's Chairman and Chief Executive Officer; Keith Kennedy, our Chief Operating Officer and Chief Financial Officer; Giulia Kennedy, our Chief Scientific Officer and Chief Medical Officer; and John Hanna, our Chief Commercial Officer. Before we begin, I'd like to remind you that various statements that we make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements include those regarding our future plans, prospects and strategy, financial goals and guidance, product attributes and pipeline, drivers of growth, expectations regarding reimbursement and other statements that are not historical fact. It also includes statements regarding the potential impacts to our business resulting from the COVID-19 pandemic, the potential timing for a recovery of our business and anticipated timing of the launches of new products, availability of our tests internationally and our total addressable market. Management's assumptions, expectations and opinions reflected in these forward-looking statements are subject to risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements, and the company can give no assurance they will prove to be correct and will not provide any further guidance or updates on our performance during the quarter unless we do so in a public forum. Please refer to the company's November 2, 2020, press release and the risk factors included in the company's filings with the Securities and Exchange Commission for a discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements. Prior to this call, we announced our third quarter 2020 results, which are available on our website at veracyte.com under Press Releases in the Investor Relations section. We also published a business and financial presentation, which we will reference during our remarks. This presentation is also available on our website under Events and Presentations in the Investor Relations section. I will now turn the call over to Bonnie Anderson, Veracyte's Chairman and CEO. -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Thanks, Tracy, and thanks, everyone, for joining us today. We delivered a very strong third quarter 2020 results across multiple measures of success. Our revenue and volumes increased significantly over the prior quarter, rebounding to pre-pandemic levels, ahead of our projected timing. Our total revenue was $31.1 million, a 50% increase over the second quarter of 2020 and slightly above our prior year results. We've outlined our key takeaways for the quarter on Slide 4 of the business and financial presentation Tracy mentioned. And with that as the backdrop, let's walk through the quarter highlights, beginning with commercial growth. Revenue from genomic testing and products was $30.3 million, an increase of 79% over the second quarter of 2020 and 13% over the third quarter of 2019. Our Afirma business led the recovery, with volumes surpassing the third quarter of last year by 6%. Our pulmonology franchise is recovering as well, although at an anticipated slower rate. We delivered a solid quarter with our Prosigna breast cancer test as well. In fact, our Prosigna revenue for the first 9 months of 2020, most of which comes from our European operations, has already achieved our pre-pandemic full year 2020 revenue goal. We continue to build out our EMEA team to drive Prosigna growth and to lay the groundwork for the international introduction in late 2021 of our Envisia test on the nCounter instrument. Additionally, our biopharma and diagnostics company partnerships continued to advance, including our J&J and Acerta pharma partnerships, which are fueling our lung cancer and lymphoma pipeline products, and our Loxo Eli Lilly program in thyroid cancer. MaviDx continues to progress forward with their work in high-volume COVID testing using the nCounter, aiming for an EUA submission to FDA by the end of the year. We had a very strong quarter in terms of reimbursement expansion, a key catalyst in our business. In October, we received a bid coverage decision for our Prosigna breast cancer test from the German government, specifically the Federal Joint Committee, or GBA, giving women in this large European market access to our genomic test, which labs can perform locally on the nCounter platform. This was a great win for us. We also achieved important reimbursement milestones for our genomic tests that we perform in our CLIA lab. In September, the centers for Medicare and Medicaid Services, or CMS, approved a new advanced diagnostic laboratory test, or ADLT status, for the Envisia classifier under the Protecting Access to Medicare Act, or PAMA. This designation marks the unique nature of our tests, which improved diagnosis of idiopathic pulmonary fibrosis and other interstitial lung diseases. It also initiated a specific market-based approach to Medicare pricing for the test, which will be based on the median price paid by private payers. CMS priced the test at $5,500, and we believe the price will remain at or near this level when the market-based rate becomes effective on July 1, 2021. Additionally, we received favorable preliminary national Medicare prices for new CPG codes for our Afirma medullary thyroid carcinoma classifier and Xpression Atlas. We look forward to updating you as pricing is finalized and believe this will facilitate both Medicare and private payer reimbursement expansion. Finally, we are also pleased to report a positive medical coverage policy for the Afirma Xpression Atlas from a large Blues plan in New York state. Evidence development is our third metric of success, and we made great progress here in the third quarter as well. In Europe, we launched a compelling study, known as PROCURE, that's bringing together thought leaders and other clinicians across Europe to achieve consensus on the evidence and clinical utility of most frequently used genomic breast cancer tests, including Prosigna. The study is led by an independent-renowned scientific committee of 12 breast cancer experts with participation from 180 clinicians across Europe and will utilize Delphi methodology, a well-established technique for facilitating consensus on complex issues. The PROCURE study will take place over about a 12-month period, after which, the scientific committee will submit its results for peer-reviewed publication. Also related to Prosigna, data were published last week in the Journal of Clinical Oncology, which suggests that the underlying biology on which the test is built may help explain its higher likelihood of predicting long-term risk of recurrence among eligible women compared to other breast cancer tests. We also expanded the library of clinical evidence for our tests in thyroid cancer, lung cancer and interstitial lung diseases, which we believe will further help facilitate physician adoption and payer coverage and reimbursement. This quarter, our tests were the focus of 2 publications and 5 abstracts at key meetings, including an oral and 5 e-poster presentations, a really strong showing. 2 studies demonstrating a strong oral world clinical utility of our Afirma and Percepta classifiers were published in the journals Cytopathology and CHEST, respectively. External researchers also shared real-world data in 3 e-posters at the American Thoracic Society's Virtual Annual Meeting, which reinforce previous findings suggesting our Percepta and Envisia Classifier's ability to improve diagnosis of lung cancer and ILDs. Additionally, at the CHEST meeting 2 weeks ago, 2 abstracts related to our pulmonary R&D efforts were presented, including an oral presentation on the foundational field of injury science that underlies our in-development nasal swab test for early lung cancer diagnosis. We also continue to advance our pipeline development during the third quarter and remain on track to introduce 4 new genomic tests next year. These encompass our nasal swab classifier and Percepta Atlas in lung cancer, our Envisia classifier on the nCounter system in international markets, and the LymphMark lymphoma subtyping test, pending an FDA grant of our De Novo classification request. We are especially excited about expanding our lung cancer portfolio, which we believe will transform the early diagnosis and treatment of lung cancer, giving physicians and patients powerful new tools to help bend the more solid curve in the fight against the world's leading cancer killer. Our noninvasive nasal swab test will give people with lung nodules clearer answers earlier in the workup. This could mean they could be taken to surgery or put on treatment faster if they have lung cancer or can avoid further workup, including risky invasive procedures if their nodules are benign. Our Percepta Atlas will provide what we believe will be the most comprehensive gene alteration information in lung cancer, helping to direct patients to appropriate targeted therapies that are available or in development, promptly at diagnosis. Importantly, it will also serve as a vehicle for building the first biorepository of lung cancer biology to include early-stage cancers. We plan to hold a virtual investor R&D Day on December 16, focused on our lung cancer franchise. The event will allow us to share new data for our nasal swab test and our Percepta Atlas as they continue to advance in development. Investors will hear from thought-leading physicians about how our lung cancer portfolio is positioned to positively impact patient care, and we will provide a deeper look into our scientific approach and data. We'll provide updates on progress across our lung cancer portfolio, which we estimate has a total addressable market of 40 (inaudible) globally. Stay tuned for more information about this event shortly. I will now turn the call over to Keith for a more detailed review of our third quarter 2020 financials. -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [4] -------------------------------------------------------------------------------- Thank you, Bonnie. I'll also refer to our business and financial presentation, which you mentioned earlier and which is available on our website. Turning to Slide 6. The table and footnotes shown here, along with the details in our SEC filings, further explain how we recognize and report revenue under U.S. GAAP. For discussion purposes, we may combine testing and product revenue to describe our diagnostic testing business, and biopharma and collaboration revenue to describe our strategic arrangements. As a reminder, net sales of data or other services to our customers are classified under biopharmaceutical revenue, and all other noncustomer revenue are classified under collaboration revenue in our consolidated statements of operations and comprehensive loss. Turning to Slide 7. Our performance against 6 key performance indicators, or KPIs, for the third quarter of 2020 compared to the prior year third quarter was as follows: Total revenue of $31.1 million was in line with the prior year quarter; testing and product revenue of $30.3 million increased $3.6 million or 13%; biopharma revenue of $0.8 million decreased $3.4 million, principally due to the recognition in the prior year quarter of $4 million in revenue from Johnson & Johnson; gross margin of 67% declined 400 basis points, principally due to the decline in biopharma revenue; gross margin, excluding biopharma revenue, was 66% in both the current and prior year quarter; operating expenses, excluding cost of revenue of $24.8 million, increased $1.2 million; net loss of $4.1 million increased $3.4 million, due principally from lower biopharma revenue, reduction in interest income on invested cash and higher amortization of our intangible assets; net cash, provided by operating activities, was $1.8 million compared to $1.6 million used by operating activities in the prior year third quarter. The $3.3 million increase in cash flow from operations relative to the prior year quarter is due to a $4.9 million reduction in net working capital, a $1 million increase in depreciation and amortization, a $0.4 million increase in stock-based compensation and a $0.4 million increase in other operating cash flow items, offset by a $3.4 million increase in our net loss. Genomic volume of 10,242 increased 3% and included 9,437 Afirma, 502 Percepta and 303 Envisia reported test. From the second to third quarter of 2020, sequential reported test volume increased 97% for Afirma, 52% for Envisia and 30% for Percepta. As Bonnie has mentioned, we expect the pace of recovery to remain more gradual for Percepta, principally, from fewer underlying procedures performed during the pandemic. Slide 8 provides a further breakdown of revenue into testing and product revenue, biopharma and collaboration revenue and total revenue. As previously mentioned, testing and product revenue increased 13% or $3.6 million for the third quarter of last year, offset by a $3.4 million decline in biopharma revenue. Total revenue was slightly above the prior year quarter. Testing revenue of $28.2 million includes $2 million in cytopathology services. Slide 9 and 10 illustrate our pacing and performance year-to-date against these same KPI metrics as well as break down our revenue into testing and product, biopharma and collaboration, and total revenue. Year-to-date, revenue is down 8% and genomic volume is down 9%, principally due to the impact of COVID in the second quarter. For the 3 months and 9 months ended September 30, 2020, we accrued, on average, between $2,800 and $2,900 for both the Afirma classifier and Xpression Atlas, which met our revenue recognition standard. This was between 90% and 95% of the reported Afirma classifier test volume. The next 8 slides outline the sequential and year-over-year results underlying each of the KPIs. Consistent with prior quarters, we present genomic volume trends on Slide 12. Genomic volume includes commercial volume for our pharma, Percepta and Envisia genomic classifiers. Genomic volume represents tests we perform in our CLIA laboratory. In December 2019, we acquired the Prosigna breast cancer prognostic gene signature assay, which is the only commercial test we sell on the nCounter platform as of September 30, 2020. We intend to expand our offering of diagnostic tests sold or distributed to third-party laboratories to run on the nCounter platform, which we also intend to include in product revenue. To give investors insight into our total test volume trends, we added tests sold to third-party laboratories that met our revenue recognition standard to our genomic volume and showed those trends on Slide 13. On the right-hand graphic of Slide 13, we identified a quarterly volume of commercial Prosigna tests sold since we acquired the test in December 2019. For those of you that are not viewing the presentation, those volumes are: 680 in Q4 2019; 2,482 in Q1 2020; 1,249 in Q2 2020; and 1,448 in Q3 2020. From the second to third quarter of 2020, the sequential reported test volume increased 16% for Prosigna. We expect the pace of recovery to remain more gradual for Prosigna, principally from fewer underlying procedures performed during the pandemic. We continue to see a rise in reported COVID cases and expect governments to continue to evaluate restrictive measures to attempt to contain the spread of the virus. We are uncertain that inter-quarter or seasonal trends we typically see in the business will hold in light of COVID. But we have been encouraged by the recovery to date. As a result of continued rise in cases and the impending flu season, we remain cautious about predicting the slope of the recovery. In light of uncertainty in the market, we are not currently returning to giving guidance. We continue to expect minimum corporate travel and expense associated with large group meetings, and we plan to continue to leverage digital and virtual selling. We believe it's prudent to plan for the impact of the pandemic through 2021, and we hope to continue to update you each quarter as we manage through this very challenging time. As shown on Slide 18, we have $340 million in cash, and we believe we have significant resources available to manage through the pandemic. I will now turn the call back over to Bonnie. -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Thanks, Keith. In closing, I'll refer you back to our key takeaways on Slide 4 of our business and financial presentation. We are very pleased with our third quarter results as our business is rebounding from the pandemic ahead of schedule. We have significant momentum across all of our products, both our original tests performed in our CLIA lab and our Prosigna breast cancer assay. This includes strong revenue and volume growth, along with reimbursement milestones and evidence development to further fuel progress. We are on track to launch 4 novel genomic tests in 2021, including our nasal swab test and Percepta Atlas, as part of our expanding lung cancer portfolio, and we continue to exercise strong financial discipline, with margins in line with expectations and positive cash flow from operations in the third quarter of 2020. Importantly, with our successful equity raise in August, we now have $345 million in the bank and no debt, giving us extensive strategic flexibility as we establish ourselves as a global genomic diagnostic leader and position the company for long-term profitable growth. With that, I will now ask the operator to open up the call for questions, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from the line of Puneet Souda from SVB Leerink. -------------------------------------------------------------------------------- Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [2] -------------------------------------------------------------------------------- So first of all, congrats on the strong quarter here in terms of volumes. Afirma volumes obviously came in strong, but on pulmonology, volumes were a little bit weak. And as you pointed out, it could be due to the procedures. And so I just wanted to understand, I know you mentioned bronchoscopy's a bit more distracted with COVID. I assume that's what's continuing to be the case here in third quarter, and I'm wondering if you could confirm that. And what are the expectations for improvement in light of this continuing as we continue to deal with COVID? And then on Prosigna, good to see that you're reaching the volumes for the full year already and in terms of the revenue. But wondering, how should we view that in light of the recent EU shutdown? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [3] -------------------------------------------------------------------------------- Yes. Well, on the back of COVID, that's why we keep taking caution with everyone, the historical actuals are what they are, but it's still difficult to predict the future. But look, back when this will hit, we predicted our Afirma business would be the first to rebound, and we're correct on that. Afirma has a large percent of the market that is physician offices, and it's very easy for physician offices to open to patient care and control the flow of patients very easily. We continue to see hospital environments take a constraint, and the flow of patients has not reached what it should be both by our data and other folks' data. I think Envisia is doing well, but keep in mind, the prior year numbers were really low on Envisia because it was just getting off the ground. So all in all, I think we're very pleased with all of those products. And then when you add to that, the tremendous progress in hitting Prosigna's original annual number through the first 9 months, I'd say we're really pleased on all of those fronts. I think that the lung cancer workups will slowly -- assuming COVID doesn't create more shutdowns, which it may, we will begin to continue to see those procedures unfold like we are. Certainly, there's been growth there over prior quarter, but just not to the magnitude of the others. And yes, I would say our European market is obviously the strongest for Prosigna. It is both the fact that we have continued to gain great reimbursement coverage, had a really big win this quarter in Germany, which is a huge market. We're super excited about that. And keep in mind, when we brought the team over for Prosigna, we kept all of the people associated with the EMEA business in place. We've since actually added a few positions, and we continue to plan on adding a few more positions here and there as we go into '21 in anticipation of launching our second menu item, Envisia, on the nCounter in addition to Prosigna. So all in all, we're super pleased with where things are, and we think we're in a great position to continue the momentum. -------------------------------------------------------------------------------- Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [4] -------------------------------------------------------------------------------- Okay. That's very helpful on the details. On the nasal swab, I know you're providing a complete update here on lung cancer portfolio in December. But just in terms of going into that event, how should -- if you could lay out for us, how should we be looking at this data and sort of the -- traditionally, Veracyte has taken an approach historically where you have steadily built data and clinical evidence behind an assay over time. Should we expect this to be any different? And should the data by year-end that you're expecting here, should that be sort of -- should we assume that is going to be a little bit more accelerated for potentially for publication and a reimbursement? After that, I know you have provided the 2021 timelines for this. But just trying to understand, as we go into this data set, how should we be actually viewing this data in light of perhaps assays that you have delivered? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [5] -------------------------------------------------------------------------------- Sure. Well, I'll give an interim, and then I'm going to bounce the ball over to our Chief Science and Medical Officer, Giulia Kennedy, and let her actually walk you guys through how this works. I mean, we've been down this rodeo a few times. We're not doing anything different this time than what we've done in the past. And you're right, it is an entire series of data that starts in the early feasibility work, like what we presented last year at CHEST, and goes ongoing through the whole process of launching the test. But typically, final validation data for publishing the validation of a study is not going to come until late in the process because there's still additional studies and work that has to be done before you're ready to unveil that. But let me turn it over to Giulia, have her walk you through that, and then maybe give you a little peek at the nature of some of the data we expect to show an R&D Day as well. Giulia? -------------------------------------------------------------------------------- Giulia C. Kennedy, Veracyte, Inc. - Chief Scientific & Medical Officer [6] -------------------------------------------------------------------------------- Sure. So we've been training our algorithm, which has included developing many candidate algorithms, and then we obviously refine them to ensure that we're accounting for all the various lung biologies that we would encounter in the real world: clinical practice, different cancer stages, nodule locations and other factors. So we continue to explore those. And right now, we're still in algorithm training, but we do expect to lock our algorithm within the next several months. The next steps would be to do, typical to what we do with all of our products, extensive analytical verification studies, and these are designed to provide a view toward the robustness of the test. And then once we're satisfied with that, in advance of commercializing, as Bonnie said, we would be unblinding the independent validation test that late in the process when we're sure that we have the algorithm that we've locked that we're satisfied with. And just a color into what we'll be presenting at the R&D Day in December. Since we've last unveiled data at CHEST 2019, where we showed some early feasibility for the nasal swab classifier, we've since then acquired additional samples, cohorts to add to the training and have added both their genomic data and the clinical data to our various algorithm development exercises. So what we're going to be presenting in December is what's called cross-validation data. It's not an independent test, but it's within the training set and on various versions of the algorithm because, of course, we haven't locked yet. We'll continue to refine these draft algorithms until we determine we're ready to lock and pick a final choice. Investors should see more data on more patient samples, a view of some of the development hurdles that we've encountered along the way and how we've solved some of those hurdles and how close we continue to believe that we'll be close to the early feasibility data, which the key opinion leaders that we work with are quite excited about. At that time, we'll also highlight clinical positioning data, patient benefit for all of our tests in the Percepta lung cancer portfolio across that portfolio. So that's what we'd expect in R&D Day next month. -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [7] -------------------------------------------------------------------------------- Thanks, Giulia. -------------------------------------------------------------------------------- Puneet Souda, SVB Leerink LLC, Research Division - MD of Life Science Tools & Diagnostics and Senior Research Analyst [8] -------------------------------------------------------------------------------- That's great. I really appreciate it. Last one, if I could squeeze in, Bonnie, Envisia ADLT, that was great to see. Great to see the reimbursement here. But just trying to also understand, how are you thinking about uptake of that product now with ADLT? And if Keith could elaborate how accretive could this be longer-term in terms of gross margin at peak levels with on nCounter? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [9] -------------------------------------------------------------------------------- Sure. I mean, yes, this was a great success. The test was priced at $5,500. As you know, Envisia is -- the eligible patient population for Envisia is about 70% Medicare eligible patients, so you can kind of do the math. Having an ADLT, and then what we believe will be a stable PAMA rate out of the commercial calculated data that won't be going to effect next July, that sets us up to see some nice expansion in reimbursement for test going through 2021 and beyond. Keith, anything to add to that? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [10] -------------------------------------------------------------------------------- No, you covered that. Thanks, Bonnie. -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [11] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [12] -------------------------------------------------------------------------------- You're making my job easy. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- Your next question comes from the line of Sung Ji Nam from BTIG. -------------------------------------------------------------------------------- Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [14] -------------------------------------------------------------------------------- Maybe, Bonnie, I'm just curious to hear your thoughts in terms of potential delays to -- delays in terms of lung cancer diagnosis, and what are the implications do you think for Veracyte going forward over the next '18, 24 months or even beyond that? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [15] -------------------------------------------------------------------------------- Well, sadly, I would say that the implications of COVID to any cancer workup, certainly, and we spoke to this early on in breast cancer, patients weren't running out to get their mammograms done. And I think that it's sad to imagine that 3 years from now, we may actually be in a position where we see more later diagnosis on these cancers that are big killers. So I hope that we can get the health institutions and patients kind of rally behind the call to make sure these patients do go get the screening protocols that are designed to save their lives, whether it's a mammogram for breast cancer patient or a low-dose CT for a patient eligible for free screening for lung cancer. And as we ramp up our efforts on both of these clinical indications, we are certainly going to be advocating for that because the last thing we want is to start to see those cancer rates and late-stage diagnosis go up 2 to 3 years from now. -------------------------------------------------------------------------------- Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [16] -------------------------------------------------------------------------------- Okay. Great. And then it's great to see the Afirma volume recovering very nicely, and I realize that there is still uncertainty with -- pandemic-related uncertainty going forward. But would you just -- would you guys be able to share, even if qualitatively, what the volume trends look like for pharma for the month of October? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [17] -------------------------------------------------------------------------------- Yes. I mean, I think that we're pretty comfortable that the trends that we saw in this quarter, we expect, could carry through Q4. We're obviously wanting to shine light of giving any guidance in that regard. But maybe Keith has a few words he could point to on the Q4 peak. Keith, anything you can add there? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [18] -------------------------------------------------------------------------------- I think we had a really good strong quarter, and there's just -- there's a lot of uncertainty. October, you start to see the case load go up and then the -- obviously, the election and a lot of politics going on as well. And so we don't really know what's going to happen in November and December, but October trends were similar to what we saw in the third quarter, and we are encouraged by that. So Afirma was doing well, and Percepta still maintain some more sort of declines relative to the prior year, but still good numbers, and Envisia is doing well. So we'll see what happens for the quarter. But if it comes out in line for third quarter, and then where testing and product revenue will be -- it will end up being what it was in the prior year, which would be a big win for us in light of all the pandemic. -------------------------------------------------------------------------------- Sung Ji Nam, BTIG, LLC, Research Division - Director and Life Science & Diagnostic Tools Analyst [19] -------------------------------------------------------------------------------- Great. That sounds great. And then just lastly from me. I'm not sure if this will be discussed at the investor meeting in December. But the NOBLE study, just kind of curious, is that largely to continue to enhance your existing test or is that to develop new tests in lung cancer? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [20] -------------------------------------------------------------------------------- Yes. The NOBLE study is for future. We have not been dependent on any of our developments for building new cohorts, which is why all of that work could continue uninterrupted with COVID. But because we're doing so many great things in lung cancer and we ultimately want to be able to move upstream, we have a slide in our deck that illustrates this so elegantly, that once we're able to intercept a patient with a known nodule and guide that patient to get people with cancer into surgery or treatment early, keep the people with benign modules out, we then want to move upstream and see if we can use the nasal swab to identify patients pre-cancer. And that's a big part of our work with J&J, and so the NOBLE program is built around that future. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Your next question comes from the line of Brian Weinstein from William Blair. -------------------------------------------------------------------------------- Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [22] -------------------------------------------------------------------------------- I think we just start with a couple on NasaRISK and then one on nCounter for you, Bonnie. But on NasaRISK, can you just go through the TAM here and how you build up to the -- I think it's 750,000 patients, and how the new USPSTF draft changes the way that you view what that opportunity is? And then can you talk about the minimum performance levels that you think are necessary from the PPV and NPV side, I believe that the data was 76% on the PPV and almost 98% on the negative predictive value from the data last year at CHEST. But how should we think about that relative to kind of where things ultimately need to be? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [23] -------------------------------------------------------------------------------- Yes. Very good. So well, I would say, first of all, the feasibility data that we put out sort of showed our cards in terms of where we think roughly the ultimate test needs to be. But the critical level for the cutoff on the low-risk side is obviously sensitivity, while the key aspect of cutoff on the upper end is specificity. I think we're very comfortable we're going to get to cutoffs that have those 2 ends characterized very well, and then the question just becomes the number of patients that we can put into those buckets. So how many of the true benign patients can we keep from undergoing a workup, making sure that we continue to drive a cutoff that's going to be highly sensitive. I think our NPV on the early set of data was something like 98%, which was remarkable. And then on the upper end, sort of the opposite, if we're going to cut off and create a highly-specific test, we want to make sure that we are not putting a lot of benign patients falsely into that bucket. And so the question will become, do we continue to move 50% to 45%, 55% into that bucket. I would say on both of those, we wouldn't need to get to the same numbers that we got to, to move to high-risk or low-risk for feasibility to have a very, very acceptable test. The key is not letting the sensitivity on the low end or the specificity on the high end suffer. Those are the key metrics. So we look forward to moving the data along, showing a little more data on the cross validation side at our R&D Day and giving people a little more flavor to that. The TAM is really fairly straightforward for us. The TAM will increase if, in fact, the preventative task force comes out and makes a final decision to lower eligibility criteria for patients getting screened. We typically don't change our numbers on market sizes until after those things get finalized, because then, you're just moving numbers all over the place. We also tend to not really look at the number of patients that might get screened and find to have nodules because there are a lot of parameters set up out there that, you know very well, that not every tiny nodule that is found is going to be paid to be worked up. And that's correct, because if a patient has a 2-millimeter nodule, the last thing you want is that patient's getting worked up. And so we size the market using the criteria that already exists on what patients with Lung RADS, if they're coming through screening or what the feature characteristics are of the nodule, if it's an incidental nodule, to size the number of patients that we believe in today's market would be referred for workup. And those will be all the patients that we would expect to have our test paid for. -------------------------------------------------------------------------------- Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [24] -------------------------------------------------------------------------------- Got it. That was very clear. And then on nCounter, and we're about a year in here, can you just talk about the updated view on that product and the opportunity and how well it had advanced over the last year? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [25] -------------------------------------------------------------------------------- Yes. So first of all, I would say, we have just -- we definitely reconfirmed that we picked up the best platform for doing distributed testing that exists. There's no doubt in our mind. This platform is incredibly robust. Of the 100-plus customers that we have around the world running Prosigna on the platform, we have 1 technical service person that supports all of those customers. That tells you how incredibly robust this platform is. Now when we acquired the platform, we were very clear that we weren't going to go out and early on, proliferate a lot more accounts with a lot more instruments because quite frankly, that was the challenge NanoString had, is it's very difficult to justify a high-cost piece of equipment on 1 single menu test on that platform. And so instead, we put our effort into accelerating menu. We've advanced the Envisia test. That will come out late next year as a new menu item on the platform. We've advanced our lymphoma test through our collaboration with Acerta Pharma in lymphoma and look forward to adding that menu to the test. And then we remain on track to move the nasal swab test over to the nCounter following its launch in the U.S. market, which will happen second half of next year out of our CLIA lab. But we're -- we've got partners now that are looking to expand that menu, including CareDx, whose work is still underway. We've got the COVID testing with our partner, MaviDx. And I would say we also have a tremendous pipeline of interest from pharma companies that are working and collaborating with NanoString today. We built a bridge so that as those companies reach a point where they're ready to entertain moving a CDX along, they get handed off to us, and we will determine at what point should we then enter the situation and migrate that customer from a NanoString research customer to a Veracyte clinical diagnostic customer. So there's a lot of every -- I'd say every lever we pointed to as value creation when we announced that deal has been confirmed that, that still is the case, and we're very excited about where we are. I think next year, as we come toward the end of the year and begin to unfold these new menu items and begin to just reaccelerate Prosigna on the back of new coverage decisions. As I said, we've hired a couple of new country managers, we've hired an additional marketing lead for EMEA, we're set up very nicely to see the win off of this deal that we did less than a year ago. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- Your next question comes from the line of Thomas Flaten from Lake Street Capital. -------------------------------------------------------------------------------- Thomas Flaten, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [27] -------------------------------------------------------------------------------- Just 1 for Keith. On the gross margin, excluding biopharma, can you talk a little bit about what you think we should be -- or how we should be thinking about that? You're kind of back to where you were mid-last year, and it seems like a happy place for the gross margins to be. But particularly as we roll into 2021, can you give us some flavor for how you see that evolving? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [28] -------------------------------------------------------------------------------- Yes. As we said before, we try to keep, call it, 64% to 66% margin here as we're launching multiple tests. Obviously, Afirma, the more we do in our mix, it's further along the reimbursement curve, that obviously helps. But 64% to 66% is where we'd like to see that. And we, obviously, Q2, we got to test what the bottom of that may look like and the shock and the volume, so we have some downside protection there. So we feel pretty good about that. -------------------------------------------------------------------------------- Thomas Flaten, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [29] -------------------------------------------------------------------------------- Great. And then I know you guys are incredibly busy with an exciting 2021 coming out, but I'm trying to balance that against this cash balance that you have. Is there -- are there thoughts -- or from a strategic perspective, how are you thinking about best utilizing that cash position? Are there additional tests that you're looking at bringing on board or how should we think about how you might utilize that cash you have on hand? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [30] -------------------------------------------------------------------------------- Yes, that's a good question. I mean, I think ultimately, we're set up with incredible strategic flexibility now, having no debt and having substantial cash in the balance sheet. We feel good about that. Look, over the next few years, we're going to be executing on all sorts of fronts to accelerate this business, take advantage of what we now have and what we have the ability to accelerate. And that's going to mean taking on some new capabilities, and certainly, expanding menu everywhere we can to become a global advanced genomic testing company with the broadest menu reaching global markets. And so I think there's multiple ways we could use the cash, but we'll, I'm sure, be smart and pull the trigger on the things that seem to make the most strategic sense for the business. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Your next question comes from the line of Tejas Savant from Morgan Stanley. -------------------------------------------------------------------------------- Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [32] -------------------------------------------------------------------------------- This is Edmund on for Tejas. Just to go back on, I guess, your outlook and your thoughts on 4Q and beyond, I appreciate the color that you guys provided and your reasons we're being cautious in not providing the guidance. But given your performance in third quarter, is there anything else behind this, more than just conservatism? Like are you actually seeing any reversals of trends among your physician practices or hospital settings or is it purely just being careful? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [33] -------------------------------------------------------------------------------- Yes, we aren't. But I think as you pick up the newspaper every day, or I guess you don't pick that up anymore, you online and look at the news every day, it's just a really uncertain world we live in out there. I think we don't feel like we have any greater crystal ball than anyone else, and that it just behooves us to not provide guidance in a world that's incredibly uncertain. That said, we're really pleased with where things are. As Keith said earlier, October remained strong, which is great, but clearly, it's hard to see out a couple of months in the environment that we're in. And then we'll -- we probably will provide guidance for next year. As we come off of our Q4 call, I think we'll have a lot greater line of sight to what might be possible for next year at that point. -------------------------------------------------------------------------------- Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [34] -------------------------------------------------------------------------------- Got it. And I guess, kind of similar -- in similar lines of looking forward, you guys had mentioned that you were rehiring some people ahead of your product launches that you're expecting coming up. But just in terms of your operating -- OpEx side, how should we think about like your scaling up of your salesforce given that you had to lay off some of the employees earlier in the year? How should we think about this in 4Q going forward? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [35] -------------------------------------------------------------------------------- Yes, I mean, I'll let Keith get into some of the numbers. But look, we're living in a different world now. I mean, we have embraced, and our clients have embraced a whole new world of digital and virtual engagement, digital education. Medical education has always been our #1 marketing program because continuing to have peer-to-peer education on our products is what moves the needle on adoption. So we've embraced that John Hanna pivoted very early on. And with that working so well, you just have to be smarter around the number of feet you have in the ground, et cetera. Keep in mind, though, that next year, we are going to be moving toward the introduction of new products. That's going to mean market opportunities to expand. And I'm sure that we will continue to layer in more reps in our sales and marketing organizations as we get organized around exactly how to bring these 4 market products to market on the backdrop of what we're doing today. But I don't know, Keith, do you have any operating expense insight there? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [36] -------------------------------------------------------------------------------- Yes. I think this quarter, we've always talked about sales and marketing or our acquisition cost getting to a target of around 35%, which is where we ended up this quarter. So I'm not -- I think we're in a point where people aren't traveling and digital is taking over. We think that's great. I do believe our sales and marketing, as we ran multiple tests, will go back up to 45% of sales. But long term, I think the point of what's possible this quarter is indicative of that. And so I'm less concerned with the amount of money we have and how disciplined we tend to be, that if John Hanna goes from, say, $11 million this quarter and he spends $14 million or $15 million in a quarter as we ramp that, that that's not a problem, right? We need to penetrate those markets. We need to get physicians using the test. This is not a perfect world. The reason we have this capital is so that we can go in there and smartly address each of those markets. And so I'm pretty optimistic about the future. -------------------------------------------------------------------------------- Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [37] -------------------------------------------------------------------------------- Got it. That's very helpful. And just 1 last 1 for me. Can you provide us with a little more color on your collaboration with MaviDx on COVID-19? I know you guys have stated that you still expect to submit your EUA submission by year-end, but has the fact that the FDA stopped issuing EUAs impacted the settle? And given the rapid antigen tests have scaled up rapidly and qPCR is still considered the gold standard, where do you see the MaviDx solution filling the gap in here? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [38] -------------------------------------------------------------------------------- Yes. Well, first of all, MaviDx isn't exactly a collaboration. We basically granted MaviDx the right to use our technology and platform to develop a very high -- ultra-high throughput COVID testing machine, and they are doing that. You may or may not recall, the founders of MaviDx were the original inventories and founders and CSO of NanoString, so they know the technology behind the product probably better than anybody. And what they're doing is taking advantage of the multiplexing capability that we like in the test. We like being able to put 800 genes into a single test. What they're doing is taking advantage of that sophisticated large-scale multiplexing and multiplexing many patients to a single COVID gene, and that's going to allow them get to thousands of patient throughput in a given month. And the EUAs from FDA have halted with the exception of very high throughput testing because that is exactly the unmet need out there. They're still doing the work, advancing their feasibility. I believe they remain making good progress and believe that they're on track to continue to file that EUA by the end of the year, which I think FDA will accept because of the significant product differentiating -- differentiation you're going to bring. And also keep in mind, this technology doesn't require any amplification or anything. It's super, super simple. And to be able to have a single technician run thousands of patient samples through a single instrument in a given day is pretty remarkable. So we'll keep you posted, as I'm sure they will, as that moves along. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- Our last question comes from the line of Steve Unger from Needham. -------------------------------------------------------------------------------- Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [40] -------------------------------------------------------------------------------- Great. First question, just on Germany. Congrats on a positive coverage decision. I was just curious if Prosigna was getting decent volumes in Germany already. And I know there's a couple of competing tests now that have positive coverage in Germany. I think 1 have a distributed platform, and 1 was supposed to, but isn't now. And I was just wondering what are your thoughts on sort of how this rolls out for you? Is Germany supposed to become meaningful, a meaningful revenue stream? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [41] -------------------------------------------------------------------------------- Yes. I think Germany will be a strong market for us. It's very hard to drive adoption of a test when there's only 1 test in the market that's covered, and that was the situation in Germany. And that got shaken up, and now there are multiple tests covered. But we believe we have a very strong relationship with some of the top centers, some of the KOLs that actually advocated for Prosigna to get this coverage decision. And we're in a very strong position being able to provide nCounters for local testing within the market, which is a big desire for Germany as well. We have a really great team that we'll be able to pivot and cover Germany very immediately and look forward to that contributing to next year. -------------------------------------------------------------------------------- Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [42] -------------------------------------------------------------------------------- Got it. Okay. And then, Keith, is it possible to get the pulmonary revenues in the third quarter? And as far as revenue per test, it's been sort of running around $1,500 a test. And with the changes specifically for Envisia reimbursement, what does that level look like in 2021, 2022? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [43] -------------------------------------------------------------------------------- Yes. So you want the lung revenue? I think we said it was like $1.7 million. No, you could have backed into that number for Q3. It was lung revenue. And in terms of revenue per test, we're doing well on the revenue per test, so that's ticked up a little bit on the lung side as Envisia is really has done well. And -- but we'll get, obviously, with ADLT status, as Bonnie said, with 70% of that market in Medicare. And we'll come back out and talk about rate and how to build the model going into next year. But I would sort of, in Q4, keep that around the same rate until we sort of determine the impact in how the billing goes. We just started billing for the test, but we'll come back. The volumes aren't that high right now. It's going to make that meaningful difference in Q4. But we'll lay that out on the Q4 call for the rest of the year in the model. -------------------------------------------------------------------------------- Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [44] -------------------------------------------------------------------------------- But overall, you should get a bump next year, correct? -------------------------------------------------------------------------------- Keith S. Kennedy, Veracyte, Inc. - CFO & COO [45] -------------------------------------------------------------------------------- Yes. You can imagine that would be a -- that could be up to $1,000 a test. But we'll have to -- I want to do the math and really get into the numbers next year and really lay that out for all the analysts so that people can build the models. I don't want to pencil with that on a call, but it will be very positive. -------------------------------------------------------------------------------- Stephen Scott Unger, Needham & Company, LLC, Research Division - Senior Analyst [46] -------------------------------------------------------------------------------- Great. And then last question. So LymphMark, are you expecting a decision from the FDA fairly soon? I guess we came up with maybe thinking that it would be in a week or so. Is that correct, or? -------------------------------------------------------------------------------- Bonnie H. Anderson, Veracyte, Inc. - Co-Founder, Chairman & CEO [47] -------------------------------------------------------------------------------- No, no, no. There is no FDA decision that happens in a week. In fact, the shortest would be a 510(k) route, where they have to respond to you in about 90 days. So no, I think what we've been pointing to is the expectation that we would commercialize LymphMark in the first half of next year. We think we're probably still on track for that. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- I am showing no further questions at this time. Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation, and have a wonderful day. You may all disconnect.