Q3 2019 Earnings Call
Good afternoon, ladies and gentlemen, and welcome to their sites third quarter 2019 financial results Conference call. As a reminder, today's conference call is being recorded I'd now like to turn the conference over to tease Kennedy either say Chief operating officer in Chief Financial Officer, you may begin.
Thank you Sandy good afternoon, everyone and thanks for joining us today for a discussion of our third quarter 2019 financial results with me today are Bonnie Anderson parasites, Chairman and Chief Executive Officer, Giulia, Kennedy, Our Chief Scientific Officer, and Chief Medical Officer, and John Hannah Archie.
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.
We're 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 facts.
Managements assumptions expectations and opinions, reflecting 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 and or implied by such forward looking statements and the company can give no.
Sure and they will prove to be correct and will not provide any further guidance for updates on our performance during the quarter unless we do so in a public forum.
Please refer to the company's October 22nd 2019 press release and the risk factors included in the company's filings with the Securities and Exchange Commission for discussion of important factors that may cause actual events or results to differ materially from those contained in our forward looking statement.
Prior to this call, we announced our third quarter 2019 results, which are available on our web site at various site Dot com under press releases and the Investor Relations section.
We also published a financial presentation, which I will reference during my remarks, and a presentation on a preliminary data for our nasal swap classifier, which Bonnie and Julia will reference later.
Presentations are also available on our website under events and presentations in the Investor Relations section of our website.
I'll now turn the call over to Bonnie Anderson parasites, Chairman and CEO .
Thank you Keith and thanks, everyone for joining us today for our third quarter 2019 earnings call.
We are speaking to you from the chest conference in New Orleans, where we announced exciting new data. This morning regarding our nasal swab classifier for early lung cancer detection, we'd like to address and underscore three key points on today's call first is the continued strength and momentum as the best.
Second is the significant progress we are making in our Pulmonology franchise.
And third is the new data for the first ever nasal swab test, which we believe will be pivotal to us scaling our business and expanding to global markets will start by reviewing our third quarter results.
We generated record revenue of $31 million in the third quarter of 2019, and increased 32% and genomic test volumes of 9941 test an increase of 24% over the third quarter of last year.
At the same time, we improved our net cash used in operating activities to $1.6 million and improvement of 13% over the prior year.
We reiterate our for you our full year revenue guidance of $119 billion to $122 billion and net cash used in operating activities of $2 million to $4 million and remain on track to reach cash operating cash flow breakeven before the end of two.
The 19.
I will now share updates on the key metrics with which we are measuring our performance in 2019.
The first as revenue growth.
We continued to see strong growth across all three of our core classifiers.
In Pulmonology, we delivered over $1 million and Percepta revenue for the second quarter in a row.
Customer response to the perceptive genomic sequencing classifier or GFC.
Which can now down classified patients to low risk as well as up classify them to high risk following an inconclusive bronchoscopy continues to be quite positive.
We are on track to report an estimated 3000 results this year doubling the prior year results.
I'm busy at classifier is gaining impressive traction as well with its ability to help physicians distinguish idiopathic pulmonary fibrosis or IPO, Jeff from other interstitial lung diseases or I oldies without the need for surgery.
Over 135 sites have ordered and I'm busy attest to date, the third quarter volumes nearly double that of Q2, and we remain on track to reporting busier test volume between 500000 tests for the year.
We also continued the strong momentum of our flagship Afirma business and vibrant cancer, where we reported third quarter test volume of 8925.
This brings our year to date affirmative volume to over 26000 tests, which has a 21% increase over the same period last year.
Our solid product growth reflects the continued success of our integrated sales strategy. In fact, the number of accounts that are using more of them one of our products grew by 30% in the third quarter two a total of nearly 220 accounts.
Finally in addition to product revenue, we booked $4.3 million and biopharmaceutical revenue during the third quarter.
Stemmed from our accelerated milestone achievements with the Johnson and Johnson lung cancer initiatives as well as our continued collaboration with Loxo oncology.
Evidence development is our second metric of success.
Here too we experienced significant progress in the third quarter in September two new papers added to the growing body of evidence supporting the use of Afirma expression Atlas or X say to help guide surgery decisions in patients. So seiwert nodules per diems suspicious for.
Cancer by our Afirma genomic sequencing classifier.
This includes a strong clinical and analytical validation paper published in frontiers and endocrinology.
As well as a study published in the journal Fibroid reinforcing the test value in identifying the presence as well as the clinical rebel and rep relevance of specific gene alterations found in pre operative thyroid nodules.
We're also looking forward to the American fiber associations annual meeting next week, where multiple poster presentations will showcase data derived from the Afirma X say further defining the gen genomic landscape around cyber and cancer.
In Pulmonology, we're having tremendous engagement with customers here at chest. In addition to the new nasal swap data five studies for our commercial products are being presented.
These include three abstracts, showing that the Envisia classifier enhances physicians ability to confidently diagnose IP address in combination with high resolution Siti imaging.
As well as two abstracts, demonstrating the clinical validity and utility of the Percepta classifier in lung cancer diagnosis when bronchoscopy results are inconclusive.
I am, especially a proud of the strong scientific and medical reputation our team is building in Pulmonology.
Our third metric of set success is pipeline advancement. In addition to our nasal swap classifier. We are announcing that we formed a research collaboration with National Jewish Health, one of the leading respiratory centers in the country to explore opportunities to further improve diagnose.
So supply Pf and other I LDS.
Through the collaboration we will combine diagnostic imaging data from National Jewish health with whole transcript on barring a sequencing genomic data from our rich fire repository of aisle deep patient samples.
Our goal is to determine if these expansive and complimentary datasets went informed by our deep machine learning expertise can enhance diagnosis across the care continuum for aisle deep patients.
We look forward to keeping you appraised of outcomes from this collaboration and anticipate it being showcased at a future scientific meeting.
Our fourth measure success its financial discipline.
Here to our team has continued to excel our net cash used in operating activities for the third quarter 2019 was $1.6 million, a 13% improvement over the third quarter last year, we remain confident that we will achieve our goal of reaching cash flow breakeven b.
For the end of 2019.
I'll now turn the call over to Keith to review, our financial results for the third quarter of 2019.
Thank you Bonnie as mentioned earlier, our third quarter 2019 financial presentation is available under events and presentations in the Investor Relations section of our website.
Turning to page three of our financial presentation, our performance against six financial key performance indicators for KBR size for the third quarter of 2019 as compared with the prior years quarter, including select highlights for each metric at the bottom of the page are as follows.
Revenue of $31 million increased 32%.
Excluding 4.3 million of biopharmaceutical services revenue up 26.7 million increased 15%.
Genomic volume of 9941 reported test increased 24%.
Gross margins of 71% increased 600 basis points.
Excluding biopharma services gross margins increased 200 basis points from 64% to 66%.
Operating expenses, excluding cost of revenue increased 21%.
Net loss of 2.7 million improved 84%.
Net cash used in operating activities of 1.6 million improved 13%.
And at September Thirtyth, we had cash and cash equivalents of 196 million.
Turning to page for their presentation, our performance against the six Cape size for the year to date period ended June Thirtyth 2019, compared to the same prior year period shows strong comparable performance.
The next six pages outline the sequential and year over year results underlying each of the six financial gave the eyes.
A few observations.
As illustrated by the revenue and genomic volume trends on slides five and six we continue to see positive momentum across the business.
Our loan portfolio represented approximately 1000 test or 10% of our genomic volume this quarter.
Turning to page 12, and our 2019 guidance as Bonnie stated earlier in her remarks.
We are reaffirming our revenue guidance of 119 million to 122 million and net cash used in operating activities of 2 million to 4 million.
In the third quarter, our loss from operations was 1.8 million, which included 3.6 million of depreciation amortization and stock based compensation.
To add some additional color on our outlook for 2019, principally the fourth quarter of 2019.
In Q4, we anticipate receiving 4 million and payments from Johnson and Johnson related milestones achieved in the second third quarter.
We expect gross margins, excluding the impact of Biopharma services revenue to be within a 65% to 67% range.
In Q4.
Expect our average quarterly spend for sales and marketing to stay within a million dollar band around the average quarterly spend of $13.5 million.
And our average quarterly spend for our combined.
Good day, and R&D spend to stay within the million dollar band around the combined average quarterly spend of $10.5 million.
Ill now turn the call back over to Bonnie.
Thanks, Keith now, let's turn to our businesses today, the preliminary data that we announced earlier today for the first ever non invasive nasal swap classifier to enable early lung cancer detection and diagnosis.
All first walk you through the market and were in today's clinical pathway of care. We are positioning this test Dr. Giulia Kennedy, our chief scientific and Medical Officer will then discuss the test development. These exciting new data and our next steps for bringing the test to market.
Keith mentioned, we have published a presentation, which will reference in our remarks, you can find this in the investor section of the website under events and presentations.
The first five slides of the presentation.
Give you background on how their site is transforming care through out the patient journey.
Starting with our mission of improving diagnostic accuracy, we have expanded to advance early detection and informed treatment decisions, we see our nasal swap classifier as a key opportunity to move upstream in the patient care continuum.
Turning to slide six.
As you likely know lung cancer is the biggest cancer killer in the U.S. and worldwide.
And early detection of lung cancer is key to saving lives.
A patients on so survival increased significantly when the disease is caught before it has spread.
As illustrated on slide seven.
While nodules are often the first sign of lung cancer, but since most nodules or benign a big challenge for physicians is knowing which patients need invasive biopsies and which patients can be safely followed non invasively.
Currently about 2 million lung nodules are detected by imaging in the United States. Each year. These cases are derived from the approximately 10 million patients who are at high risk for lung cancer and are the us eligible for annual CTG screening as well as.
Approximately 1.6 million cases, where in lung nodules are detected incidentally, the FCTA scan or X ray.
We expect the number of nodules to increase and screening programs continue to expand.
When Lamont nodules appears suspicious on C.T. scan patients are typically referred to a pulmonologists for work up and diagnosis.
The Pulmonologists then decides how to work up each patient based on the risk that debt nodule is cancerous.
Those assessed at being higher risk typically are advanced to more invasive diagnostic evaluation and potential treatment, whereas those considered low risk are monitored noninvasively.
Today, there is a lack of standardization and objectivity in determining this risk.
As a result, many patients many benign patients undergo workup, they do not need in patients with cancer potentially experience delayed diagnosis and treatment.
We propose our nasal swap classifier will help solve this problem.
As you can see on slide eight.
We are positioning our nasal swap classifier to provide pulmonologists with a simple convenient and objective tool to inform patience diagnostic and treatment pathway.
The sample for this test can be collected right in the Pulmonologists office with no need to refer the patient out for a blood draw.
And as Julia will show you the preliminary data suggest that our native nasal swap classifier can transform this trajectory for many patients at this point, enabling patients with lung cancer to get the treatment they need sooner wellhead, helping patients whose nodules are.
Actually benign avoid unnecessary and costly invasive procedures.
By accurately identifying low and high risk patients. We believe we can greatly reduced the number of patients in the current intermediate risk or uncertain path forward risk pool.
This would significantly improve patient management and health outcomes compared to todays current standard of care.
On slide nine we note that we estimate that the market opportunity for our test is approximately $1.9 billion in the US. This is based on the estimated 750000 patients annually, who are referred to a general pulmonologists for us.
Mark up office suspicious looking lung nodule found either through lung cancer screening or incidentally.
We estimate the market opportunity to be approximately 3.9 billion for both the U.S. and the European Union.
As a reminder.
On slide 10 development of our nasal swap classifier stems from our long term collaboration with Johnson and Johnson innovation and the lung cancer initiative, which we announced in January 2019, we also plan to explore opportunities to deploy our field of injury technology.
And other points along the lung cancer care continuum, we believe the overall global lung cancer diagnostic market is approximately $30 billion.
I'll now turn the call over to Dr. Giulia, Kennedy, our chief scientific and medical officer to walk you through the new data.
Thanks Bonnie.
As Bonnie mentioned, our nasal classifier is built on proven field of injury science.
This means we can detect genomic damage associated with lung cancer in the Airways of current for former smokers.
Our Percepta GST uses this approach to determine from solve collected in the main brung fuel airway, whether remote lung nodule is likely cancer as or not.
In the study published in the journal of the National Cancer Institute in 2017, researchers from Boston University showed that this genomic damage could also be detected in epithelial cells collected from the nodes.
Our preliminary data confirms and extends these findings, allowing us to develop a prototype set of biomarkers for a new nasal swap club buyer.
Our methods are shown in slide 11.
In order to develop and assess the performance of our preliminary classifier, we're very fortunate to have access to nasal swab samples collected from our large scale multicenter prospective aegis, one and he just two clinical studies, we acquired the sample through our 2000.
In 13 acquisition of Allegro diagnostic.
These studies recruited thousands of patients who are undergoing evaluation for potential lung cancer, and who have long term follow up.
In addition to final adjudicated benign or malignant diagnoses, we have extensive clinical in radiology information for each sample such as the age gender smoking status use of inhaling treatments and nodule characteristics found on imaging.
Importantly, having this rich repository has enabled us to shape several years off of the time it would otherwise take to develop a test like ours.
As shown on slide 12.
We began by randomly dividing the aegis cohort into a training set of 411 nasal samples and an independent test set of 261 samples for our early biomarker discovery.
You can see the broad range of clinical features in nodule characteristics that were included in both sets we extracted our nay from the nasal samples and conducted whole transcriptome sequencing to measure a quarter million features.
We then develop machine learning models that were trained to identify two conditions benign and malignant cases, using the genomic and clinical features.
We developed and evaluated hundreds of models using nested cross validation several of the best models were selected and then use discord independent test set meaning be samples were not involved in treating the algorithm.
Data for the best performing model, which provides us with a firm foundation for developing our future nasal swap classifier were presented earlier today at the chest meeting.
Slide 13 gives an overview of our prototype classifier the model, which is a penalized logistic regression classifier was developed by machine learning on clinical features such as those relevant to smoking history as well as other clinical features and combine them with genomic features.
Extracted through our R&D sequencing pipeline. The foundation of this capability has been built over the last decade at various site.
Turning to slide 14, when we initially is that the test we took a common approach of selecting a single cut off to distinguish benign from malignant cases.
We found that test sensitivity for lung cancer with 97% and its specificity was 46%.
This means that among patients whose nodules were actually benign the genomic test classified over 40% as low risk for cancer with high accuracy. So that these patients could be monitor noninvasively.
Hi sensitivity is crucial for test used at this point because if physicians are directing patients to monitoring they would not want to miss cancers.
This was our first version of the test development and was what we included in our initial abstract submission to chest.
In analyzing the data further we thought that in addition to seeing high performance in classifying samples as low risk we saw on opportunities similar to that used in our percepta GST development to classify samples as high risk that finding led us to employ a second hi.
Cut off to improve the test specificity for malignancy.
As you can see on slide 15.
We subsequently demonstrated the test performance using to cut off.
In addition to the previously shown high sensitivity, which allows us to call a substantial portion of the true benign patients as low risk while missing very few cancers, we found that among patients, whose nodules, where malignant that test classified over 40% as high risk for cash.
Answer and how to specificity of over 94%, meaning these patients could be directed to more invasive diagnostic procedures and treatment with a low rate false positive results.
Thus the test achieve success at both ends of the spectrum, calling truly benign patients low risk with high sensitivity and calling truly malignant patients high risk with high specificity. We also observed that the test performance was consistent regardless of lung nodule Pfizer location.
As well as cancers subtype per stage, giving us confidence that the test can perform and smaller nodules eni diversity of cancers that might be encountered by physician.
Now, let's look at slide 16.
Because the cancer prevalence rate in our aegis cohort was high 78%, we modeled how the test would perform in a population with the cancer prevalence of 25%, which is more aligned with the patients on whom it will be used in this scenario with the sensitivity of okay.
95% the test negative predictive value would be 98% when it identifies patients is low risk with fewer than 5% of truly malignant patients Miss classified as low risk.
And it's positive predictive value would be 76% when it identified patients as high risk for cancer with less than 6% of true benign patients Ms classified as hybrid.
We're very pleased with the strength of these early data and look forward to further refining the classifier and preparing it for commercialization.
Specific next steps will include analytical work to ensure robustness of the test system and sample collection methods along with additional studies needed for publication pipeline.
I'll turn the call back to Bonnie.
Thanks Julien.
To conclude we are very excited about the progress with our nasal swap classifier and truly think it can be a game changer in the fight against one cancer.
As we have illustrated on slide 17, we believe our noninvasive nasal swap classifier can guide patient work up consistent with guidelines to avoid invasive procedures on benign nodules, while making a more timely diagnosis and treatment decisions.
On high risk patients.
And we believe this will be a tremendous tool for physicians in standardizing care with objective measures.
Additionally, this test will greatly reduce the pool of intermediate risk patients, who will follow the course standard treatments as they do today.
We expect to finalize the test over the coming year and commercialize it in early 2021 in the U.S.
In closing we are thrilled with were very site is today and where we are heading in all three of our clinical indications.
We expect to provide our 2020 guidance when we report our fourth quarter 2019 financial results, but as we look ahead to next year, we expect to deliver revenue, excluding biopharma services and genomic test volume growth of over 20% in 2020, it should be another.
Exciting year.
I'll now ask that need to open up the call for questions.
Thank you, ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone.
Your question press the pound key please standby will be compiled acuity roster.
Our first question comes from the line of sung Ji non.
BTI G. Your line is open.
Hi, Thanks for taking the questions.
So maybe starting out with a clarification I think you mentioned earlier early detection versus diagnosis, but this nasal swab classifier.
In available you will you wouldn't require additional work up post. The result is that correct. So you can.
Potentially recommend.
Okay, Yes, that's correct, although with this test you can employ aimed at the multiple steps it sometimes takes place today and we'll be able to get the high risk for cancer patients in for a diagnosis immediately on treatment and avoid a work.
Up on patients that are truly low risk because our results are near you could almost call them benign with the level of performance. We have so by cutting those two pools in half, we're going to be able to move half the patients to the next step they need and.
Thats a pretty exciting result.
Okay that makes sense.
I haven't had a chance to look at the publication cited here, but could you kind of go over more in more detail the intended to use population.
Is that based on specific medical guidelines or medical Society guidelines.
We should be aware of.
The way this work today as we know there about 10 million patients at risk that our.
Currently eligible actually to get.
A low dose cts screening for lung cancer free of charge that was part of the CEO requirements that came out a couple of years ago.
Unfortunately them many of those patients that are at risk and are eligible for screening do not get AMD for screening and what we hear and what our data show is that often that's because the concerned about the workup required today to make the diagnosis being highly.
Invasive costly in risky. So the first thing is we believe we are now going to help improve this pathway of work up so that these 10 million patients that are eligible get in for screening.
We think that the imaging low does CTG screening is actually a really good tool. It's sensitive the challenge with it is the false positives and thats what needs to risk and greatly improve on.
In addition to those screening patients there are about 1.6 million patients today that present west nodules.
Just through incidental findings these patients may be undergoing a work up for before they go into surgery. They might have a C.T. scan after following a car accident or an X ray and when these incidental nodules are found then they are determined workout.
We're not work opt.
Out of all of those nodules found about 2 million today in the U.S.
There are a number of those nodules that are determined very very low risk. So they're not even refurb for work up but about 750000 all of those nodules will be suspicious enough to be referred for workout.
And so when you think about what could happen next with those 750000 patients and this is about a 25% prevalent in group. So there is roughly 200000 cancers detected every year in the you asked some of these numbers round a little bit so if.
Our national test were to be performed next we would be able to take.
All about over 40% of those 550 benign patients and at that point in time classify them as low enough risk to not need work up.
At the same time, we will be able to take about 40% of the 200000 malignant or about 80000 cancer cases, and put those patients into a high risk for cancer bucket. So that they move through the process quickly did get diagnosed right away and on treatment.
But that's the magnitude of what we're going to be able to do here in the meantime, we're going to end up was still in intermediate risk group bucket, because we do fantastic on the bookends, but you'll have the group in the middle that are still intermediate risk and that bucket will be about.
Half when its estimated to be today.
So a tremendous improvement and objective improvement where when you look at the guidelines and they recommend patients with a low risk being moved to CTO follow up RF nasal classify our low risk call achieves that less than 5% risk of malignancy.
So that exit thats excellent that fits right in with a guideline today and obviously with a positive predictive value estimated as over 75% those patients want to get diagnosed and on treatment for lung cancer.
So great on it ought to have a great impact for patient care, and hopefully get more and more patients into screening for lung cancer.
That's super helpful. And then lastly from me if I understand this correctly I think this is the same patient sample cohort that have from cost could be swab data as well so was wondering.
Maybe too early but how I guess how does.
How do the results that you presented compared to preceptor performance.
I'm not sure. This is the right we think about it.
Yes, it's a different intended use population right because we have percepta, we're capturing the patients that have gone through a borrowing cost could be worked up about 380000 patients today undergo bronchoscopy work up and up to 50% 60 per se.
10 of those are inconclusive and that is the group were measuring with percepta. So it's a completely different subset of the patient population and the prevalence is actually a little bit higher I think when we presented our perceptive data the prevalence of cans.
Sure in the testing population there is about 30% to 35% I believe somewhere in that neighborhood. So it's a little bit higher than what this all comer group will be and also many of the suspected cancer patients, but they're they're defined by more than 60%.
Risk of cancer as assessed clinically would often go on to the surgical biopsy in place of Brent cost to be work up. So we are fortunate that when the age of clinical trial was conducted that they had the fore sight to gather nasal swab.
And all these patients so that we could go back to this library of very well curated samples and begin the work in the knows of course, we call. We obtained all of that when we acquired a lever I think in the script. We said 2013. It was actually 2014 that we made that acquisition.
And Percepta was very far along and already validated so it was smart to take that to market first and now we're able to turn our attention to what we can do in the nose and we believe there are even more opportunities beyond the one that we are presenting the data today, where this test.
Right add value.
In the global marketplace for improving lung cancer diagnosis and treatment.
Great that makes a lot of sense. Thank you. So much thank you for joining us.
Thank you. Our next question comes on the line of Tom's Flatten with Lake Street Capital markets. Your line is known.
Thank you congrats guys on the naval slightly the looks great just.
Looking at Slide 17, and I was hoping Bonnie if you could help us understand the future percepta in this new paradigm I am assuming it obviously fits into that intermediate group, but if you could add some color that that'd be great.
Yeah, I think we would expect that the intermediate risk group would follow the work up as they would today, which is.
Typically bronchoscopy is very attractive at this point, because it's less invasive and this population has a little bit lower at like a moderate risk and malignancy in the numbers that we were talking about earlier it will be about 25% to 30% risk of malignancy. After the nasal test is perfect.
Formed.
What you also have to keep in mind is with the nasal test intercepting the.
The classification of the patients in advance of Workup, we expect the funnel of patients coming through and nodules being found grow so while that intermediate bucket will still be the likely bucket to go on to Brock. We also believes that the 750.
8000 patients that are moved through the work up could double or triple as a 10 million patients at risk for lung cancer get screened so the dynamic will change the market for both cash should actually grow over what it is today and we believe with a combination of our nasal swap class.
The fire the perceptive GFC and eventually Percepta expression Atlas that we are going to be able to inform on everything from early detection to diagnosis to treatment decisions at the time of diagnosis with the partnership with the Pulmonologists that are making these decisions.
And we're really excited about the the success and the advance that we have made in our Pulmonology franchise.
That's great. Thank you.
Keith one for you with respect to guidance.
The there's an increase above and beyond what you had projected coming out of the second quarter in the bio pharma revenue from I think you had 10 million pegged in the second quarter and now were might be up as much as 6 million on top of that.
When can we infer then from that that there's a there's an implied drop in the guidance that's associated with testing revenue.
We've been updating you quarterly this quarters 2 million of incremental service revenue over where we were last quarter and hours due to advances that we made.
Yeah.
While stones and the nasal of those as we come out with this test.
So we are relative to history I think were debt, we're probably a million total.
Below and revenue on the classifiers in a million up on service revenue in total.
So I mean, it's okay.
Theres a little bit of a difference was not not marked difference okay.
Thanks for taking my questions.
Thank you.
Thank you and our next question comes from the line of Puneet Souda SVB Leerink. Your line is open.
Yes, Hi, Bonnie Keith.
And Julien So question that I have is if I could on ask on the data if you could help me understand.
Your rationale for to cut classifier here in the first place I know you elaborate a bit on that but.
Which one on the either and has more value in your view is that the lower risk at the high risk.
And I'm asking that because the specificity is lower in the low risk insensitivity is lower in the high risk group.
Maybe just if you could take a minute and hopeless educate on those front than sort of.
What I'm trying to get to is even after this classifier whats the a group of patients that we are the assays the still missing.
And now it's still not part of the ones that are going to Bronx could you if you're going to help me understand that that's baked I'll start and then I'll hand, it over to Giulia, but I have to say.
When we can take nearly you know for over 40% of true malignant patients.
I would classify them as high risk with very high specificity, which means there's very very few benign patients going to be put into that class.
There is there's not much better improvement to that.
On the low end, it's the same thing being able to take 40% of the patients that would be enough pool of intermediate risk patients today that the physicians would sort of pick and choose and calculate and try to decide the best next steps.
When we can put half those benign patients are over 40% of those patients into a low risk bucket with over 96% sensitivity, we are doing that and not missing hardly any cancers. So I think the first thing that's important to clarify.
Is we're not missing anything here, we are taking this pool of all these patients with nodules and putting nearly half the high risk into one class. That's obvious what you do next nearly half into low risk, which is obvious what you'll do next.
And cutting that intermediate risk pool literally in half those patients will follow what ever you would do today with the entire bucket.
Julien do you want to talk about the and the rationalization and rationale for those two class approach. We realize this is kind of cutting edge sorta, new but it's pretty exciting.
Yeah, I would say, it's it's a bit of an unconventional approach, but what we've done as play to the strengths of our data at either ends of the spectrum. So it's very hard to get a test that's both highly sensitive and highly specific and by adding needs to cut offs, we basically play to the strength of the high sensitivity cut off.
At the bottom of the range to to call patients low risk with very high sensitivity and then at the top of the range, where both with the second cut off call those with very high specificity b to b truly malignant with very very low rates of false negatives on the bottom and full.
Yes positives up at the top it's just really playing this to the strength of the test.
Okay. That's that's a that's very helpful.
If if I could ask on the pricing of the testimony that the ranges here is 802 2500 could you elaborate on the what was the pathway to get to that pricing what are some of the benchmark used for that.
And a follow up there isn't.
Do you have created strong clinical evidence and publish that in you know high impact papers like noon on Joe medicines and others.
For Afirma Percept up so do you think you have an adequate data here I mean adequate data at this point to go to publication.
And do such an I'm back publication or do you need more of a further studies here too.
You know bring that to bring that bring that clinical evidence to market.
Yeah. So it wouldn't be the first time and I back when we developed Afirma, we actually had the first publication that came out that got referenced many times. After the test was launched was in some of the early work that was done it was to the vol and all and.
It was a very high impact publication, even though it was an earlier data set than the final released product. So yeah, our scientists and obviously all of our clinical investigators that are part of this journey with us I'm sure we'll want to get this data out and publication I'd be.
Very surprised if this would not we're in a high profile a.
The journal.
In terms of pricing of a test and more details on that we put the range in the market slide just to be transparent that we believe pricing will need to be different perhaps in the u. than the U.S. part of the market and.
And we will need to continue to do some work on the modeling around the true value. The tests will deliver and then we'll pick.
A price point that makes sense for the value, we're delivering and the market that the test will be sold in but that reference isn't necessarily because we don't have any idea where world price to test. It's more to give you the ranges around how we came up with the market data.
But you'll hear a number of that as we move that's part of what will be doing over this next year is the market development work, the premarket and commercialization planning and tightening down all of those details and we'll keep you all very abreast of that progress.
Okay, and if I could.
Just.
Ask on the tough performance how much of that is related to.
The the.
Genomic evaluation relative to other inputs in the algorithm the age and the up the patient APAC years of smoking nodule characteristics et cetera. So what is you know how much is that contributing to that say.
Yes, a really good question I'll ask giulietta to that was in the poster actually that was presented and we'll try to get the poster access to the poster with a link at some point after we get home from chest on our website as well, but Giulia why don't you talk a little bit about this versus east clinical calculators sure. So.
So we developed the model to include in addition to gene transcript features from 2000 Sixteen's. We actually also have what are called interaction term those genes and clinical factors as part of the aegis clinical corridor cohort, we collected a large number.
Clinical factors and we use these as features in the machine learning and so our algorithm actually is a combination of genomic features and clinical features.
When this classifiers compared to a commonly used a clinical risk predictor, which doesn't have any genomic features and it's just some clinical factors for example, the Gould model with what we have in the poster.
We find that there is substantial improvement of our classifier over the performance of the classifier on the low sensitivity side as well is on the specificity side. So it increases the number of benign that are called low risk by 70% both.
For what the gold classifier would do by itself and 18% of the malignant to high risk more than what the.
Thank you Julie anything else.
If I could last one for Keith I don't want to Miss him in this.
Gross margin Keith.
You know expectations for any any improvement on that it's sort of flat lined in the last.
Three quarters.
Well, yes, that's right 60, 466%, where we're holding on me.
Margin, we obviously have long products are reimbursing the lower rate.
In Afirma, obviously, so that weighs on the margin. So we're trying to hold and 64% to 66% range for the first couple of years as we go down to managed care journey on those products.
Okay.
Alright, great. Thank you guys. Thank you very much for joining us and for the questions.
Thank you. Our next question comes from Paul Knight with Janney Montgomery. Your line is open.
Bonnie if we start to think about to commercialization of the problem you're seeing is learning in 2021.
Im assuming that you're kind of thinking that that's the initial Dave perhaps the private pay.
And depended upon CMS approval, you would need published papers, so I'm, assuming you're thinking what CMS approval sometime in 2021 as well and when do you think commercial pay could develop.
Yeah, you know Paul we know it'll take a little bit a time, a history would show that.
No it can take a year depending on.
How quickly are able to assemble the required evidence and get it accepted into publication et cetera.
But we've done this a few times. So I think that you can expect over the next year, we'll probably get as much of this lined up as we can and try to be as as a quick post commercialization to coverage as we can be.
And we'll keep you updated as we have anymore clarity on that pathway.
And then Keith regarding this youre going to have about 8 million or so.
Service.
Here in the second half.
That seems to be above I think where you were.
At the beginning in the years so.
What could once.
Within the core the diagnostic franchise today is it.
Got it seems like is a wooden lower then.
We started out with a year that pricing is that ramp up on a path what would you give us color on regarding that change in.
In the build out of them on.
Well, we've done about 26% growth on revenue year to date on our molecular test and so that just afirma percepta and vizio sets up about $15 million for the first nine months of the year, our cytopathology business, which we've always talked about as being a flat to no margin business.
But an important factor in terms of Afirma on and the you know the market for the commercial team that's down about close to 2 million a year over year, So thats drag from 26%.
Onto our testing down the 20%.
And then on the quarter, we probably had about 3% reduction in that growth rate because we had the prior year revenue recognized four tests performed in prior periods. We didnt have the advantage up this period, so thats, where diluted the growth rate by and large affirm us.
Growing around 17, 18% and volume and revenue on a recurring around $2800 for occurred samples on the to us and thats been consistent quarter over quarter.
And outages, that's what that's very close to where we predicted a permit to beat for the year. So it's growing genomic volume, 28% over the year sort of the for the first nine months relative the fire nine months and 24% this quarter over the prior year quarter and so do you think about our long tassels now 10%.
Of our portfolio, Theres, probably 6% to 7% growth embedded.
And the reduction and what we get for that so we're getting $1300 and we should be getting 26 $2700 on average those tests.
We factor in patient pays and all that we're leaving 6% to 7% of that growth on the table and over the next two three years, we really don't that volume up and we get to that commercial journey. That's what creates a tailwind you saw on afirma. So eventually our revenue growth rate will exceed our volume growth rate on the early years of across.
Our volume growth rate is higher and or revenue growth rate, which we actually think of a very positive indicator for the long term growth of the business. So it makes us very helpful.
Great. Thanks.
Thank you Paul.
Thank you. Our next question comes from Brian Weinstein with William Blair. Your line is open.
Hey, guys start for the background noise Giulia for you can you just go back and describe a little more detailed current standard of care for classification.
Model, how that used to just make sure that we understand how your product compares for me.
I believe is what this is all based on I didnt see that will survive, but it's a big part as opposed to that.
Came down to see today.
Sure on the clinical models that are used and specifically the gold model uses.
Factors simple factors, such as age and smoking.
Exposure never current or former nodule size and things like that.
Our MBS these variables actually.
Our clinical variables are themselves quite variable and there is a lack of generalized ability to these models. So when there.
Developed in certain cohort they don't always generalized two other cohorts and so theres a lack of standardization lack of general liability. What we've done is we've taken on clinical factors, we've interacted them with the gene expression terms in the classifier and we've made the test more stay.
Andrew Dice and less objectivity, so regardless of what the pre test risk.
That that nodule may have going into this testing population, we can take those brushing nasal brushing from those patients regardless of what their risk is in assign them with this nasal swab test.
Hey.
Highly accurate low risk in high risk assessment of their risk of cancer.
Yeah, Brian to add to that we have a lot of market data going out and asking physicians, what they actually do today and what we have found is that while these risks calculators are great tools and you know they.
Can be used multiple different ones by some of the different positions, what we notice a and what the data show is that regardless of the calculated risk. There is a vast lack of standardization in what is done next so even though they may use.
Is the tool and try to assess the pre workup risk in reality you have many low risk patients undergoing aggressive surgical biopsy for diagnosis, you have more higher risk patients it actually or move to watch will follow up because of the lack of objective any instead.
Under disease patients across you know the universe of sites. So we think this is a really great tools to help.
Sort of seven new standard of care of how risk is actually assessed.
Great work up.
Great. Thank you for that clarification, and then reference for me is just moving further upstream with this technology and the opportunity to move to maybe more true screening population talk about.
The opportunity there.
Are you guys would think we bought that and how that might contribute to this there to the $30 billion overall all market opportunity that you guys you referenced.
Yes.
Well I think it pretty provocative to be able to detect genomic damage and nasal airway swab.
And develop this level of accuracy or in a very large percent in these patients. So it is a pretty provocative I'm pretty exciting data from that standpoint.
If we can do that post nodule detection. There certainly is no reason to imagine that something is magical about that patient with the non Joel.
So we're definitely interested in ways that we can move further upstream it would certainly be interesting under the new paradigm and thinking in the pharma world to be able to predict pre cancer with patients that you could halt progression of disease, perhaps and certainly a those are some of the disk.
Sessions, we have with our JNJ collaborations, but I do want to come back to a point that we actually think is pretty important and that is that.
That screening broaden populations for lung cancer is a in fact, one of the posters right next to ours today show that screening lung cancer screening would love. It does see t. can be very effective but even today, it's expensive because of the workup costs associated with.
What you do once you find goes nodules.
We believe that it's highly unlikely that broad population screening will ever be done in lung cancer. Because there are factors that can be used and that have been used to identify the at risk population and when you have an at risk population you're really.
Not doing population screening youre using a total to get those at risk populations to get detect the cancers that are there early so some of those so semantics, but.
But we do believe that low dose C.T. screening is a great toll the only problem with it today is the high rate of false positives. If we can solve that problem with the nasal swab, then having an inexpensive low radiation dose screening tool in place that is completely none of us.
Basis is not at all a bad place to start for at risk lung cancer screening.
So you know will play to the strengths of where we think the test is best position and then we may look for alternative.
Ways that maybe in markets, where low dose screening isn't as prevalent will have market opportunities there and that the last thing I want to clarify is that the market opportunity that we have shown here of roughly 4 billion between U.S. any you.
So there is a much larger market opportunity for this exact has positioned where this win is if you may you know add up the China, Japan, and you know middle Eastern markets, Latin America, et cetera, et cetera, which we haven't done yet and as we you know.
Solidify our commercial plans and think about that more global opportunity will bring those numbers forward as well, but we've started with us any do because we think that it will be important.
Two.
Stake our path for international expansion and we believe this pulmonology franchise is the one to do it with.
Okay, and if you are doing equal more near you can you just cleared by the comments in 2020, a little bit I got that.
You're talking about over 20% growth I, just want to make sure I understood. What that comment was because typically refer you or what it was excluding so you just reiterate that please.
By the dogs, who started about topline genomic and revenue growth of 20 for 20% excluding bio pharma as you know we have a lot of biopharmaceutical service revenue we've been clear this year.
That we're not the JJ revenue a will not worry about 9 million left on that to earn out the 20, and we will come forward in the fourth quarter call and talk about biopharmaceutical service revenue and where we think thats where to play out next year.
But on product rather what I would call product revenue was nice still service revenue, but our classifier plus cyto revenue she's talking about 20% topline genomic and revenue on those.
Great. Thank you for that.
Alright, thank you.
Thank you and our next question comes from Steve Unger with Needham Your line is open.
Hi, Thanks.
So are you guys plan to commercialize in 2021 with the nasal Swat that's quite a bit earlier than I think anybody expected.
Is the expectation then to do an early access program similar to the other long test pilots in Medicare reimbursement and then go nationwide.
Well as you might expect I will probably say that as our commercial plans come together and we have clarity on that process and the timing of it will certainly Ah Ah bring that all forward. We're under evaluation right now and that's what will take you know us through.
Through a 2020 to make sure we line all the pieces up to have an excellent execution on that launch.
I'm not trying to avoid the answer I just think it's a little early yet to make.
Make any claim on exactly how we'll do it I think we have lots of options. We're already in the Palm suite with these doctors.
80% of the palms using per visit or also using percepta. So this will be one more way to add a test in the Pulmonology suite and build the relationships with our customer so that will certainly be part of the angle, but in terms of Medicare versus.
As you know commercial and all of that probably take US a couple of more quarters before we have that information laid out but thanks for the question it's exciting.
You know to expand internationally as you know, particularly in the you are you planning the full pulmonology portfolio to to expand that internationally or or be assembly planted the seed right now that we do believe the global markets our bid it.
Very complicated right to tap some of the global markets and we've always believed that we would look toward that planning once we had products in a portfolio that made more sense to make that effort on and so we bring it up today as part.
This data because we believe the nasal swap classifier could definitely be a pivotal part of thinking about that global expansion, we will be very thoughtful I think as we always are and we will give everyone plenty of notice at.
On what that plan and timing and thinking will be but there's certainly a big opportunity outside the U.S. to ignore when you have a test like this that can have such a great impact on care.
And then if I could just one more.
As far as the cost of the progress it's a it's already see great. It's on the same platform.
What what does the.
$800 at the low end to your price range is that a price.
The you know is commercially viable.
Given sort of the average cost per test the you're running out there or could be running out and 2020 122.
Yeah, I mean, I think that we obviously will start where we can be on the upper end to that price range. We believe there is a good viable market for that and ER and we you know.
We'll enlighten you with other plans as those roll forward, but nothing different as far as costs relative to the perceptive for example, as far as running the testing.
It's not not right now now got it right now.
Okay. Thank you.
Ladies and gentlemen, this concludes our call today. Thank you for joining US you may now disconnect everyone have a wonderful day.