Q2 2022 Veracyte Inc Earnings Call
Okay.
Good day, and thank you for standing by welcome to the various sites second quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your Speaker today, Sheila Gorman director of Investor Relations.
Good afternoon, everyone and thanks for joining us today for a discussion of our second quarter 2002.
<unk> financial results.
With me today are Marc Stapley Chief.
Chief Executive Officer, Rebecca Chambers, our Chief Financial Officer, Dr. Tina Nova President of our U S CLIA business and.
And Dr Giulia Kennedy.
Well, Chief Scientific officer, and Chief Medical Officer.
<unk> issued a press release earlier this afternoon detailing our second quarter 2022 financial results.
This news release, along with our business and financial presentation is available in the Investor Relations section of our website at <unk> Dot com.
Before we begin I'd like to remind you that various statements that we may make during this call will include forward looking statements as defined under the applicable securities laws.
Forward looking statements are subject to risks and uncertainties and the company can give no assurance they will prove to be correct.
Further we are not under any obligation to provide further updates on our business trends or our performance during the quarter.
To better understand the risks and uncertainties that could cause actual results to differ we refer you to the documents that <unk> filed with the Securities and Exchange Commission, including verify its most recent Form 10-Q and 10-K.
In addition, this call will include certain non-GAAP financial measures reconciliation of these measures. The most directly comparable GAAP financial measures are included in today's earnings release accessible from the IR section of aerospace website.
I will now turn the call over to Marc Stapley <unk> CEO .
Thanks, Sheila and thanks to everyone for joining us today.
I am pleased to provide an update on our second quarter financial results as well as our key growth drivers.
As you saw in today's earnings release, our strong execution during the quarter resulted in impressive Q2 growth of 32% versus the prior year with revenue equals equaling $72 9 million.
I was particularly proud of our endocrinology and Pulmonology commercial teams, who worked tirelessly in the wake of an unexpected supply chain issue to ensure that all patients were taken care of and have access to our tests.
More on that later.
The largest contributor to our second quarter revenue was our decipher prostate product.
With growth of close to 1200 tests compared to last quarter. We saw the largest sequential increase in this product to date.
Adoption is growing nicely yet we still estimate the market penetration for this class of test is currently less than 30%.
This gives us confidence that there remains ample room for growth and for penetration to continue to meaningfully increase for a number of years.
Besides the Prostates adoption has been propelled in part by the growing body of literature, demonstrating the test's ability to guide treatment decisions for men with localized prostate cancer.
Last month, we announced findings from our multicenter randomized phase III trial, which were published online in Annals of oncology.
This study demonstrated that the decipher prostate tests can help identify patients who are at highest risk of cancer progression following prostatectomy and who would benefit from earlier more intensive treatment.
In May we were delighted the American Urological Association and the American Society for radiation oncology issued an updated clinical guideline that is favorable towards genomic testing, including with the size of the prostate test to help guide catheter men with localized prostate cancer.
The guideline all to specifically cited extensive evidence including for multiple phase III clinical trials, which demonstrated that the decipher prostate genomic risk score is strongly associated with prostate cancer outcomes.
We believe this additional clinical data as well as bolster guidelines will augment the already extensive body of evidence we have generated in support of our prostate tests.
Moving to Afirma fortifying and building our endocrinology business remains a key strategic imperative.
As a result, our investment in the product and associated clinical evidence continued during the quarter.
A new meta analysis presented at the Endo 2022 annual conference showed that the Afirma GSC real World performance is consistent with and even stronger in some cases than the test's clinical validation study findings.
Additionally, our new study published in thyroid demonstrated the accuracy of our Afirma medullary thyroid cancer classify and identifying mtc, a rare, but aggressive form of thyroid cancer and prepared pre operative samples.
This classify as already part of our Afirma GSC test, we believe the clinical evidence such as this combined with our continued investment in product enhancements and the customer experience will support Afirma growth next year of mid to high single digits.
Okay.
Regarding our firm is Q2 results, we saw slightly lower volume growth than we expected during the quarter. We were surprised by a key vendor the underwent a flawed ERP transition significantly impacting their ability to process, our customer orders on a timely basis.
Our team mobilized quickly to identify and prioritize critical orders to locate and assemble key components.
Thousands of shipments in house, while working with the vendor to optimize their activities for our customers.
What I would describe as a <unk> of our team we were able to meaningfully minimize the impact to those customers and most importantly their patients.
We believe that in the end very few patient procedures were delayed and while the two in quarter impact to Afirma is difficult to quantify we estimate that this situation lower volume by approximately 4% compared to the prior year and our expectations.
At this point the vendors internal issues are now largely resolved and we're back to a normal level and timing of shipments from them with our team continuing to supplement as needed.
Another standout in the quarter was up Biopharma business, which generated key data as well as strong quarterly revenue.
An oral presentation at <unk> detailed that our immediate score immune checkpoint or IC assay can identify patients who are likely to benefit from immune checkpoint inhibitors or ICIS in metastatic non small cell lung cancer.
Further our publication in the Lancet oncology also demonstrated similar results in metastatic total colorectal cancer.
These findings are important because while immune checkpoint inhibitors of revolutionize therapeutic management of patients in a number of cancers current biomarker the limited for identifying the patients who will benefit.
We believe that the immuno score ICSC could help biopharmaceutical companies select the right patients for their immune therapies and help improve the success rate of that clinical trials, notably in combination trials, including ICIS.
We look forward to additional future publications, incorporating our immuno oncology assays.
These exciting findings reinforce our confidence that immuno oncology will continue to be an important part of <unk> long term strategy.
Going forward, we are particularly focused on our multi omics biopharma offerings as we believe we have a differentiated asset.
At the same time and after a thorough analysis of our immuno oncology portfolio, we have decided to pause our commercial efforts for the immuno score colon cancer diagnostic test.
Given the breadth of investment opportunities in front of us with early stage products at various phases of being launched or developed paired with our acute sense of fiscal responsibility. We are prioritizing our focus and resources accordingly.
Moving now to our long term growth drivers, we were pleased to share additional performance data on a preceptor nasal swab test at the recent Ats meeting.
These data demonstrated that our tests could accurately determine lung cancer across a range of tobacco related exposures, ensuring that it can be used reliably and people, whose lung nodules are found incidentally all through screening.
With respect to broad commercialization of nasal swab, we remain focused on securing a clear path to reimbursement prior to driving high volume growth and generating clinical utility data to ensure commercial success, including finalizing patient enrollment in our Nike <unk> study by the end of next year.
Activation of sites is progressing well and while patient enrollment is lagging our expectations by about a quarter, we are starting to see momentum build.
Early signs from the tests and treatment results that we have on a small number of patients who are encouraging as we are already seeing a positive impact on treatment decision, making.
Of course, we don't yet have the ultimate patient diagnosis, but our robust clinical validity data, which we have already shed gives us confidence that the outcomes that we expect to see when we do.
We are monitoring the data as it is generated and plan to take advantage of opportunities to publish favorable interim clinical utility results in an effort to drive the earliest reimbursement decision possible. We're excited to witness the positive impact for us at the nasal swab will have on patients and providers.
Another key long term growth driver is the transition of our tests onto the encounter analysis system to fuel our global expansion.
We believe the menu of IBD test and development are exclusive diagnostic rights to a best in class instrument and the team's extensive track record of developing IBD test positions us extremely well to succeed in global markets. We are already off of the Prosigna breast cancer test and are on track with our development submission timelines for a broader menu as previously detailed with that.
I will now turn the call over to Rebecca to discuss our financial results in more detail.
Thanks, Mark as Mark said, our continued focus on execution drove strong quarterly revenue of $72 9 million, an increase of 32% over the prior year.
We grew total volume to over 24900 tests, a 19% increase over the same period in 2021, and a 7% increase compared to the prior quarter, we delivered testing revenue of $59 $7 million, an increase of 18% versus the prior year quarter.
Testing ASP was approximately $2650 per test roughly flat sequentially.
As expected ASP was again impacted by the 2021 Afirma billing code change. Despite this our confidence has grown that this is a temporal impact which should abate next year.
Testing volume was approximately 22600 tests with strong decipher urology growth driving approximately 10000 tests.
Afirma volume grew 3% as compared to the prior year. However, we estimate volume growth would have been approximately 7% without the vendor driven supply disruption Mark mentioned.
Second quarter product volume was approximately 2300 tests, resulting in revenue of $3 1 million up 16% compared to Q2 2021, despite a currency headwind of approximately 10% given prior year rates.
Biopharmaceutical another revenue equaled $10 million meaningfully above our expectations. This outperformance was driven by a large contract IBD manufacturing project. Originally part of our second half forecast, which was completed ahead of the May 26, IBD our deadline per the customer's request. Another good example.
Sample of strong execution by our team.
Moving to gross margin and operating expenses I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets and other acquisition related expenses, but do include routine stock based compensation.
non-GAAP gross margin was 66% an increase of approximately 50 basis points sequentially, driven primarily by higher biopharmaceutical and other margin.
<unk> gross margin was 69% and product gross margin was 47% both flat compared to the prior quarter.
Biopharmaceutical and other gross margin was 53% an increase of approximately 350 basis points sequentially due to project mix.
non-GAAP operating expenses, excluding cost of revenue declined by <unk> 1 million sequentially to $49 million as lower benefit expenses were partially offset by ramping clinical trial in project expense reach.
Research and development expense increased by <unk> 6 million to $9 $1 million and sales and marketing expenses grew to <unk> 6 million to approximately $23 $1 million driven by personnel expense.
General and administrative expenses were down $1 2 million to $16 $8 million.
Primarily due to lower professional fees compared with the first quarter.
non-GAAP cost of revenue and operating expenses included $6 million of stock based compensation.
We recorded a GAAP net loss of $9 5 million, which included a $3 $3 million intangible asset impairment, resulting from the immuno score colon diagnostic tests commercialization decision net.
Net cash provided by operating activities was <unk> $7 million and we ended the quarter with approximately $164 million of cash cash equivalents and short term investments.
Turning to our updated 2022 guidance, we expect revenue of $272 million to $280 million or 24% to 28% growth versus the prior year on a reported basis.
This range compared to our previous guidance of $265 million to $275 million reflects our strong performance in the second quarter continued outperformance of our urology business Afirma revenue growth of low to mid single digits and current currency rates Q3 revenue is expected to be.
Lower sequentially due to the impact of summer holidays on our testing Biopharma and contract IBD businesses as well as the large Q2 contract IBD order for Q4, we are forecasting quarter over quarter growth.
For the second half of 2022, we expect to see an increase in operating expenses driven primarily by higher R&D expenses with the current inflationary environment in recession concerns on the horizon, We believe our diagnostic testing business, which makes up the vast majority of our revenue will remain resilient.
With this in mind, we are confident that we have adequate cash on hand to ultimately take the business to profitability.
Being M&A, we believe this positions us to invest in our long term growth drivers, while ensuring that our cash profile is suitable for the foreseeable future.
In closing we are pleased with our performance this quarter and remain focused on making the necessary decisions to drive long term growth with a clear path to profitability I will now turn the call back to Sheila.
Thank you Rebecca will now go into the Q&A portion of the call and Tina Nova President of our U S business.
Julia Kennedy Global Chief Scientific Officer, and Chief Medical Officer will join US operator, please open the lines.
As a reminder to ask a question you will need to press star one one on your telephone.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Brian Weinstein with William Blair. Your line is now open.
Hey, guys. Good afternoon. This is Chris.
<unk> on for Brian Thanks for the questions.
Maybe just to start on to cipher could you just talk a little bit more about that growth outlook and runway in terms of <unk>.
Asps and units.
So growing part of the story and then as we think about layering on bladder could.
Could you just talk about what if any impact there was from bladder in the second quarter and how youre thinking about that second half.
Yes, Chris Thanks for the question I'll start and I'll.
Right.
That's going to weigh in as needed but.
You saw again another quarter here of strong performance by the size of the prostate business in particular.
Cited a lot of reasons without including the continued evidence development.
We just got some really good steady drumbeat here and the penetration.
A key factor, we said in the script less than 30% penetration of these types of tests in the market of which we.
We believe decipher prostate has significant majority share.
And so we expect to continue to drive incremental penetration of this market with our test.
And we're on a good momentum here and there is no reason that we see ahead of us honestly for that momentum to slow down so very excited about where prostate could go in Athena anything you want to add to that and feel free to talk about the bladder, which was the second part of the blood test in the second part of Chris's question. Thank you.
Yes, I think we really saw a fantastic performance by our sales team in the last quarter.
And they continue to do a terrific job.
And also I think that is the <unk>.
Now the data that we continue to release and channel positions that shows that our test is really makes a difference in the risk of progression after surgery.
We just had an increase in some guidelines from the EUA in the American Society of radiation oncology update.
Note that our risk score is strongly associated with outcome and independent.
Showing some data that came from <unk>, where we looked at 10528 patients and show the correlation between outcomes and what was predicted by.
By decipher so that data continues to really helps bladder is a much much smaller market.
<unk> has a much smaller indication and so although it is just starting out in the marketplace.
It's not at the same level as prostate.
Prostate cancer.
And with regard to what's implied in our guidance and what was recognized in the second quarter Griffin.
Effectively you that is a rounding error at this point in time, obviously casino point. This is an exciting opportunity ahead of us, but just like other early stage products. It takes quarters and years to really generate the incremental evidence and.
Demand for this product and importantly, given how wonderful.
Decipher urology franchises is operating at this point in time, we're very cautious to to disrupt that through incremental bladder efforts and so right now we want to make sure we're really focusing on biopsy in radical prostatectomy, because it's really what's driving that.
Growth here, so bladder is exciting over a three to five year period in the next couple of quarters, it's not where I focus my attention I'd really personally focus on radical prostatectomy and biopsy.
Okay, that's great.
And then just second on Biopharma.
<unk> Park.
Upside to that.
Alright.
ABB contract payments here, but it's such a fundamentally different business post halyard. The extra can you just the nature talk a little bit more about the nature of those revenues.
When you talk about those growing faster than the corporate average understanding. It's just a portion of the total biopharma revenues, but would love to just get more color on that.
Yes, Thanks, I'm, sorry, Griffin I misheard your name at the beginning but thanks for that question as well the the Biopharma business. We obviously put the three parts of the Biopharma businesses together and they are somewhat different but there's a lot of overlap and commonality.
The reason, we put them together as we can drive a lot of.
Improved access to markets in the U S for the Tesla came or the capabilities that came out of all the <unk> acquisition for example, and vice versa.
What a lot of the revenue that is focused on purely the Biopharma line is coming from today is really our immuno oncology assets, which is why I talked about those as being a key growth driver key strategic <unk>.
Investment for us in the future and I'd like to see more of that penetrating our U S customer base.
Which we should expect to see in the future and then similarly, the incredible amount of data that we've generated on both the <unk>.
Emma side, and the decisive side and the loan side as well being able to leverage those globally with our existing customer base was pretty strong in Europe as well so.
Either it's.
Clinically clinically relevant biomarker identification and harvesting our customers' clinical trials through biomarkers or companion diagnostics work, there's opportunity globally to do a lot with the assets that we've gotten acquired here.
On the IBD services side of the business is continuing to leverage the capabilities that that team has.
But we're actually deploying internally right now to develop our own assay, but also for third parties and on that last point I would just add our goal is not necessarily to grow the IBD services business. Its really to ensure that that business is enabling our long term opportunity with the encounter instrument.
And products on a global basis, so that business is much more or much more keen to work on the manufacturing transfer than we are to really drive revenue growth through that line.
And you mentioned the growth rate of the Biopharma business Biopharma in other business and I just wanted to clarify that we haven't necessarily given our long term growth rate for that business and we arent going to be in the habit of doing so today. If you look at 2022, though.
We this is a human capital business and we did call out some timing impacts in the first half of the year. So I would take those into account and as a result of that timing those timing impacts we expect the second half to be sequentially lower if you will than the first half in terms of revenue, but given that additionally, the seasonality of both of the businesses in the Biopharma.
Fine.
Given their human capital dependent is obviously as I stated on the call pretty acute in the third quarter and in aggregate. We do think about this much more on an annual basis on a quarterly basis given it is a lumpier business and then the testing our product business. So hopefully that helps.
With the modeling over the long term basis as well as 2022.
That's great. Thanks for the questions.
Thanks.
Yes.
Thank you.
Our next question comes from Puneet <unk> with SBB Securities. Your line is now open.
Yeah, Hi, guys. Thanks for taking the question so.
First one just maybe on can you just update us the latest on the hospital access that you have are firm.
And the pulmonary franchises in Maine in terms of the sales reps or where do you stand in terms of face to face interactions.
And.
Do you still have.
Sort of challenges there.
Or just maybe give us the latest on that front.
Yes, Thanks Benny.
I would say, we're kind of pretty much of back to business as usual here the level of access that we're seeing across the board.
Is what you would expect barring anything.
He kind of local region by region Lockdowns, none of which we've seen as of late but if that were to happen. Again, then of course that would affect access but absent that I think.
Our teams it feels like our teams are getting access where they need to.
And.
It feels almost business as usual.
You want to add to that no I think thats exactly right. The one thing. We are we do continue to see is some struggle with staffing.
Especially in the physician offices, rather than the hospitals and that is still an issue that we see but except for that we do feel like we've gotten away from from this last quarter for the first time.
Okay. That's super helpful. Yes, staffing with my next question, but.
Maybe just.
Sure.
Yes.
Maybe just on Rebecca maybe this is for you and obviously look a number of moving parts in the business are you pointed out of pharma.
Challenges that you had this quarter.
It looks like you have successfully resolve that going forward. There is may be a catch up coming from that decipher continues to do well biopharma colon test that's getting discontinued so maybe just talk to us about how should we pizza all of this together to think about sort of the.
Is 24% to 28% the sort of the growth rate, we should be thinking about going forward or maybe it could be.
But better than that.
Yeah, Greg Good question Puneet, and then I'll do my best to answer it.
With regard to the moving pieces in 2022.
Immuno score at this point in time, given the amount of investment and the size of the commercial organization was not a material revenue driver in 2022.
So I wouldn't necessarily.
Take that into account neither here nor there on a go forward basis, obviously, we won't have that that revenue, but again. It was it will not be that material of a headwind.
With regard to our firm and the impact in the quarter from the supplier issue that Mark mentioned, we don't expect there to be a catch up there because these patients had to go into their treatment decisions and treatment paradigms and so.
We arent necessarily in the low to mid single digit guide that we provided we are not providing that does not include a catch up because that is not currently what we do expect.
Decipher we are expecting to can as Mark mentioned to have continued strong growth over the course of 2022 and I'm already provided kind of the biopharma and other impact in the second half with regard to reference prior question.
I'm looking forward to 2023, we guided to Afirma decipher we are very excited about and expect it to continue to grow quite nicely, albeit law of large numbers the growth rate declines as the numbers get larger so I'm not necessarily going to guide to a growth rate there, but just we're early stages in penetration. We're incredibly excited about the continued penetration of this.
Market and the performance vis vis its peers.
So all good news just not commenting on the growth rate, specifically, and obviously biopharma and other are going to be lumpy in any given period, but we do expect growth on a year over year basis in the product businesses is early days as well so growth. So I'll, let you sum all that up and come up with an expectation for 2023 based on I think you have all the puts and takes.
There accordingly.
Okay.
That's helpful and then last one maybe for Tina.
When you look at the decipher franchise today and sort of the competitive landscape. Obviously, you have a strong position in the marketplace.
Data continues to be generated maybe just give us a sense of sort of.
Thinking about this.
Product longer term.
What what sort of.
What sort of position in the marketplace that you can continue to maintain it seems to me that it's leading the market.
Are there any puts and takes.
Competitively that you would point out where you can continue to gain more and more share in the marketplace and just maybe talk to us about the positioning of the product and how do you see this more longer term because obviously this is a key important driver for our birthright.
Yes, no question about it I think.
Very proud of the team I think our sales team is absolutely top and I think that we're hiring reps and I think we're really going to training I think it's very very important because the interaction between sales reps and between physicians is extremely important because as you know on prostate was behind the eight ball.
And sort of getting up to speed using genomics and so there is still a lot of training that happened out in the field with our position on the use of these and these tests that has not changed and I think that because we're still at less than 30% penetration, we still have a nice runway in front of us.
For the future you have to continue to publish you have to continue to add new data you need to continue to have the best service that you can.
You can have ease of ordering recourse to customer service and what have you all of those play just as much as an important role in the product itself.
But I think that we're in very good shape for the future I felt very good about our strong position right now.
Thanks Sam.
I think the.
The level of <unk>.
Publications, and then guideline support and the breadth of indications for the size of a product I think position us really really well. In addition to all the things. The team has had to punctuate one point I mean, our our sales team we look at various metrics for our sales team and it is truly best in class in terms of the metrics that they deliver and the sales optimization.
Patiency.
A set of relationships with physicians. So no. There's no reason to assume that we can continue to grow in.
Maintain and gain share as we should given the investments that we're making in this product and we're not going to slow down I mean, this is a key focus area for us.
We will continue to be for quite some time for a long time.
Got it okay. Thanks, guys.
Yes.
Okay.
Thank you.
Our next question comes from Matt <unk> with Goldman Sachs. Your line is now.
Hi, everybody. Thanks for taking my questions good afternoon.
Maybe if we could start out just.
Awesome.
Taking my.
<unk> good afternoon.
Maybe if we could start out just.
On the on the issue how was your vendor or their ERP. It seems very specific to them, but as you kind of experience that and just given the real time nature of some of the decisions your patients need to make.
And some of the more loss revenue that resulted in.
That caused you to kind of look across your vendor relationships and just kind of.
Better understand what they might be going through maybe you understood. The ERP implementation, but maybe not the impact I was just wondering kind of lessons learned from that particular experience as you manage your vendor relationships.
Yes. Thanks for that question is really good one.
Everybody has been experiencing supply chain disruption and issues, including ourselves over many years. The last couple of years and we've been able to deal with those very very very effectively.
And haven't had any impacts and then this one came along that has nothing to do with global supply chain issues are more to do with our local challenge with a specific vendor and our team was able to put in place the necessary prioritization and our own internal processes to make sure that.
No customers no patients were left.
As far as we could tell with.
Procedures that were delayed obviously that's impossible to.
A measure, but thats something that we strove for and that became a priority that distracts from being out in the field to generating new business and spending your time with existing customers and the way that you normally do and so that really was the effect. So I feel like the effect was less patient impacting I'm sure. There are some examples.
Where you can find we find that was the case, but really not in the main are more to do with distraction for our sales team and everybody else, who was focused on making sure. All patients were impacted so you kind of got it we got ourselves into that situation.
We found ourselves in that situation did a really good job of getting ourselves out of it as best as we could in the quarter now to your broader question any business is.
Continuously doing business continuity planning there are some proprietary.
Anders with proprietary components that you just comps second source and there is no plan to be right in that.
That wasn't the case here there are some vendors were <unk>.
Components, where you need to really plan ahead to make sure. Your plan B is in place and able to be mobilized when you need it and we will do that we're doing that just like anybody else. The third one which is really where this category. This one fell into the category was.
It's something that we could very quickly standup internally ourselves to the extent we needed to.
And mitigate so those ones pull down lower on the priority list of business continuity planning because you can you can mobilize quickly. So of course, we will do that and I think more importantly, though this one probably has all been theyre looking at their own processes and thinking about how.
How do they implement system changes without things like this happening again.
Got it thanks for that color Mark appreciate it.
Then just Rebecca one for you just on the Opex. The trend has been flattening pretty much I mean, certainly relative to the first quarter of this year.
And continuing to come in below our expectations, which makes sense given sort of the spend that you did last year and the buildup of the sales force do you expect that Opex trends remained relatively stable over time I know the G&A costs were some lower spend on professional services is that a one off and should resume or how are you thinking about the different components of op.
And should we expect that to really stabilize here in terms of the spend as the revenue continues to grow.
Yes, Thanks, Matt I think it's a great question.
If you recall back to your conference. We did highlight that we are seeing a good amount of leverage through the sales and marketing line and I do expect that to continue.
Specifically in the second half, we will have maybe a small uptick as peony and.
Peony comes it comes back more than it was in the first half, but I think outside of <unk> for.
For the most part we look at we will see continued leverage through the sales and marketing line.
The research and development line that is the line, where we do expect to see relatively meaningful increases and this is tied to Mark's comments, primarily on nasal swab as well as on the contract I'm, sorry, as well as on the IBD development.
Both of those programs are continuing to ramp we are enrolling our clinical utility study that is obviously critically important for us to increase our spend on and so to the extent that you do see a meaningful increase in operating expense per my comments in the script in the second half.
The majority will be in research and development and G&A, we do expect to see a slight uptick as well in the second half we have some some key.
It projects, which we'll have incremental spend primarily and we've added a little bit of head count, but thats going to be around the edges.
The vast majority of the gains will come from the R&D line.
Great and just one last quick question from me just the decisions is continuing immuno score colon cancer test just maybe some background behind that decision was it a competitive landscape or is it just the.
Potential material revenue versus the cost you are putting into I just want to kind of understand I'm sure you have across your broad portfolio and make these decisions.
Instantly, but just wanted to understand a little bit more behind that specific decision that get some color on your strategic thinking.
Yes, that's good and thanks for acknowledging I mean, we do portfolio planning on a continuous basis.
As part of our strategic planning.
And that's really what led to this rather than anything else. So we look we looked across the level of investment that's needed the level of evidence development, that's going to be required the building of the sales team and commercial.
Channel and then yes of course, you always look at the competitive space as well, having said that this is a very novel test.
But where we see these capabilities that we have in immuno oncology, having the greatest near term opportunity.
Near to midterm and the long term is in our Biopharma business now diagnostics may may spawn from that over time, and probably will but just the timing of those diagnostics the launch and the penetration that relative to the investment you need to make is obviously a key part of the assessment and evaluation, we go through and so.
We did that on this product as we do on every product.
<unk> reached the conclusion that we did.
I mean, clearly and I want to acknowledge our team.
Especially in Marseille, and enrichment put a tremendous amount of effort into developing this diagnostic but they are also putting effort into.
The assets to build our support our biopharma business too and so none of that work goes to waste it all leverage in that broader opportunity.
Thanks very much.
Yes.
Yes.
Thank you our.
Our next question comes from Joseph <unk> with Morgan Stanley . Your line is now open.
Hey, guys good evening.
Just a couple of clean ups on the guide here Rebecca for you to kick things off. So I know you had mentioned the Rev. Rec impact from the code switched last year is that tracking to plan in terms of what you had baked into the guide and that slide trimming of the a formal guide from mid single digit to low to mid single digit is that just related to the vendor.
Issue essentially that you saw in Q.
Yes, thanks for the questions, Hey, Joss taking them one by one on ASP, yes that is trending exactly how we had expected and I think we even gave as I mentioned in the prepared comments, we gained incremental <unk>.
Clarity, if you will that conviction, probably a better word than clarity actually incremental conviction that that trend is going to abate at the end by the end of the year. So so we're obviously still work.
Working through the bits and pieces, there and are reaching out to specific specific payers, but we have we have absolute conviction that that will by the end of this year abate if you will.
<unk>.
And with regard to the supplier transition and the change in the guide for mid to high to low to mid definitively that is all around the supplier issue.
We quantified that for you previously that in the prepared remarks, as well and so the only real change in outlook. There is the supplier issue.
Perfect and then on FX, how material are international revenues today I know you added that was the incremental line in terms of the guide and how much of a headwind you really be.
Taking in in the back half of the year.
Given where rates are today.
So international revenue, which is primarily euro denominated and you would expect is around 15% and we've we have absorbed $2 million of incremental headwind for instance, since the last time, we guided in the updated guide today.
Perfect Super helpful. And then on the FIFO prostate Mark have you seen any noticeable shift in momentum since EUA Astro guideline update from me.
Yeah, I'll ask Tina to respond to that we always see is it meaningful it's really a combination of small pieces that come together and so we have that and we have obligations as well and going and participating in all the major meetings this year as well, where we had posters and oral presentations.
It's hard to just pinpoint one thing out of that.
Got it and last one from me for you Mark I mean, given some of the restructurings underway at some of your genetic testing peers. How are you thinking about sort of being a little bit opportunistic in terms of adding to your portfolio here.
<unk> assets, obviously that are being shopped around so just curious as to your take on on the landscape.
Yes, I'm glad you brought that up.
I don't want to kind of find out, but we do feel that we're in a very beneficial position relative to the.
The strength of our balance sheet, our P&L and the work that we've done over the years to ensure that we get.
We get a reasonable ASP for our tests and the way, we're not overspending relative to what we're generating.
So.
We're very prudent in fiscal and fiscally responsible in that regard so that puts us in a good position Rebecca talked about cash and the runway that we have.
Ex M&A.
We're very focused on on the path to profitability and having said that.
With course would be opportunistic in looking at the market and seeing what the opportunities are in the marketplace and thinking about those but we do that anyway and we've been doing we do that continuously so I would never say you were completely.
Ambivalent about that on the country.
As we always are we're watching what's going on and we're paying attention but at the same time, we're very very focused on execution of our business, which is in a good position.
And that's before we move on to just one one last thing to add to my comments on FX, obviously with the Helio acquisition. We are much in a much we have a much more natural hedge across the P&L given while we have a headwind on.
On revenue the operating expenses.
Effectively coming in lower than planned given that same change in currency rates. So I just wanted to share that across the P&L not perfectly on a one for one basis, but pretty darn close we're pretty hedged.
Got it got it very helpful. I appreciate the time guys.
Thanks.
Thank you.
Our next question comes from Andrew Cooper with Raymond James Your line is now open.
Hi, everyone. Thanks for the question a lot's already been asked so maybe just taking a little bit.
Nothing tremendously new necessarily on the nasal swab efforts, but you mentioned.
Wanting to get interim readouts and potentially as soon as possible and to drive that reimbursement I guess can you give us a little bit better sense for.
What point you need to be at in the study to say Hey, it's time for an interim readout we got.
Enough patients enrolled long enough kind of timeframe to look at what are the things you need to see.
When if you could bracket best case worst case can you give us some guidelines for for when we should be thinking about seeing some of that data.
Yes.
Ill go ahead, and then I'll see Julie if theres anything you want to add on the on the <unk>.
Study design itself, but without getting into too much details here under the.
For the study design of course, we put in place certain milestones along the way, where we get to look at the data when we get to see how how significantly.
Physicians are changing practice and Thats, obviously, one of the key things you want to measure here. We got an early look at that already and it's a very small set of numbers set of patients, but as I said in the prepared remarks. So far the results are encouraging we will see as time goes on so there are multiple points along the way where you take a look and depending on.
The results that you're seeing.
That could help drive earlier earlier publication of some of that data I don't know Julie if theres anything you want to add to that.
I think that's right I mean, it's still early days.
Data are looking encouraging encouraging and we do plan on.
Opening up the results at pre specified times, along the course of the study to check in and see how the data looks so we'll be looking at it multiple times.
Seeing a pre specified protocol.
Thanks Julien.
Okay, Great I'll stop there thanks again.
Thanks, Andrew.
Thank you.
Our next question comes from Mike Matson with Needham <unk> Company. Your line is now open.
Yes, thanks for taking my questions.
So I wanted to ask one on to safer just on the bladder test.
Can you remind us what the Tam is there and then just thinking about prostate over the next few years I mean, 30% penetrated.
Bob large numbers, I mean, thats, probably going to start to slow down some but bladder should be kind of ramping up so is there a potential for that to kind of.
Help sustain the growth of the decipher kind of urology franchise.
Kind of offset some of the slowdown in the prostate side, maybe over the next few years or is it just too small.
Yeah, and I wouldn't I wouldn't be thinking about a slowdown in the prostate side over the next few years, I mean, where Rebecca was referring to the kind of a law of large numbers is dominated grows but.
I see the momentum continuing for the foreseeable future here on prostate.
Bladder market here is.
About a third of the sizeable so of prostate so call. It 80000 patients a year in.
Our current test addresses roughly half of that market.
But of course I will.
Look to see US do similar things that we've done on the prostate side and over time, you build the indications out until you cover as much as possible.
So we would do that so yes of course, I mean as part of our urology franchise bladder could be a contributor in the kind of more medium to long term, but as Rebecca said earlier, we're very focused on not disrupting any of the momentum that we have in prostate right now so it's.
It's not a needle mover in the near term.
Okay.
Alright.
It's much more of a niche market.
And we are looking at other studies that we will be starting over the next few years and looking at expanding that product over time.
Okay, Alright, and then just given the kind of homerun success, we've seen with the decipher prostate tests.
Is there any kind of lessons learned from the commercialization strategy that can be applied to your other categories like pulmonology, which seem to be seeing a bit slower ramp or maybe just earlier stage not apples to apples, but.
Or is there something really unique about kind of the urology specialty call point.
Just allowed it to happen a lot more quickly than something like Pulmonology.
Well actually I mean, the lessons learned across our entire portfolio go back to our strategy here really.
That's always been the same and it's been done very successfully in a firmer than has been done very successfully in prostate in that as you identify a clinical unmet need to fit into the physician's workflow you generate a lot of evidence you get kols support you get into guidelines you get reimbursement and you have a very efficient and effective commercial team.
<unk> and <unk> continue to repeat that now than you have in addition to verify the added layer of being able to take those tests and make them available globally on our encounter platform as well. So that's really the general lesson learned and then specific I would say to prostate I mean remember that there've been molecular diagnostics for prostate cancer for quite some time and.
<unk> done a really good job the type of product.
Team has done a really good job of.
Coming into that market, where a lot of the groundwork.
Did exist and penetrate that market really really well and create new groundwork to expand that market beyond where we're at currently been penetrated so and then Conversely, pulmonology is a little bit different in that.
That groundwork hasnt been laid and we're doing that.
We're not the only ones doing that to a significant degree.
So it's.
No indication by indication unmet need by unmet need in <unk> and the Formula is pretty well understood at this point.
Okay, great. Thank you.
Thank you.
Our next question comes from Nathan <unk> with Stephens. Your line is now open.
Hey, guys. Thanks for the questions, maybe just starting with the say for cross date on the commercial team. How many reps you added year to date and how many reps are supporting that test currently and then if you could could you provide some color on the efficiency of new reps versus some of your more tenured reps is there a metric that you could call out.
Yes.
And then how long does it really take for these new reps.
Get fully ramped and efficient.
Yes, that's a great question.
40 ish around reps right now.
Obviously, we want to add a handful more.
And the timing just depends on how things are going et cetera across the year.
<unk>.
Could you just really have to work very hard on.
Hiring you have to work very hard on training.
Joining us for a long time and I don't know if thats the secret numbers secret Formula I feel like it takes six to nine months for sales reps.
Matter, what theyre selling in this business to really get to a point, where they feel comfortable and really start making a difference and paying for themselves I think that's actually pretty common timeframe.
Got it thanks for that and then thinking about ASP of this test how much room do you still have left to run in terms of penetration of the commercial payer market any color in terms of near term opportunities or expectations around incremental coverage, maybe over the next year or two.
Oh, absolutely that's something we work on all the time.
There is still more run rate way for us to.
Get contracted for the on the commercial side. There is no question about that it's something we're very very focused on every time, we add these new studies.
You can bet that we go back to the commercial payers and share that information with them, but yes. This area was just slow on the commercial side, the holding urology area with just very slow on obtaining a commercial coverage, but yes. There is more runway and yes, we continue to add new contracts every year.
Got it alright, well that's it from me thanks.
Thanks, Nathan Thank you.
Okay.
Our next question comes from Paul Knight with Keybanc. Your line is now open.
Hey, Rebecca on the pricing I missed the early comments there but is it centered around the.
The commercial payers on that ASP.
So Paul to comment on pricing was specific to Afirma and specific to the code change made in January or Q1 of last year and the impact that is going to have over the course of 2022 on the Afirma Asp's. So nothing new with regard to that we had commented last quarter that we had expected that <unk>.
Packed over the duration of 2022, we are equally confident that it's now under the duration of 2022, and we will not go into next year. So I think when it comes down to it we have worked hard work through this we now just have to wait for a little bit of time to pass, but we're confident going into 'twenty three ASP for our pharma will not necessarily be the <unk>.
<unk> tied to the Gen. Two the CPT code change if you look at Asps.
Across the entirety of our testing business it was roughly flat sequentially and so.
Obviously, there is puts and takes across the board, but you can you have the afirma detail that we've provided and and we will get through this over the course of the year and look forward to next year and it not being a headwind.
Yes, youre, saying that ex affirm it was pretty flat.
I'm, saying, it's flat even with the impact of Afirma, So steady state across the board year to date.
Alright. Thanks.
That concludes today's question and answer session I would like to turn the call back to Marc Stapley for closing remarks.
Thanks, Operator I appreciate it in the current challenging environment I'm incredibly proud of our team's execution and financial discipline in Q2 and to date.
We believe that this focus as well as our portfolio of high value tests to address key unmet needs sets us apart in the industry, we remain committed to transforming care for patients across a range of diseases. We're doing this successfully in the U S and have a clear pathway on plans to bring our tests to patients in global markets. So thank you for joining us today and I look forward to keeping you apprised of our progress.
Ladies and gentlemen, this concludes aki unmet need sets us apart in the industry.
You may now disconnect.
The conference will begin shortly to raise Johan during Q&A you can dial one one.
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