Q1 2023 Veracyte Inc Earnings Call
Good day, and thank you for standing by welcome to the Vera side first quarter 2023 financial results webcast.
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I would now like to hand, the conference over to your speaker today shallow Gorman director of Investor Relations. Please go ahead.
Good afternoon, everyone and thanks for joining us today for a discussion of our first quarter 2023 financial result.
With me today are Marc Stapley birthday, Chief Executive Officer.
And Rebecca Chambers, our Chief Financial Officer.
Or if they had issued a press release earlier this afternoon detailing our first quarter 2023 financial results.
This 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 make during this call will include forward looking statements as defined under applicable securities laws.
Forward looking statements are subject to risks and uncertainties and the company can give no assurance they will prove to be correct or are there you're not under any obligation and should 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 the Birthdate files with the Securities and Exchange Commission, including birthday. Its most recent Form 10-Q and 10-K.
In addition, this call will include certain non-GAAP financial measures reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release.
First of all from the IR section of their website.
I will now turn the call over to Mark <unk> CEO .
Thanks, Sheila and thanks, everyone for joining us today.
I'm very excited to share our first quarter results, which were even better than we anticipated almost across the board.
We delivered revenue of $82 4 million.
22% growth over the prior year, driven primarily by outperformance, but pharma in this cycle.
Further with our continued focus on financial discipline. We ended the first quarter with cash cash equivalents and short term investment meaningfully ahead of our projections at $178 million roughly flat to the prior quarter, even with the seasonal use of cash than we anticipated.
Behind this balanced approach to growth and capital preservation is a proven framework identifying a specific clinical unmet need.
Developing the tests to address that need and securing the clinical evidence reimbursement guideline inclusion required to drive sustained market penetration.
This approach is the force behind the performance of our Afirma disliked the tests and enables us to invest in our long term growth drivers.
This quarter, we delivered close to 12 and a half bounded the Afirma test.
Patients being evaluated for thyroid cancer more than we anticipated given that we had expected a greater impact due to seasonality, which is typical in the first quarter.
We saw positive growth trends across both our ordering base and orders for existing provider on.
On the reimbursement front, we secured four new payer contracts, making the test an in network benefit for over 4 million additional health plan members.
In addition to the outstanding work about commercial and reimbursement team.
I'm excited to share that as part of our initiative to enhance our best in class Afirma Test. We recently launched edition of touch promoting mutation testing to DFM a report.
There have been several studies published recently that correlate the presence of a third permit promoting mutation to a high risk of malignancy.
As well as highlighting that such mutations co occurring with the BRAF <unk> hundred <unk> are associated with a poor prognosis.
Given the value of these insights transforming patient care, such as where the more aggressive treatment is warranted.
Team worked hard to develop a high quality DNA assay that allows us to reliably determine that we promoted gene mutation status for patients with suspected all diagnosed thyroid cancer.
To further empower physicians to optimize clinical decision making.
We believe the product enhancements such as this along with the work we've done to improve the customer experience streamline ordering will continue to benefit our performance in the coming quarters.
Given this as well as our strong first quarter results. We now expect to bolster the growth rate in the high single digits for the full year.
Turning to urology, we continue to expand on the body of evidence surrounding to decipher prostate tests.
Further helping to establish the test as a new standard of care.
At the American Urological Association annual meeting earlier this week multiple abstracts were presented focusing a lot of its IPO.
Particularly exciting with data from two large real world dataset encompassing more than 100000 men with prostate cancer, which reinforce the clinical utility of our test in.
In the first study researchers that data from the National Cancer Institute database with patients who had undergone disciple prostate testing and found the use of our test was independently associated with a twofold increase and conservative management, among those with favorable risk disease.
And the second study over 90000, decipher prostate test results will link to electronic health and claims data.
Demonstrate the despite the score at initial diagnosis was independently predictive of risk of metastasis.
And after radical prostatectomy with predictive about biochemical recurrence and metastasis.
In addition to the data presented at <unk>.
We published a number of studies last month to further advance the clinical utility evidence for the size of the prostate test.
The first study published in European Urology oncology founded a cohort of over 4000 patients.
Cyber prostate could help better identify those patients with early micro metastatic disease, who may benefit from treatment intensification.
Study adds to growing evidence around the use of recycled prostate to help inform treatment decision, making at initial diagnosis.
Additionally, new data from an analysis of an NCI sponsored phase III study published in the International Journal of radiation oncology physics known as the ratio.
Joseph can decipher prostate test can help physicians more accurately categorized personal risk.
And select the appropriate treatment for men with intermediate risk prostate cancer.
This is important because prostate cancer deemed intermediate risk by end CCN guideline is the most heterogeneous of all risk groups.
And a wide variety of treatment is available.
Of note its randomized study in which patients were followed for nearly 13 years is that fair.
To validate any gene expression by market needs immediate risk patient population.
The attainment of level one evidence the validation of our test in the most recent <unk> guidelines along with the stellar execution by our team and our differentiated site for grid report led to Q1, despite for prostate volume of more than 12% return.
Like Afirma. This growth was also driven both by strong adoption from new ordering physicians as well as higher volumes from existing accounts.
Building on the framework, we've established with Afirma decipher, we are making good progress on our long term growth drivers.
Diet and patient enrollment for 19 Gal the clinical utility study profits up to nasal swab continues to progress well demonstrating the potential for a novel Noninvasive tests to help guide physicians next steps the patients with potentially malignant nodules.
We look forward to presenting expanded preliminary data on the familiarity phase of the trial, which enabled investigators to learn how to incorporate the test since the patient management.
One of the clinical utility trials at the American Thoracic Society or Ats International Conference later this month.
The global launch of our test menu to patients outside the United States is another key long term growth driver for verified.
Our current IBD product offering prosigna for breast cancer patients had a record quarter delivering close to 3000 tests.
Demonstrating traction and adoption supported by clinical evidence.
With the submission of our invasive genomic classifier to European regulators in December 2022.
Now responding to feedback from our notified body.
In the meantime, we continue to build critical evidenced during busier and are looking forward to the presentation of abstracts that Acs demonstrating the test the impact on patient management.
Its ability to predict disease progression in patients with interstitial lung disease.
We believe our focus on evidence generation will help drive adoption of video globally.
During the LDC in the U S. While gaining important kols support in Europe in preparation for the international launch of the IBD.
We're also making good progress building out a broader menu of diagnostic diabetes for the U S market with the type of prostate expected for submission in 2024, and our nasal swab, we expected for submission in 2025.
While our Biopharma business is facing significant headwinds over the course of this year given the impact of a sizable customer pulling back on planned spending and the current macro environment. We continue to advance our unique multi year Nick offerings.
We were pleased to share three abstracts will host the spotlight theater at the ACR annual meeting.
I think our distinctive set of assets to help Biopharma partners, but all points along the drug development process.
We are continuing to build out our pipeline of new customers to fuel our long term growth prospects of this business.
As I laid out on our call last quarter, one of the strategic focus areas for 2023 is to identify new opportunities to expand our testing menu beyond our currently available products in the pipeline I outlined.
A part of these efforts we held our first annual discovery day in April , bringing together, our R&D medical clinical and commercial teams from across the globe to imagine the future for oncology diagnostics and verify its important role as a leader in shaping that future.
I am extremely pleased with the work our teams are doing on this front and our investments to drive the next phase of growth for the company.
Before I close I'd like to highlight the publication of our inaugural environmental social and governance report earlier this week. This.
This ESG report highlights our mission and values are deeply embedded in our business and demonstrates not only our dedication to transforming patient outcomes all over the world, but also our commitment to our shareholders employees.
<unk> partners and other stakeholders.
I am pleased to provide transparency into our ESG efforts and I'm excited to build on the foundation, we've laid to further advance our program.
So in summary, Q1 was a fantastic quarter marked by solid execution across the team. We are excited about our progress to date, our clear focus for the future with that I will now turn to Rebecca to review our financial results for the quarter and updated expectations for 2023.
Thanks, Mark as Mark said, we had another excellent quarter with $82 $4 million in revenue an increase of 22% over the prior year.
We grew total volume to approximately 28800 tests, a 24% increase over the same period of 2022.
Quarterly testing revenue was $72 $4 million, an increase of 29% year over year, driven by higher than expected decipher prostate and afirma volume as well as strong cash collections in the quarter.
Total testing volume was just under 26000 tests.
ASP was $2800 per test benefiting from approximately $2 million of out of period collection.
Adjusting for this impact testing ASP would have been slightly greater than $2700.
First quarter product volume was approximately 2900 testing and product revenue was $3 9 million up 31% year over year biopharmaceutical and other revenue totaled $6 1 million.
Down 30% year over year, primarily due to lower IBD contract manufacturing and overall spending constraints across the industry as previously discussed.
Moving to gross margin and operating expenses I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets as other acquisition related expenses and restructuring costs, but does include routine stock based compensation.
non-GAAP gross margin was 68% up approximately 300 basis points compared to the prior year.
Testing gross margin was 73% up 400 basis points compared to the prior year benefiting from higher lab volume.
And long data collection.
Product gross margin was 44% biopharmaceutical and other gross margin was 29% down year over year, given lower fixed cost absorption. While we are forecasting a sequential step down in consolidated gross margin as we invest to support our better than expected volume outlook, we are reiterating our full year expectation.
The non-GAAP gross margins in the mid sixties.
non-GAAP operating expenses, excluding cost of revenue.
We're up 18% year over year at $58 1 million.
Driven by ramping clinical trial, and IBD development expenses as well as higher personnel costs research.
Research and development expenses increased by $4 2 million to $12 7 million sales and marketing expenses increased by $2 7 million to $25 $2 million.
And G&A expenses were up $2 1 million to $20 1 million.
We recorded a GAAP net loss of $8 1 million, which included $8 1 million of stock based compensation expense and $6 7 million of depreciation and amortization overall, we ended the quarter with $177 9 million of cash cash equivalents and short term investments.
Well ahead of our expectations.
Turning now to our 2023 guidance, we have updated our projections to 330 million to $340 million.
Higher than our previous revenue guidance of 325 million to $335 million.
This increase is a result of our strong performance in the first quarter and updating testing revenue expectations of mid to high teens.
Offset by a greater than previously expected decline in Biopharma and other revenue.
For the remainder of the year, we are forecasting sequential revenue to increase into Q2, and then decline going into Q3, given typical seasonality in the summer holidays, before finishing 2023 with quarter over quarter growth in the fourth quarter.
Moving to our expectations for cash cash equivalents and short term investments as always our comments our borrowing potential M&A.
In 2023, we now anticipate maintaining our 2022 year end cash balance of approximately $180 million, even with the impact of prior acquisition related contingent consideration.
I am proud of how we started 2023 and look forward to continuing to deliver on our plans and financial projections.
We will now go into the Q&A portion of the call operator, please open the lines.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced.
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Please standby, while we compile the Q&A roster.
Our first question comes from the line of Puneet.
<unk> of <unk>.
SP SCP Securities. Your line is now open.
Great. Thanks.
Mark Rebecca Thanks for taking the question. So first one on the firm.
And I have to say congrats on the really solid beat here in the guide range. So.
If you could talk a little bit about that product.
Driving the strength there.
The sales force.
Optimization is a great data.
Is it just more conversations around that product, maybe just talk to us whats driving the strength in the pharma and.
When you are modeling high single digit for the year what could.
Can you talk a little bit about what could push that a little bit higher.
Or maybe a little bit lower as we go through the year.
Yes, thanks, Tony and thanks for recognizing the strong performance of the Afirma.
Alex and the team I think it's pretty much all of the above that you mentioned, but mostly I would say it's driven by.
Really strong commercial execution continued.
Continued enhancements in the product and the Canada process of ordering and engaging with physicians.
A good example of an enhancement in the product as the launch of <unk>.
We recently launched in the quarter enables.
Further clinical utility of the test is always publications, including around to it and more data and evidence.
As well.
I think I really do have to give a lot of credit to our sales team who are visiting physicians visiting customers.
Talking about the benefits of our pharma with them.
Yes.
Some competitive dynamics out there too and it feels like we've got some real tailwind there as well at least.
Anecdotally it feels that way so very very excited about how our pharma has been going so far.
In terms of kind of potential for that growth rate to be any different I think having one of those drivers.
Could always be competitive dynamics.
We're continuing to add new physicians, we're continuing to broaden the adoption within current physician and provide a basis.
So to the extent, we're able to take to take incremental share that would be helpful to drive that up again.
There's always competitive dynamics can go the other way too we just that's why we keep investing in the product and ourselves to anything you want to add non covered it well.
Got it that's great and then just a quick one on mute.
Mutation.
Does this change the LCD pricing or what you can obtain from commercial payers here in the near term or longer term.
Yeah. Thanks, Puneet I'll take that one the answer for all intents and purposes is not necessarily so.
So it will be.
Sure It will be ordered for a subsection of us.
Patients and at this point in time, while there is a code there isn't necessarily pricing associated with that code and so we are doing this primarily for the benefit to patients and to ensure continued enhancement of the product and we will obviously work over time on getting that price, but given the list price being in the $300 range, we wouldnt expect that to materially impact.
ASE, one way or the other even if once we're successful with.
Once we're successful getting that's contracted and covered.
Again, it's a very small percentage of patients for which chart will be ordered which is why we don't think even though even once we are successful in getting covered lives for turn will have a meaningful impact to ASP, but its important for those patients critically yes, just to add to that I mean.
Only one 2% of thyroid nodules that undergo molecular testing are expected promoting mutations right.
First we essentially ordered from for more than that that would be the outcome, but.
Rebecca.
It's a small subset of cases, but important to us.
Makes sense.
And then just last one for me on biotech funding obviously.
The macro situation in the biotech funding is continues to be a challenge in somewhat reflected in the biopharma revenue this quarter as well. So maybe just talk to us about sort of what is the level of moderation through the year, what should we be imagining florists or step down for the full year, but in the context of the guide for <unk> Biopharma. Thank you.
Yes.
Remember this is something I think we called out several quarters ago as a potential headwind and I think we were fairly early and seeing that but then again.
We have a pretty concentrated position with a small number of customers accounting for a large portion of our biopharma revenue.
So thats one factor B, we're very early and we're very much involved in the early clinical research work, which is I think the area across all of the Biopharma that is most impacted versus existing.
Existing ongoing clinical trials and on market products. So so we're feeling the brunt of it one of our goals has been to diversify.
Customer.
Portfolio, there and I think we're making we are making good progress of doing that but we still remain fairly concentrated.
So Jeff that's going over it's a very small percentage of our revenue biopharma and others roughly 10% by farmers around just slightly more than half of that.
So a little movement here and now obviously.
It translates to a fairly big percentage change Anthony just to help with the math a little bit we've given updated affirm our guidance of high single digits. As you cited earlier, we'd get it given updated testing revenue growth for the year of mid to high teens.
We continue to expect the product business to do around mid teens, and so obviously youre backstop.
That biopharma and other lines, so you should get pretty close to it with that math.
Got it okay.
Okay. Thanks, guys.
Alright, thank you.
Thank you one moment for our next question.
Our next question comes from the line of Mr. Carrico of Stephens, Inc. Your line is now open.
Hey, guys congrats on the quarter really strong performance.
Maybe just a quick question here I know, it's probably not the simple, but how print promotional responsive is the thyroid market is there somewhat of a linear relationship to rapid repetitions and growth could adding a few reps potentially bump up that growth rate or where how are you.
Thinking about adding reps going forward within your.
Thyroid franchise.
Yes, and we've been not just for a lot of years in the firearm business. So we've got a lot of experience there and there is always an optimal point that you get to with the commercial teams and of course, when you start adding reps, it's not as simple as adding a rep you have to redesign territories.
Reallocate territory and that creates.
Some disruption when you have very good relationships between existing reps in their accounts and so.
We always ask ourselves that we have continued to grow that team, but we don't have to grow it significantly in order to achieve the kind of results we're getting.
I think what is what really matters is.
Sales rep effectiveness and the sales reps having.
Lots to talk about with their customers and a good reason to go and visit another customer.
Have a conversation.
Example, again its term.
Again, while it wouldnt be ordered in every patient case, it's another reason to go out and talk to the physician about the addition of <unk> and.
What it means and when they can order it and so on so just have routine cadence of good strong communication.
Between our existing sales reps and their customers and then obviously.
Being out on the street, finding new customers and converting new customers over to Afirma is a big part of it as we've talked about before this product a total.
Fireeye testing molecular diagnostic testing is about just over 50% penetrated.
A lot of customers out there a lot of physicians, who are ordering this test and should be when you actually look at the yield in terms of the number of surgeries have been avoided thanks to afirma.
It should be a fairly easy conversation, but it takes it takes some investment from the sales team and going out and visiting those accounts and the only thing I would add to that Nathan is while we are adding head count here, we're not nearly adding at the same growth rate as revenue is growing right. So we're seeing immense leverage over the sales and marketing line.
Expect to continue to do so which is one of the one of the benefits of the specialty oncology channel. These markets can be served with.
Call. It $50 55 sales heads and you don't need to build.
Sales forces that are 100 100 to just serve differ.
Different types of physicians so.
We obviously really like this model and really are benefiting from a differentiated cash position and cash generation as a result of the leverage we're getting through the sales and marketing line.
Okay.
Got it. Thank you that's helpful and maybe on the site for prostate.
I think last I checked youre at like 195 million covered lives something like that still seems like there is a lot of room to run. There you guys have been publishing a lot of studies so could I just get your updated thoughts on <unk>.
Potential coverage wins or how youre thinking about that going forward.
Yes, yes, as you quite rightly pointed out there is a lot of room. There are some key coverages that we need to get.
And what do you think about it you've got a test here.
It's very well reasonably well penetrated at least so far.
And CCN level, one guidelines more than 70 peer reviewed publications. There is so much evidence out there supporting the use of the test.
Got it.
It's still a little surprising that it can take this long it's not for lack of trying there are a lot of we have.
Our market access team that this is what they do.
And they are working with payers in order to drive the coverage decision so more to come on that in the future. That's one of the opportunities that we have.
A future <unk>.
<unk> and <unk>.
Just got to keep driving it we're still getting as you heard today with pharma has been on the market will know 11, 12 years 12 years, and we're still driving commercial coverage in some cases so.
It's a core part of what we have to do in in diagnostics as you know and Nathan as we shared on.
We shared I think on the last earnings call, we're expecting the vast majority of the decipher growth to come from volume.
As it already has quite favorable asps and this quarter was no different from a volume growth in the mid Forty's pricing did add a little bit, but I'm, sorry, I said at this time.
Decipher I mean, I would be very happy with Afirma volume rather than the mid portion as well, but decipher grew in the mid Forty's and.
Price there was was not necessarily it added a little bit to it but the vast majority of the growth came from volume thanks for bearing with us for standing there right.
All good thanks, guys I appreciate you taking the questions.
Pleasure. Thank you.
One moment for our next question.
Our next question comes from Matt <unk> of Goldman Sachs. Your line is open.
Hi, good afternoon, Thanks, taking my questions and congrats on the performance this quarter.
Maybe Rebecca I just wanted to start out on the.
On the Opex side I know there was a bit of an increase obviously the revenues were up as well.
You had mentioned IBD.
IBD development ramping clinical trials, but just what should we expect from an Opex standpoint. This quarter, you gave kind of the gross.
Margin guide, but just sort of below that can you kind of give us a sense for opex trends over the course of this year.
Yes, happy to and obviously, if you look at our year over year growth.
A good chunk of that came from increased R&D as we cited in the prepared remarks.
And we're investing heavily not only in IBD development, but also in the night and Yale study for the benefit of nasal swab, we expect that trend of sequential growth for R&D tooling to continue throughout the course of the year R&D for us will be the largest contributor to opex growth over the course of 2023.
As I as I mentioned earlier sales and marketing.
Is not expected to grow that materially throughout the year if anything.
So again thats, a great source of leverage for us and on the G&A line, as we invest and really ensuring the systems and facilities and.
Infrastructure to scale over the course of the coming years, especially with the incremental volume growth. We're seeing we will expect G&A to grow slightly, albeit at much less of a rate growth rate than R&D.
Got it.
And then just maybe to follow up on some of the comments or questions have been asked on decipher and thank you for that volume number Im just wondering just I think in your March presentation, you saw the penetration rate around 25%. So I assume that's probably pretty consistent with where we are today, but just maybe any update on sort of the competitive landscape that you're seeing there and.
Where you're seeing sort of the most traction with that product just given the volume growth.
Yes, I remember I think a couple of factors at play here one is as we talked about last time.
Incidents of prostate cancer is growing.
You can see that it was around 7% growth in so that's partially driving the home market to be larger in terms of the 25% penetration that was our rough math at the end of last year, so not tough to update that when not everybody gives you numbers.
It's hard to tell but I would say clearly we are continuing to take share when as Rebecca just mentioned.
This business grew in the mid forty's quarter over quarter.
Feels like that that represents some some share gains as well as taking share in.
Growing the overall market.
Got it and if I could just ask one last just clarification question because I think you talked about in your prepared remarks, but just remind me on the on the ramp.
In Europe for the IBD.
Cigna is it an <unk> type of prostate then preceptor sort of like 'twenty four 'twenty five time period or could you just maybe help me outline that a little bit better.
Yes, so yes, thanks for the question.
So starting with Sigma, which is a market today and actually had a good quarter, we talked about that the growth there and how well that tested so far.
With close to 3000 in the quarter, which has achieved a record quarter for that product, which is great news and then and visa we submitted in December last year, a little ahead of schedule and as I mentioned in the beginning of the call. We're dealing with comments from the notified body, which is normal normal part of the process, what we expected in the back and forth.
Bill can get a sense of timing when that will be approved.
As the IBD our processes so.
Tried and tested still at this point, we're going to submit you got the timing right that we're going to submit decipher prostate in 2024, and we're going to submit nasal swab in 2025, and then they'll go through a very similar review and response process.
Great. Thanks for clearing that I appreciate it mark and congrats again.
Okay.
Alright. Thank you one moment for our next question.
Our next question comes from the line of Andrew Brockman.
Blair Your line is open.
Hey, good afternoon, and thanks for taking the questions.
<unk> been asked already maybe if I could just.
Two housekeeping question here can you just sort of reiterate or remind us around timeline for the Nightingale study is it still on track.
Finished enrollment later this year and how should we be thinking about a potential readout. Thanks.
Yes, thanks for the question.
Gal.
Yes.
Actually the progress has been really good in terms of signing up new sites.
Our clinical team has done an excellent job of contracting and getting those going in with.
With patient starting to enroll in those sites, where we're starting to see some nice uptick here still expecting around the end of the year.
Pull through the last patient in the trial in terms of the readout, that's where there's a lot of variability because as I think Scott talked about before we're going to take a.
Few bites of the Apple here in terms of looking at some short term analysis.
Clearly how well we.
How much we can use that to drive the appropriate clinical utility conversations for reimbursement will depend on the results of that analysis. So there's couple of pathway that we're pursuing in order to move as quickly as possible to reimbursement, but ultimately as we've said before we've got to get the clinical utility data.
Published which is it takes time and then that drives the reimbursement conversation, which also takes time.
And just one thing to add there is is the guideline.
The guidelines to a two year follow up and we hope that we'll be able to effectively do a shorter follow up enough with the longest follow up that would be required before we go through the publication of our early readout would be up to two years.
Okay. Thanks, and then Rebecca has got a boring modeling question for you I think you are.
Mentioned.
<unk> will step down in gross margin can you just maybe give a little bit more color around what's driving that thanks.
Absolutely be happy too. So so obviously, we were very pleased with our gross margin this quarter.
Especially the testing gross margin line, but overall.
We really did benefit from fixed cost absorption both on the labor and overhead side this quarter.
The benefit of mix as well as the benefit of the $2 million of prior period collections flowing down at 100%.
If you look forward with the sequential impact you cited we will not necessarily have that benefit of the prior period collections and so that will be a headwind sequentially.
And we have been running incredibly lean in the lab.
A couple of hundred basis points with the majority of that coming from labor absorption is not a sustainable business model and so we will be to ensure and to ensure.
To ensure the ability to continue to grow at increased volume levels were seeing we are going to have to staff up in the lab, which will also <unk>.
<unk> gross margins on a sequential basis.
In addition to that we are expanding our laboratory here in San Diego two to take into account the growth of the decipher franchise.
We will be buying instruments will be taking on incremental space. All of that also will impact margins. So it's a good news story in the end because we are growing a little bit faster than we had expected.
Obviously, we need to invest in that growth.
And even a mid <unk> margin is a pretty solid one and so even though it's a slight sequential step down I'll take it all day long for the growth we're seeing.
Okay, great to hear thanks.
Thank you one moment for our next question.
Our next question comes from Mike Matson of Needham <unk> Company. Your line is open.
Hi, guys.
Joseph on for Mike.
Maybe another question on <unk>.
<unk>.
Now that Terry testing has been added.
Maybe looking back to when I guess expression Atlas was introduced for the test.
I'm assuming that.
Expression Atlas is probably ordered or will be ordered a lot more but.
In terms of your sales force and productivity, maybe when that add on was introduced.
Did you did you see a large uptick in interest from.
New physicians or what have you or maybe you're kind of expecting a similar thing going forward with.
Testing.
Yes.
Yes, the way I would look at it is as I said earlier the <unk> testing.
Really important for some of our physicians because it's important for some of our patients, but we're able to provide a readout on to.
But it gives the sales team a really good reason to go and have the conversation with the physician about about the enhancement to the product and Xa would have done the same thing in now.
We're making this kind of more of a blended product sale.
<unk>.
Sales person is speaking to the physician about afirma as a as a group of products, which includes our pharma and it includes.
Genomic sequencing classifier to include.
Yeah.
X as well as Curt if you check that box.
So it's actually just for.
For a more straightforward conversation at this point.
I wouldn't look necessarily to drive as Rebecca said earlier in terms of the ordering patterns.
Significant incremental sales on its own.
But I just think it helps to continuously enhance the product to make sure that we're providing physicians, while they need to be able to deliver the insights to patients.
Okay. Thanks for the color on that.
Maybe.
A question on encounter.
Just looking at the installed base, maybe without getting into the into the numbers.
In Europe .
Just looking.
Where these are where these machines are installed weather.
Hospital labs at clinical labs, maybe that versus academic institutions or pharma.
If you have an idea on the split there and maybe the same question for the U S installed base.
I think it's already think about it in terms of the nature of the installed base I think if you think about Europe , we have to go.
Once we get the regulatory approval for a new test to add to the encounter menu, which is obviously the strategy here.
We have to go even if we get the regulatory approval, we have to go country by country to drive reimbursement.
Then once you've got that reimbursement decision in a country you go lab by lab to drive placements now the placements could be an academic labs. So it could be in smaller clinical labs.
It's really going to be driven by.
The menu and the flow through of patients in those facilities.
And so and it's not really about the current installed base. Because we are also going to have to place new instruments in order to drive that and to do that we need to have the menu on the platform. Hence the strategy. So I think about it more in terms of going.
Going country by country, and that's the important way to focus on it including in the U S. As well, yes, and the only thing I would add as well.
We obviously are selling for cigna in the U S. It is.
I would say the vast majority of revenue is actually outside the USA.
I think that is where we put divest the <unk>.
Majority of our investment to develop those.
U S market.
Something to keep in mind.
Okay.
Yeah, Okay that makes sense and then maybe just one last one.
In terms of the.
Biopharma revenue you had mentioned in your prepared remarks that.
Not only from IBD development that youre, seeing some pullback, but as well as some of the I guess earlier stage.
Services or clinical trial services that you guys do.
Has there.
And any.
Effect.
In terms of maybe licensing revenue from decipher grid database are you guys as other databases, maybe how is that.
Trended here in 2022 and two.
The start of 2023.
Yes, just maybe a reminder, the majority of our Biopharma revenue is coming from our immuno oncology business.
Which itself stems from the <unk> acquisition and a lot of it is outside of Europe .
There was a little bit of U S related revenue that is associated with.
The former virus decipher businesses.
But the majority of the impact we're seeing in the decline is on the immuno oncology side.
So that's why we're seeing effect and that's the bit that's involved in the very early.
Our market development work, where we're more likely to see that impact. So no I would say there is no read through there in terms of.
Decipher grid related activity.
A lot of interest in that.
But.
I wouldn't say that's the biggest driver.
Okay, Great makes sense. Thank you very much for taking the questions.
Thank you one moment for our next question.
Okay. Our next question comes from the line of tier Savant.
Organ Stanley Your line is now open.
Hey, guys good evening.
I'll start with a real simple one for you Rebecca.
It fair to assume that in terms of those out of period collections that you called out $2 million impact here in the fourth quarter that youre essentially zeroing it out in the guidance for the rest of the year.
Yes, that's fair.
Okay perfect.
And then mark.
A big picture one for you one on Biopharma I know you called out sort of the sizable customers are pulling back on spend et cetera, but as you look to the next sort of.
Three years or so are there any key missing pieces in your offering that will make it sort of really.
Step up here in terms of the traction in.
The other side sort of participate more substantively in that opportunity.
Yes, it's a great question and I don't think that there are and to the extent, they're all we're working on developing those but the biggest of which is our biopharma Atlas.
Because we believe that there's a.
Really interesting market demand for that.
And so thats what were working on because Thats one of the things. We think is going to drive revenue growth in this business, but I think we have most of what we need today I mean, we have custom assays, whether they be in.
The chemistry for proteins or we have RNA expression based assays multiple versions of that we have DNA that we can we can do out of.
Our lab in Marseille and also here. So we've got we've got the capabilities.
Plus of course AI capabilities on top of that which is a lot of what's behind the Atlas work. So we've got the capabilities. We've got the assays. We have got the lab, we've got the people.
We just need to drive more success on the selling side and bring more of those biopharma customers in in the current macro environment, that's more difficult conversation.
Don't expect the current macro environment to last for the next three years I would certainly hope not so wished.
We're starting to get traction and we'll see how that pans out.
And our guide, we're being a little bit more bearish on this side of the business right now given some of the trends that we've seen.
Got it makes sense.
And then on the on the encounter menu Mark I think you've pointed to decipher prostate in 2024 is a particularly important submission.
Is there anything you can do that's within your control to pull it forward I mean, obviously the approval timelines and then the reimbursement timelines by country or sort of largely out of your control, but in terms of the submission itself to the Europeans anything you can do to accelerate it.
No I already has been I mean relative to the original timeline.
For all of these products on the platform, we pulled it through pulled it forward substantially.
It's not happening in theory, and I think thats, an important point to make we don't work on Nvidia then install work on disciple and install work our nasal swab.
<unk> have been happening in parallel.
But they were just a different stages of development. So the work to bridge over the decipher assay to the encounter platform has been progressing very well and we've made good progress and we're moving to the next stage of that so it's going to go as fast as it can go with our current plan and roadmap and Thats not really much we can do the.
The most important thing we can we can do to speed things up is on the notified body review and making sure that what we submitted a very thorough and detailed dossier. The work that we're doing on Nvidia and we wait for it would be this way is kind of like a pilot process, it's giving us some of that.
Our sense of what the notified the new notified body under the new IBD. Our process is looking for that might be different from what it used to be our teams got 15 years experience in doing this but the regulatory.
Three processes, new as you know and so there's a lot of learning for the notified body.
And anyone who submitted so that should help hopefully speed decipher along and make it a little bit smoother. The other thing is we can point to the extensive evidence that we have for the decipher test in.
In the U S and outside the U S and <unk>.
That drives the notified bodies accordingly, because there are patients at the end of this the need this test in Europe .
Multiple come on that but yes, we're going to go as fast as we can.
Got it that's helpful. And then one final one for me on.
On M&A I mean in the past you've talked about.
Staying away from.
The cash Guzzlers in this space so to speak either in cancer screening or perhaps even in the metastatic setting Mardi et cetera is that sort of a red line for you as you think about the M&A opportunities in the pipeline I mean, obviously, you mean seller willingness tiara has gotten a little bit better following the regional banking crises.
Sure.
So could we at some point and sort of see you dabble in that space or is that just sort of off limits in terms of how you think about it philosophically.
I think no change in our philosophy around M&A, So I would say.
Said it before we.
We will obviously not be blind to opportunities, we'll keep our eyes open for things that make sense, but the bar is very very high for us in terms of the care continuum in itself.
We're not necessarily looking to enter that.
Healthy screening.
Area, because theres a lot of people doing that.
It's a significantly heavy investment, but as far as dealing with cancer patients. So patients who are suspected of having cancer. That's right in our sweet spot all the way across the care continuum once you've been identified as a patient and thats, where youre going to see us always continue to focus.
Fair enough. Thank you guys I appreciate the time.
Thank you one moment for our next question.
Our next question comes from sung <unk> Nam of Scotiabank. Your line is open.
Hi, Thanks for taking the question.
One more question on your calendar IBD strategy.
Do you think there'll be market opportunities for laboratory why don't you just adopt one test on the platform or do you think for this model to work.
That you would have to see multiple tests being adopted how do you see that playing out I don't know if its too.
Too early to tell but.
David It's actually the right question, because we've said all along you need you need an extensive menu to drive adoption.
And that's what we're building.
Hence it.
I mean, if you think about it this way having a breast test, which we do have envisaged or is more of a rare disease. So I don't think that necessarily.
<unk> steps up the adoption on its own prostate significant.
Indications significant disease pent up demand that starts to really move the needle and then if you think about adding nasal swab on top of that.
Where where the population the potential use cases are much more significant.
When you really get into that at the point, where you get to a very extensive menu and that makes it much easier to have those placement compensation and just having prosigna today, having said that we are seeing some traction will be a small with just the breast cancer test today.
It's going to take the menu to drive it.
Got it and then one for Rebecca Thank you for the cash flow guidance for the year I'm, sorry, I missed it sorry, if I missed it but wondering.
There might be any kind of upcoming pipeline development initiatives or.
Any activities associated with any of the commercial launches next year that could potentially drive.
The accelerated cash use next year.
Fair enough question, Sandy, we havent gotten into our budgeting exercise for next year.
So it's premature to discuss that being said I know mark and I share the same philosophy and that is one where we're going to do our best at any point in time to balance investment with cash generation and so while in any given quarter or any given year. The scale may tip slightly one way or the other overall.
We're absolutely work focusing on balancing balancing those two those two sided size. If you will so not committing to anything given we haven't budgeted yet.
I think thats the over a philosophy that we that we abide by day in day out.
Yes, Greg I would add to that.
Something that I think it's evident to everybody that really fuels and drives our business, whether we're talking about afirma and decipher all the adoption of <unk> this year.
The IPD strategy outside the U S as evidenced generation as evidenced development and so this.
This year, we're investing heavily in 19 Gal for nasal swab, we always invest somewhat in driving more evidence to decipher and we're going to be investing in evidence development for IBD business outside the U S and so to the extent we.
We feel that the affordability to be able to do that within the parameters that we've said we will continue to do that and fund studies to make sure. The evidence development as is.
It is really helping drive our business.
Great. Thank you so much.
Thanks Angie.
Thank you one moment for our next question.
Okay.
Our next question comes from the line of Andrew Cooper of Raymond James Your line is now open.
Hey, everybody. Thanks for the question a lot's been asked so maybe just one.
One more on <unk>.
The margin side of things the cost side of things in terms of one of the you made you talked about personnel costs can you just give us a sense.
As you look to add maybe some had been R&D some heads in sales and marketing maybe a little bit more.
The measure to Huawei, how much of that is incremental head versus.
Wage inflation is really starting to kind of hit you just a sense for kind of the hiring environment out there and and what youre seeing on the wage and labor side would be helpful.
Yes happy to do so I would say, it's a little bit of bolt on the on the on the wage side.
Given the inflationary environment, when we set our merit budget for this year, we did take that into account and.
And so I would say it was slightly elevated though not materially so versus prior years.
And so that would be one point.
Their point is we are adding head.
And in doing so in areas, where we think both from a <unk>.
<unk> perspective, as well as across the the operating lines.
We will get a meaningful return from and I think that's relatively evident I would say the third thing in the first quarter you always have your benefit resets.
And your benefit and tax reset in which obviously does impact the first quarter much more so than others and you will and you obviously see that in our Opex figures this quarter as well so I would kind of think about those three things.
The primary drivers.
And.
I think going forward.
While we are adding some heads.
We're very comfortable with the budget reset.
And we're very comfortable with even being vastly ahead on the cash side than we had expected to be at this point in the year. So.
I think our investment levels are quite prudent and I think from a cash.
And ending cash forecast of 2023, we're really happy with where we are where we are ending forecasting to end at this point in time and from a hiring environment standpoint, I would say, it's certainly a lot better than it was before and we're really at most levels, having very little trouble finding great people to join our company.
We place.
Some really good talent recently so it's.
It's nice to be able to be hiring right now.
Great and then just one more from me can you give us a little bit more detail.
Yeah.
The efforts and the progress being made on the manufacturing front in terms of continuing down that transition from named our spring two to yourself internally what are some of the guideposts, we should be thinking about through the year and has there been any surprises or anything that that has changed from the last update on that front.
No nothing new it's continuing well in the activity to transition that over to our team in France is progressing as we had planned and the idea is to have that done at the end of this year.
And so we're on track to be able to do that.
And I wouldn't expect I mean.
This is a day in day out type of type of thing at this point in time, you probably won't get meaningful updates until it's done. So no news is good news if you will.
Yes.
Great well nice quarter, and I will stop there I appreciate it.
Okay.
Alright. Thank you. So much. This concludes the Q&A portion are now I'd like to turn it back to Marc Stapley for closing remarks.
Thanks, Stephen appreciate it so.
So just to wrap up obviously I'm very pleased with the performance of our core testing business in the first quarter with both Afirma decipher exceeding our expectations and it's good to see our efforts on market access and adoption in Europe drive a strong quarter for our product business I'll focus on the evidenced development product enhancements and commercial excellence is really fueling the growth of our business.
Which will be further supplemented in the long term by the new products that we're developing for global markets, such as our nasal swab for lung cancer and our IBD menu.
Really proud of the great work the entire <unk> team is doing for patients all over the world So with that I'd like to say thank you.
Ladies and gentlemen, this concludes our call today. Thank you for joining US you may now disconnect.
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