Veracyte Inc
NASDAQ:VCYT
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Veracyte Inc
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Good day and thank you for standing by. Welcome to the Veracyte First Quarter 2023 Financial Results Webcast. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Shayla 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 results. With me today are Marc Stapley, Veracyte's Chief Executive Officer; and Rebecca Chambers, our Chief Financial Officer.
Veracyte issued a press release earlier this afternoon detailing our first quarter 2023 financial results. This release, along with a business and financial presentation, is available in the Investor Relations section of our Web site at veracyte.com.
Before we begin, I'd like to remind you that various statements that we may make during this call will include forward-looking statements as defined under applicable securities laws. Forward-looking statements are subject to risks and uncertainties and the company can give no assurance they will prove to be correct. Further, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Veracyte files with the Securities and Exchange Commission, including Veracyte's most recent Forms 10-Q and 10-K.
In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable GAAP financial measures are included in today's earnings release, accessible from the IR section of Veracyte's Web site.
I will now turn the call over to Marc Stapley, Veracyte's CEO.
Thanks, Shayla, and thanks everyone for joining us today. I am 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 of Afirma and Decipher.
Further, with our continued focus on financial discipline, we ended the first quarter with cash, cash equivalents and short-term investments meaningfully ahead of our projections at $178 million, roughly flat to the prior quarter, even with the seasonal use of cash that we anticipated.
Behind this balanced approach to growth and capital preservation is our proven framework of identifying the specific clinical unmet needs, developing a test to address that need and securing the clinical evidence, reimbursement and guideline inclusion required to drive sustained market penetration. This approach is the force behind the performance of our Afirma and Decipher test and enables us to invest in our long-term growth drivers.
This quarter, we delivered close to 12,500 Afirma tests for 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 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 of our commercial and reimbursement teams, I'm excited to share that as part of our initiative to enhance our best-in-class Afirma tests, we recently launched the addition of TERT promoter mutation testing to the Afirma report. There have been several studies published recently that correlate the presence of the TERT promoter mutation to a high risk of malignancy as well as highlighting that such mutations co-occurring with the BRAF V600E variant are associated with a poor prognosis.
Given the value of these insights for informing patient care, such as whether more aggressive surgery or treatment is wanted, our team works hard to develop a high-quality DNA assay that allows us to reliably determine the TERT mute -- promoter gene mutation status for patients with suspected or diagnose thyroid cancer to further empower physicians to optimize clinical decision-making.
We believe that product enhancements such as this, along with the work we've done to improve the customer experience and to streamline ordering will continue to benefit Afirma's performance in the coming quarters. Given this as well as our strong first quarter results, we now expect the bolster growth rate for Afirma in the high single-digits for the full year.
Turning to Urology. We continue to expand on the budding evidence surrounding the Decipher Prostate Test, further helping to establish the test as a new standard of care. At the American Neurological Association Annual Meeting earlier this week, multiple abstracts were presented focusing on Decipher Test, particularly exciting with data from two large Real-World data sets encompassing more than 100,000 men with prostate cancer, which reinforce the clinical utility of our tests.
In the first study, researchers paid data from the National Cancer Institute their database with patients who had undergone Decipher Prostate Testing and found that use of our test was independently associated with a two-fold increase in conservative management among those with favorable risk disease.
In the second study, over 90,000 Decipher Prostate Test results were linked to electronic health and claims data to demonstrate the decipher score at initial diagnosis was independently predictive of risk of metastasis, and after radical prostatectomy was predictive of both biochemical recurrence and metastasis. In addition to the data presented at AUA, we published a number of studies last month that further advance the clinical utility evidence for the Decipher Prostate Test.
The first study published in European Urology Oncology found in a cohort of over 4,000 patients, the Decipher Prostate could help better identify those patients with early micrometastatic disease who may benefit from treatment intensification. This study adds to growing evidence around the use of decipher prostate to help inform treatment decision-making in initial diagnosis.
Additionally, new data from an analysis of an NCI-sponsored Phase 3 study published in the International Journal of Radiation Oncology Physics, known as the Red Journal, choose the Decipher Prostate Test can help physicians more accurately categorize personal risk and select appropriate treatment for men with intermediate risk prostate cancer. This is important because prostate cancer deemed intermediate risk by NCCN guideline is the most heterogeneous all risk groups in the disease and a wide variety of treatment is available.
Of note, this randomized study in which patients were followed for nearly 13 years, is the first to validate any gene expression biomarker in the intermediate risk patient population. The attainment of Level 1 evidence the validation of our test in the most recent NCCN guidelines, along with the stellar execution by our team and our differentiated Decipher Grid report led to Q1 Decipher prostate volume of more than 12,500 techs. Like Afirma, this growth was also driven both by strong adoption from new ordering position, as well as higher volumes from existing accounts. Building on the framework, we've established with a firm decipher we are making good progress on our long-term growth drivers. Decipher patient enrollment for NIGHTINGALE, the clinical utility study for our Percepta Nasal Swab continues to progress well, demonstrating the potential for our novel noninvasive tests to help guys positions netted for patients with potentially malignant lung launches.
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 into patient management in advance of the clinical utility trial 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 Veracyte. Our current IVD product offering, Prosigna for breast cancer patients had a record quarter, delivering close to 3,000 tests, demonstrating traction and adoption supported by clinical evidence. With the submission of our Envisia Genomic Classifier to European regulators in December 2022, we are now responding to feedback from the notified body -- in the meantime, we continue to build clinical evidence for Envisia and are looking forward to the presentation of abstract at ATS, demonstrating the test impact on patient management and its ability to predict disease progression in patients within interstitial lung disease.
We believe our focus on evidence generation will help drive adoption of NVIDIA globally, bolstering the LDT in the US, while gaining important KOL support in Europe in preparation for the international launch of the IVD. We're also making good progress building out our broader menu of diagnostic IVDs to US market with the type of prostate expected to permission in 2024 and our nasal swab 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-omic offerings. We were pleased to share three abstracts and host a Spotlight Theater at the AACR Annual Meeting, highlighting our distinctive set of assets to help biopharma partners that all points along the drug development process.
We are continuing to build out our pipeline of new customers to fuel the 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 and the pipeline I outlined.
As 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 Veracyte's important role as a leader in shaping that future. I'm 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 ESG highlights how 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, business partners and other stakeholders. I'm pleased to provide transparency into our ESG efforts and I'm excited to build on the foundation we late to further advance our program.
In summary, Q1 was a fantastic quarter marked by solid execution across the team. We're excited about our progress to date and 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, Marc. As Marc said, we have another excellent quarter, with $82.4 million in revenue, an increase of 22% over the prior year. We grew total volume to approximately 28,800 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 26,000 tests. Testing ASP was $2,800 per test, benefiting from approximately $2 million of out-of-period collections. Adjusting for this impact, testing ASP would have been slightly greater than $2,700.
First quarter product volume was approximately 2,900 tests 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 IVD 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 mix and long-dated collections. 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 expectations of non-GAAP gross margins in the mid-60s. Non-GAAP operating expenses, excluding cost of revenue, were up 18% year-over-year at $58.1 million, driven by ramping clinical trial and IVD development expenses as well as higher personnel costs. 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 in Q2 and the 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 are barring 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'll now go into the Q&A portion of the call. Operator, please open the line.
Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from the line of Puneet Souda of SVB Securities. Your line is now open.
Great. Thanks. So Marc, Rebecca, thanks for taking the question. So first on Afirma, and I'd say congrats on the really solid beat here and the guide raise. So, if you could talk a little bit about that product. What's driving the strength there? Is it the sales force optimization as a data? Is it just more conversations around that product? Maybe just talk to us what's driving the strength in Afirma. And you're 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, Puneet. Thanks for recognizing the strong performance of the Afirma product and the Afirma team. I think it's pretty much all of the above that you mentioned, but mostly I'd say, it's driven by really strong commercial execution, continued enhancements in the product and the kind of the process of ordering and engaging with physicians.
A good example of an enhancement in the product is the launch of TERT that we recently launched in the quarter that enables further clinical utility of the test, there's always publications including around TERT and more data in evidence as well. And 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 Afirma with them. There are some competitive dynamics out there, too, and it feels like we've got some real tailwinds there as well, at least anecdotally, it feels that way. So, very excited about how Afirma has been going so far.
In terms of kind of potential for that growth rate to be any different, I think I think one of those drivers could always be competitive dynamics. But we're continuing to add new physicians. We're continuing to broaden the adoption within current physician and provider basis. And so to the extent we're able to take incremental share that would be helpful to drive that up. Again, there's always competitive dynamics that can go the other way, too. We just -- that's why we keep investing in the product and our sales team. Anything you want to add?
Nothing, you covered it well.
Got it. That's great. And then just a quick one on the TERT mutation, is this change the LCD pricing or what you can obtain from commercial pairs here in the near term or long-term?
Yes. Thanks, Puneet. I'll take that one. The answer for all intents and purposes is not necessarily. So TERT will be ordered for a subsection of 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 benefits of patients and to ensure continued enhancement of the product. We'll obviously work over time on getting that price, but given the list price being in the $300 range, we wouldn't expect that to materially impact ASP one way or the other, even if we're -- once we're successful with -- once we're successful getting this contracted and covered. Again, it's a very small percentage of patients for, which TERT will be ordered, which is why we don't think even once we are successful in getting covered lives for TERT will have a meaningful impact to ASP, but it's important for those patients critically.
Yeah. And just to add to that, I mean only 1% to 2% of thyroid nodules that undergoing molecular testing are expected to have TERT promoter mutations, right? That success what we essentially order for more than that, that would be the outcome. But yeah, as Rebecca said, it's a small subset of cases but important to have.
Make sense. And then just last one for me on biotech funding, obviously, the macro situation and biotech funding continues to be a challenge and somewhat reflected in the biopharma revenue this quarter as well. So maybe just talk to us about what is the level of moderation through the year? What should we be the imagining for step down for the full year within the context of the guide for biopharma? Thank you.
Yes. I mean, remember, truly this is something I think we called out several quarters ago as a potential headwind, and I think we were fairly early in seeing that. But then again, A, we have a pretty concentrated position with a small number of customers accounting for a large portion of our biopharma revenue. So that's one factor.
And we're very early in -- we're very much involved in the early clinical research work, which is, I think, the area across all of biopharma that is most impacted versus existing ongoing clinical trials and on-market products. So we're feeling the brunt of it that one of our goals has been to diversify our customer portfolio there. And I think we're making -- well, we are making good progress at doing that. But we still remain fairly concentrated.
A cue suggests that's going over. It's a very small percentage of our revenue. Biopharma and other is roughly 10%, biopharma is around just slightly more than half of that. And so a little movement here and there, obviously, translates to a fairly big percentage change.
And Puneet, just to help with the math a little bit, we've given updated Afirma guidance of high single digits as you cited earlier. We give an 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, your back solve is that biopharma and other line. So you should get pretty close to it with that math.
Got it. That works. Okay. Thanks both.
Thank you.
Thank you. One moment for our next question. Our next question comes from the line of Mason 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 this simple, but how promotionally responsive is the thyroid market? Is there somewhat of a linear relationship to repetitions and growth, could adding a few reps potentially bump up that growth rate, or how are you thinking about adding reps going forward within your thyroid franchise?
Yeah. And we've been at this for a lot of years in the thyroid business. So we've got a lot of experience there. And there's always an optimal point that you get to with commercial teams. And of course, when you start adding reps, it's not as simple as adding a rep, you have to redesign territories and reallocate territories and that creates some disruption and where you have very good relationships between existing reps and 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 reps effectiveness and the sales reps having a lot to talk about with their customers and a good reason to go and visit another customer and have a conversation.
So a good example, again, turn it's -- again, while it wouldn't be ordered in every patient case, it's another reason to go out and talk to the physician about the addition of turn and what it means and when they should order it and so on. So just that 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 a firm is a big part of it.
As we've talked about before, this product, total thyroid testing, molecular diagnostic testing is about just over 50% penetrated. There's a lot of customers out there, a lot of physicians who aren't ordering this test and should be when you actually look at the yield in terms of the number of surgeries that have been avoided thanks to a firm, it should be a fairly easy conversation, but it takes some investment from the sales team in going out and visiting those accounts.
And the only thing I would add to that, Mason, is while we are adding headcount 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 and expect to continue to do so, which is 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 to just serve 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.
Got it. Thank you. That's helpful. And maybe on Decipher Prostate. I think last I checked, you're at like 195 million covered lives, something like that. Still seems like there's 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 potential coverage wins or how you're thinking about that going forward?
Yes. Yes. As you quite rightly pointed out, there is a lot of room there. There are some key coverages that we need to get. And when you think about it, you've got a test here that is very well -- reasonably well penetrated at least so far is as NCCN Level 1 guidelines, more than 70 peer-reviewed publications, there's so much evidence out there supporting the use of the test that 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 a market access team that this is what they do. And they're 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 for future tailwinds here and just -- we just got to keep driving it. We're still getting, as you heard today, a firm has been on the market, what now 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 diagnostics, as you know.
And Mason, as 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 a favorable ASP and this quarter was no different. Afirma volume grew in the mid-40s, pricing did add a little bit -- but I'm sorry, I said Afirma, I meant Decipher, Decipher -- I mean I would be very happy with Afirma volume growth in the mid-40s as well. But Decipher grew in the mid-40s and price there was not necessarily -- it added a little bit to it, but the vast majority of the growth came from volume. Thanks for bearing with me.
All good. Thanks guys. Appreciate you taking the questions.
Thank you.
Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Your line is open.
Hi, good afternoon. Thanks for taking my questions and congrats on the performance this quarter. Maybe, Rebecca, I just wanted to start out on the OpEx side. I know there was a bit of an increase. Obviously, the revenues were up as well.
You had mentioned IVD 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 IVD development, but also in the NIGHTINGALE study for the benefit of Nasal Swab.
We expect that trend of sequential growth for R&D to continue throughout the course of the year. R&D growth will be the largest contributor to OpEx growth over the course of 2023.
As I mentioned earlier, sales and marketing is not expected to grow that materially throughout the year, if anything. And so again, that's a great source of leverage for us. And on the G&A line, as we invest in 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. Just wondering, just I think in your March presentation, you still had 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. And remember, I think a couple of factors at play here. One is, as we talked about last time, the incidence of prostate cancer is growing. You can see that it was around 7% growth. And that's partially driving the whole market to be larger.
In terms of the 25% penetration, that was our rough math at the end of last year. So, not as tough to update that when not everybody gives you numbers, and it's hard to tell.
But I would say, clearly, we're continuing to take share when -- as Rebecca just mentioned, this business grew in the mid-40s quarter-over-quarter. It certainly feels like that represents some share gains as well as taking share and 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 ramp in Europe for the IVDs. You obviously have Prosigna. Is it Envisia, Decipher Prostate, than Percepta in sort of like 2024-2025 time period, or could you just maybe help me outline that a little bit better?
Yeah. So yeah, thanks for the question. In this year, so starting with Prosigna, which is on market today and actually had a good quarter, and we talked about the growth there and how well that test is so far with close to 3,000 in the quarter which is actually a record quarter for that product, which is great news. And then Envisia, 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 a normal part of the process, what we expected and the back and forth there. And I still can't give us a sense of time on when that will be approved as the IVDR process is so untried and tested still at this point. We're going to submit -- you've got the timing right there. 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 up. I appreciate it, Mark. And congrats again.
All right. Thank you. One moment for our next question. Our next question comes from the line of Andrew Brackmann of William Blair. Your line is open.
Hi. Good afternoon. And thank you for taking questions. A lot has been asked already, but maybe if I could just do a housekeeping question here. Can you just sort of reiterate or remind us around time line for the NIGHTINGALE study is it on track to finish enrollment later this year? And how should we be thinking about a potential readout? Thanks.
Yeah. Thanks for the question there. And NIGHTINGALE, yes, actually, the progress has been really good in terms of signing up new sites. And our clinical team has done an excellent job of contracting and getting those going and with patients starting to enroll in those sites, we're starting to see some nice uptick here still expecting around the end of the year to 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 I've talked about before, we're going to take a few bites to the apple here in terms of looking at some short-term analysis. And 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 a couple of pathways there 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 -- takes time, and then that drives the reimbursement conversation, which also takes time.
Yeah. And just one thing to add there is the guidelines point to a two-year follow-up and we hope that we'll be able to effectively do a shorter follow-up than that. But the longest follow-up that would be required before we go through the publication or early readout would be up to two years.
Okay. Thanks. And then Rebecca, I've got a boring modeling question for you. I think you mentioned the sequential step down in gross margin. Can you just maybe give a little bit more color around what's driving that? Thanks.
Absolutely. I'd be happy to. So obviously, we were very pleased with our gross margin this quarter, and 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 higher 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 -- to ensure the ability to continue to grow at increased volume levels we're seeing, we are going to have to staff up in the lab, which will also impact gross margins on a sequential basis.
In addition to that, we are expanding our laboratory here in San Diego to take into account the growth of the Decipher franchise. We will be buying instruments. We'll see taking on the incremental space. All that also will impact margins. So, it's a good new story in the end, because we're growing a little bit faster than we had expected. But obviously, we need to invest in that growth. And even a mid-60s 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 & Company. Your line is open.
Hi guys. This is Joseph on for Mike. Maybe another question on Afirma. Now that teratessin [ph] has been added. Maybe looking back to when, I guess, Xpression Atlas was introduced from test. I guess I'm assuming that Xpression 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 see a large uptick in interest from new physicians or what have you? And maybe you kind of expecting a similar thing going forward with the testing? Thank you.
Yes. No, I wouldn't -- the way I would look at it is, as I said earlier, the third testing, it's really important for some of our physicians because it's important to some of our patients that 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 the enhancements to the product. And I’d say would have done the same thing. And now, we're making this kind of more of a blended product sale. The salesperson is speaking to the physician about Afirma as a as a group of products, which includes Afirma, it includes the genomics [indiscernible] as well as Teri you check that box, and so it's actually just a very more straightforward conversation at this point.
I wouldn't look necessarily to drive, as Rebecca said earlier, in terms of the ordering patterns for significant incremental sales on its own, but I just think it helps to continuously enhance the product and make sure that we're providing physicians what 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 numbers, in Europe, just looking where these machines are installed, whether hospital labs or 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 US installed base?
I think -- I don't really 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.
And then once you've got that reimbursement decision in the country, you go lab by lab to drive placements. Now the placements could be in academic, last, 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're 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 country by country, and that's the important way to focus on it, including in the US as well.
Yes. The only thing I would add is -- we obviously are selling Prosigna in the US. It is, I would say, the vast majority of revenue is actually outside the US. I think that is where we put the majority of our investment to develop out those US markets. So just something to keep in mind.
Yes. 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 IVD development that you're 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 been any effect in terms of maybe licensing revenue from the Decipher GRID database or you guys as other databases? Maybe how has that trended here in 2022 and 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 HalioDx acquisition. And a lot of it is outside of Europe also the US. There is a little bit of US related revenue that is associated with kind of the former Veracyte Decipher businesses. But the majority of the impact we're seeing in the decline is on that immuno-oncology side.
And so that's where we're seeing the effect. And that's a bit that's involved in the very early biomarker development work where you're more likely to see that impact. So no, I'd say there's no read-through there in terms of the Decipher GRID-related activity. There's a lot of interest in that. But yes, 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 Tejas Savant of Morgan Stanley. Your line is now open.
Hi, guys. Greetings. So maybe I'll talk about the real simple one for you, Rebecca. Is it fair to assume that in terms of those out-of-period collections that you called out a $2 million impact here in the first quarter, there’s -- you're essentially zeroing it out in the guide for the rest of the year?
Yes, that's fair.
Okay. Perfect. And then, Mark, a big picture one for you 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 and help better sites sort of participate more substantively in that opportunity?
Yes. It's a great question. I don't think that there are. And to the extent there are -- 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 that's what we're working on, because that's 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 Immunohistochemistry or Proteins or we have RNA expression-based assays multiple versions of that. We have DNA, that we can do in our lab in Marseille and also here.
So we've got the capabilities and we got 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've 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 a more difficult conversation. I don't expect that current macro environment that lasts for the next three years, I would certainly hope not. So we're starting to get traction, and we'll see how that pans out. We're -- in 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 nCounter Menu, marc, I think you pointed to decide for 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 time lines and then the reimbursement time lines by country are 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, it already has been. I mean, relative to the original timeline that we looked at for all of these products on the platform. We pulled it through -- pulled it forward substantially. It's not happening in series. I think that's an important point to make. We don't work on Envisia then start work on Decipher and then start work on Percepta. All three have been happening in parallel, but they were just at different stages of development.
So the work to bridge over the Decipher or the nCounter platform has been progressing very well, and we've made good progress there. 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 that's not really much we can do. The most important thing we can do to speed things up is on the notified body review and making sure that what we submit is a very thorough and detailed dossier.
The work that we're doing on Envisia and we always thought it would be this way is kind of like a pilot for us. It's giving us some of that sense of what the notified -- the new notified body under the new IVDR process is looking for that might be different from what it used to be.
Our team has got 15 years of experience in doing this, but the regulatory process is new, as you know. And so, there's, a lot of learnings for the notified body and anyone who's submitted. So that should help hopefully see Decipher so long 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 the U.S. and outside the U.S. And -- and hopefully, that drives the notified bodies accordingly, because there are patients at the end of this that need this test in Europe. So, more will come on that, but yeah, we're going to go as fast as we can.
Got it. That's helpful. And then, one final one for me on M&A, I mean, Marc, in the past, you've talked about sort of staying away from the cash strugglers in the space, so to speak, either in cancer screening or perhaps even in the Metastatic setting via MRD, 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, I'm assuming seller willingness here has gotten a little bit better following the regional banking crisis. So could we, at some point, 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’m currently seeing no change in our philosophy around M&A. So I've said it before, we we'll obviously not be blind to opportunities. We'll keep our eyes open to things that make sense, but the bar is very, very high for us.
In terms of the care continuum itself, yes, we're not necessarily looking to enter that healthy screening area because there's a lot of people doing that, and it's a significantly heavy investment.
But as far as dealing with cancer patients or 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 that's where you're going to see us always continue to focus.
Fair Enough. Thank you, guys. Appreciate the time.
Thank you. One moment for our next question. Our next question comes from Sung Ji Nam of Scotiabank. Your line is open.
Hi. Thanks for taking the questions. One more question on your nCounter IVD strategy. Marc, do you think there will be market opportunities for laboratories once 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 it's too early to tell, but --
Definitely [ph], it's actually the right question, because we've said all along, you need an extensive menu to drive adoption, and that's what we're building. I mean, to an extent -- I mean, if you think about it this way, having a breast test which we do have, Envisia is more of a rare disease. So I don't think that necessarily 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 the population, the potential use cases are much more significant than you really get into.
That is the point where you get to a very extensive menu and that makes it much easier to have those placement conversations and just having Prosigna today. Having said that, well, we are seeing some traction, albeit small with just the breast cancer test today. But 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. Sorry, I missed it. Sorry, if I missed it, but I was wondering if 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 accelerated cash use next year.
Fair enough question, Sung Ji. We haven't gotten into our budgeting exercise for next year. So it's premature to discuss. That being said, I know Marc 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 -- we're focusing on balancing those two sides, if you will. So not committing to anything, given we haven't budgeted yet, but I think that's the overall philosophy that we abide by day-in, day-out.
Yes. I think I'd add to that, something that I think is evident to everybody that really fuels and drives our business, whether we're talking about Afirma or Decipher or the adoption of Envisia, or the IVD strategy, [indiscernible] evidence generation, evidence development. And so this year, we're investing heavily in NIGHTINGALE for nasal swab. We always invest somewhat in driving more evidence to Decipher, and we're going to be investing in evidence development for our IVD business outside the US. And so to the extent we feel that, there's the affordability to be able to do that within the parameters that we said that, we will continue to do that and fund studies and make sure the evidence development is really helping drive our business.
Great. Thank you so much.
Thanks, Sung Ji.
Thank you. One moment for our next question. 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 has been asked. So maybe just one more on sort of the margin side of things, the cost side of things. In terms of one of the costs you made, you talked about personnel costs. Can you just give us a sense as you look to add maybe some heads in R&D, some heads in sales and marketing may be a little bit more measured away? How much of that is incremental heads versus wage inflation is really starting to kind of hit you, just a sense for kind of the hiring environment out there and what you're seeing on the wage and labor side would be helpful.
Yeah, happy to do so. I would say, it's a little bit of both. On the wage side, given the inflationary environment when we set our merit budget for this year, we did take that into account. And so I would say, it was slightly elevated, though not materially so versus prior years. And I would -- so that would be one point.
The other point is we are adding heads and doing so in areas where we think both from a laboratory perspective as well as across the operating lines, we'll 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, which obviously does impact the first quarter more so than others, and you obviously see that in our OpEx figures as well.
So I would kind of think about those three things as being the primary drivers. And I think going forward, while we're adding some heads, we're very comfortable with the budget we set. And we're very comfortable with even being vastly ahead on the cash side than where 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 ending cash forecast for 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 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, and we placed some and grow some really good talent recently. So 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 on some of the efforts and the progress being made on the manufacturing front in terms of continuing down that transition from NanoString 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 has changed from the last update on that front?
No, nothing new. It's continuing well and 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 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.
Okay. Great. Well, nice quarter, and we'll stop there. I appreciate it.
Thanks.
All right. Thank you so much. This concludes the Q&A portion. I would now like to turn it back to Marc Stapley for closing remarks.
Thanks, Stephen. I appreciate it. 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 and Decipher exceeding our expectations. And good to see our efforts on market access and adoption in Europe drive a strong quarter for our product business.
Our focus on evidence 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 in lung cancer and our IVD menu.
I'm really proud of the great work the entire Veracyte 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.