Veracyte Inc

NASDAQ:VCYT

Earnings Call Analysis

A Robust Q4 Caps a Strong Year

The final quarter of the year proved to be a remarkable one for the company, with revenue hitting $98.2 million, marking a 22% uptick from the previous year. The increase was even more pronounced for testing revenue, which soared to $90.4 million, a 29% year-over-year growth. This success can be attributed to higher-than-expected demand for Afirma and Decipher tests, alongside substantial collections from prior periods. Although product revenue grew by a modest 13%, it demonstrated resilience in the face of supply chain challenges, emphasizing the company's operational efficiency.

Optimizing Margins and Managing Expenses

Non-GAAP gross margins rose impressively to 70%, a 340-basis point increase compared to the previous year, influenced by greater lab volume and out-of-period collections. Operational expenses also went up by 28%, highlighting proactive investments in research and development, aimed at advancing clinical studies and expanding technology platforms, as well as sales, marketing, and administrative capacities.

Solid Financial Position Going Forward

The company concluded the year with a healthy cash reserve of $216.5 million, a substantial increase from the previous year. Looking ahead to 2024, revenues are projected to land between $394 million to $402 million, with testing and product revenue poised for a 13% to 15% increase. This guidance reflects both steady growth expectations and a strategic adaptation to evolving market conditions, such as a predicted decline in biopharmaceutical revenue.

A Strategic Shift to MRD in Bladder Testing

In a forward-looking move, the company divulged plans to launch a test for muscle-invasive bladder cancer in the first half of 2026. The decision underscores a prioritization of areas with clear reimbursement pathways and significant market opportunities, signifying an alignment between the company's R&D initiatives and its commercial ambitions.

Afirma's Momentum and Decipher's Bright Horizon

Turning the clocks back, Afirma has bounced back from the co-change impacts felt in 2022 and is now positioned to maintain its enhanced ASP. Coverage ground gained in 2023 builds confidence in maintaining this trajectory. On the Decipher front, a nascent coverage profile masks a potent ASP story promising further payer wins, accentuating a deeper focus on expanding coverage in the near future.

Long-term Growth Prospects for Afirma

Afirma's market penetration after more than a decade paints a picture of enduring growth potential. The company's continual investments in product enhancements, physician engagement, and expanding clinical indications hint at a robust pipeline of opportunities that are yet to reach their zenith.

Portfolio Expansion and Geographic Outreach

Beyond extending its domestic stronghold, the company is exploring international markets, aspiring to replicate its U.S. success. The MRD platform presents significant opportunities for geographic diversification and potential application across various indications. The company's focus remains on channel strategies and prudent selections that align with its broader growth objectives.

Earnings Call Transcript 2023-Q4

[Operator]

Good day and thank you for standing by. Welcome to Veracyte Fourth Quarter and Full Year 2023 Financial Results Webcast. At this time, all participants are in a 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 pass the call over to the Senior Director of Investor Relations, Shayla Gorman.

[Shayla Gorman, executive]

Good afternoon, everyone, and thanks for joining us today for a discussion of our fourth quarter and full year 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 fourth quarter and full year 2023 financial results. This release, along with the business and financial presentation, is available on the Investor Relations section of our website 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 filed 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 website. I will now turn the call over to Marc Stapley, Veracyte's CEO.

[Marc Stapley, executive]

Thanks, Shayla, and thanks, everyone, for joining us today. I am pleased to share that 2023 was a record year for Veracyte. Our high-value test improved care for more than 125,000 patients and their physicians, enabling better diagnosis, prognosis and treatment decisions. I'd like to thank the entire Veracyte team for their hard work and dedication to our mission of transforming cancer care.Over the course of 2023, we grew revenue 22% and generated $44 million in cash from operations to deliver our second consecutive year of positive cash flow. This is a significant proof point that our philosophy to drive cash generation while investing in our strategic growth drivers is paying off, and we expect to achieve positive cash flow going forward.I'm extremely proud of our strong financial profile, allowing us to further expand the impact we are having on patients' lives. Our success is attributable not only to the dedication of our employees to our mission, but also to the Veracyte Diagnostics platform, which refers to our unique approach to launching and driving adoption for our diagnostic tests. This is driven by broad sets of genomic and clinical data, deep bioinformatic and AI capabilities, a powerful evidence generation engine, which ultimately drives guideline inclusion and durable reimbursement for our tests as well as proven commercial excellence.The platform creates a flywheel for the generation of novel insights that in turn drive innovation and pipeline development toward future test expansion in a way that is extensible and repeatable across multiple indications. Decipher Prostate continues to be a clear example of this platform in action. Over the course of 2023, we added 8 publications and 16 abstracts to the clinical evidence library for Decipher Prostate and an additional 12 abstracts and 7 publications from our research use only, or RUO, decipher grid offering.During Q4, data from multiple studies were presented at the Annual Meeting of the Society of Urological Oncology or SUO, highlighting the ability of Decipher Prostate to identify patients whose prostate cancer is likely to progress. This focus on evidence generation reinforces the test status as the only molecular test to receive Level 1 evidence designation in the National Comprehensive Cancer Network or NCCN prostate cancer guidelines. The backbone of clinical evidence supporting Decipher Prostate is clearly resonating with physicians as we delivered approximately 15,500 decipher test results in the quarter. We now estimate that the market for molecular test in prostate cancer is approximately 35% penetrated with plenty of headroom remaining for growth as we believe penetration could get to 80% over time.Looking to 2024, we are focused on bringing Decipher Prostate to even more patients. We believe this will occur through indication expansion, additional payer coverage and even more clinical studies, some of which will utilize Decipher GRID to further accelerate the flywheel of data generation and claims expansion. One example of this, we anticipate the current draft of Medicare's local coverage decision policy for patients with metastatic prostate cancer to become final later this year or early next year. As a reminder, we estimate there are an additional 30,000 patients annually who could benefit from the prognostic and predictive information Decipher delivers to clinicians or pivotal moments in their journey to treat cancer.Moving to Afirma. This was another record quarter for test delivered. We reported approximately 15,200 Afirma results with growth driven by new and existing accounts, including competitive wins. Over the course of the last two years, we have continued to enhance the Afirma offering, adding TERT promoter mutation testing, enhancing the online physician ordering portal and introducing the Afirma Grid RUO tool.While GRID for Afirma has only been available for a short period of time, the promise of advancing science and developing prognostic signatures has been well received by customers focused on research. Many have proactively reached out and are interested in collaborating to publish and fully validate new signatures. These launches and enhancements led to increased popularity and adoption of Afirma over the course of 2023, which represented a record growth year for a product which launched more than a dozen years ago.Looking to 2024, we expect Afirma to deliver solid growth through three key mechanisms: first, continued execution to further drive penetration into both existing and new physician accounts; second, engaging with MolDX on their draft LCD to cover Bethesda [5] patients who could also benefit from insights provided by Afirma. And lastly, scientific engagement empowered by GRID and an enhanced customer experience to ensure that we maintain and grow our community of dedicated physicians.Decipher and Afirma are great illustrations of the Veracyte Diagnostics platform in action. This proven approach will enable our long-term growth across three vectors: global expansion, solving new cancer challenges and with the acquisition of C2i Genomics earlier this month, serving more of the patient care journey.With our Percepta nasal swab tests, we are focused on tackling new cancer challenges. We believe the test will benefit patients and physicians as a noninvasive option to help guide clinicians next steps for patients with potentially cancerous lung modules.During the quarter, we made significant progress publishing the clinical validation data for the test in the journal chest and bringing the number of sites enrolling for the NIGHTINGALE clinical study close to 100. NIGHTINGALE is designed to demonstrate clinical utility and support reimbursement for the test and remains a key focus in 2024 as we expect to complete patient enrollment in the summer. The level of interest demonstrated by the large number of sites that have engaged in NIGHTINGALE gives us optimism in the value the Percepta nasal swab test could bring to physicians and their patients.Shifting to our focus on global expansion. Our strategy to deliver IVD versions of our tests to physicians and their patients outside of the United States is another key long-term growth driver. Over the last quarter, we have largely completed the transfer of kit manufacturing for our Prosigna breast assay from NanoString to our Marseille France location. With this transition, while we maintain some near-term dependency on NanoString for component supply and instrument service, we have worked through mitigating most of the supplier issues we began experiencing in the second half of last year. As a result, Q4 Prosigna volumes were ahead of our prior expectations. Looking forward, we're monitoring the situation and doing our best to ensure continuity wherever we remain dependent on single source suppliers.As we shared previously, we are now executing on a multi-platform IVD approach where we leverage the quality of our diagnostics and the level of evidence supporting them to differentiate us. We are focused on key products and market development activities that will help drive a steady cadence of IVD test kit launches over the coming years. We will soon submit our existing Prosigna test for approval under the IVDR framework, which is a key step to catalyzing launches across our oncology IVD portfolio. From there, we expect Decipher Prostate to launch in mid to late 2025 on PCR and an updated NGS-based Prosigna test around the same time to be launched on NextSeg Dx. And we continue to expect Percepta nasal swap to be commercially available in 2026 on NGS.Turning to serving more of the patient care journey. We recently closed our acquisition of C2i Genomics, and I'm thrilled to welcome the C2i team to Veracyte. This acquisition enables us to enter the minimal residual disease or MRD market and expand our role across the cancer care continuum, building from our position in early diagnosis and risk assessment to treatment monitoring and disease recurrence testing. C2i's novel whole genome sequencing approach to MRD fits well into the Veracyte Diagnostics platform, making it the ideal solution for us to address this portion of the patient journey.First, the assay requires less than four mill of blood, much lower than many competing tests. Second, the rapid generation of patient-specific signatures available almost immediately after the whole genome assay is performed, is faster than bespoke panels that take weeks to develop. Third, the approach takes the widest possible view of the tumor genetic landscape to deliver performance that we believe enables earlier detection versus imaging and other molecular tests.By identifying the effectiveness of a treatment almost real time, the physician can rapidly tailor the care plan for a patient, which we believe will lead to better outcomes. And because C2i's technology uses whole genome sequencing, we get more data for evidence development, giving us a rich view of tumor biology that allows for more collaborations and will catalyze further discoveries.As we mentioned when we announced the acquisition, we will commercialize MRD first in muscle invasive bladder cancer, where we expect to launch a test in the first half of 2026, leveraging the same strong urology channel that has delivered continued growth in decipher. I am excited about our trajectory and even more by the impact we are having on physicians and their patients.With that, I will now turn to Rebecca to review our financial results for the quarter and expectations for 2024.

[Rebecca Chambers, executive]

Thanks, Marc. Q4 was another record quarter with $98.2 million in revenue, an increase of 22% over the prior year, higher than our pre-announcement due to the finalization of cash collections, which benefited ASP. We grew total volume to approximately 34,000 tests, a 21% increase over the same period in 2022. Testing revenue during the quarter was $90.4 million, an increase of 29% year-over-year, driven by higher-than-expected Afirma volume, Decipher growth and strong prior period cash collections.Total testing volume was approximately 31,000 tests. Testing ASP was approximately $2,900 as we resolved and collected over $4 million of out-of-period payments. Adjusting for this impact, testing ASP would have been approximately $2,750. Fourth quarter product volume was approximately 2,600 tests and product revenue was $3.7 million, up 13% year-over-year as the team did a tremendous job limiting the patient impact of the supplier issues Marc mentioned. Biopharmaceutical and other revenue was $4.1 million, in line with our expectations and down 39% year-over-year, given overall spending constraints across the industry.Moving to gross margin and operating expenses. I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets, other acquisition-related expenses and restructuring costs but does include routine stock-based compensation. Non-GAAP gross margin was 70%, up approximately 340 basis points compared to the prior year. Testing gross margin was 73%, up 90 basis points compared to the prior year, benefiting from higher lab volume and over $4 million of out of period collections. Product gross margin was 52%. Biopharmaceutical and other gross margin was 15%, down year-over-year due to lower fixed cost absorption.Non-GAAP operating expenses, excluding cost of revenue, were up 28% year-over-year at $65.6 million, including a $3.5 million technology access fee to develop our IVD kitted test on the NextSeg Dx NGS platform. Research and development expenses increased by $7.6 million to $18.7 million due primarily to the tech access fee and increased costs related to our NIGHTINGALE and Decipher clinical studies.Sales and marketing expenses increased by $1.8 million to $25 million. G&A expenses were up $5.1 million to $21.9 million, driven by higher personnel costs and infrastructure-related investments. We recorded a GAAP net loss of $28.3 million, which included $32 million associated with the impairment of HalioDx biopharmaceutical intangible assets, $7.6 million of stock-based compensation and $6.3 million of depreciation and amortization. We increased our cash position by $14 million from the prior quarter and ended 2023 with $216.5 million of cash and cash equivalents, 21% higher than the balance of $178.9 million at the end of 2022.Turning now to our 2024 outlook. We are maintaining our total revenue guidance of $394 million to $402 million. This reflects the year-over-year testing and product revenue growth of 13% to 15% and a decline of approximately 50% in biopharma and other revenue as we have not seen evidence yet of an improvement in the market. We expect non-GAAP gross margin to be in line with 2023 as tailwinds from operational testing efficiency efforts and fixed cost leverage roughly offset the annual supplier list price increases, merits and the benefit of more than $10 million of out-of-period collections in 2023. We are also maintaining cash guidance and expect to end 2024 with between $230 million to $234 million in cash, cash equivalents and short-term investments, including $8 million of onetime acquisition-related items. As always, our cash commentary is barring potential M&A.Moving to the first quarter. We are forecasting a sequential decline in total revenue, given the impact of cash collections in the fourth quarter and typical seasonality. Additionally, we expect non-GAAP operating expenses to be higher sequentially given the impact of the C2i acquisition and the annual reset of taxes in [Merit]. For the quarter, excluding the benefit of acquired cash and customary closing considerations from the C2i acquisition, we are forecasting a slight usage of cash due to the usual timing of compensation payments.I am excited about the momentum we have heading into 2024 and our commitment to executing on our strategic priorities over the course of the year. We'll now go into the Q&A portion of the call. Operator, please open the line.

[Operator]

Thank you. (Operator Instructions.) One moment for our first question, please. It comes from the line of Sung Ji Nam with Scotiabank.

[Sung Ji Nam, analyst]

Congratulations on the quarter and a great year. Maybe just kind of kick off with the TERT promoter mutation capability that's part of Afirma. Could you give us a sense of kind of what percentage of the volume that would actually be useful for that particular testing of the Afirma volume?

[Marc Stapley, executive]

Yes, Sung, thanks very much for your kind comments. It was certainly a great year. On TERT itself, it's a relatively rare condition. And so, the percentage of patients that actually show up with that mutation is quite small. Having said that, it's very -- it's proving to be extremely useful to order that test certainly in a larger number of the cases. I don't actually know if we've got the percentage that we're currently seeing. I don't know if you have that.

[Rebecca Chambers, executive]

Yes. I believe it's ordered approximately 20% of the time where we have a positive result with Afirma. But the actual percentage that has a mutation in my recollection is more in the single-digit type range. But -- so that just gives you a sense of how frequently it is being ordered and how frequently it is being seen. I think importantly also, TERT is a competitive differentiator for us with regard, and we aren't necessarily seeing ASP uplift from TERT because it is not something we necessarily have coverage for, but it's more -- to Marc's point, it's more about the overall clinical contribution of having the assay than it is about a financial contribution to the company. It's more about the patient benefit.

[Marc Stapley, executive]

And one of the ways I really think about having that capability has helped our Afirma team and our business in particular, it's really given our sales team -- have another reason to go and engage with their customers. It's enhanced our test relative to both the competitive landscape and also where we think ultimately guidelines can go. And so, we always felt it was important to include that as part of Afirma.

[Rebecca Chambers, executive]

And Sung Ji, I apologize. I said 20%, it was -- it's actually more like a third.

[Sung Ji Nam, analyst]

Okay, wow. Okay. Fantastic. Super helpful. And then my follow-up is just on -- you mentioned the C2i, the first indication is going to be in the muscle-invasive bladder cancer. Could you guys remind us about Decipher Bladder, the genomic classifier and kind of -- how does that kind of go hand-in-hand with your MRD offering where the plans for the MRD offering? Is there -- do you think there could be synergies there? Just kind of how should we think about the Decipher Bladder platform?

[Marc Stapley, executive]

Yes. I mean there are always going to be synergies whenever we can continue to increase the menu of offerings and tests that we have in the urology space. As you know, a few years ago, we launched a bladder test. It's more of a subtyping test to help potentially determine a course of treatment. But what we're -- and it's had relatively low penetration, and we didn't particularly drive that commercially. One of the reasons being it is -- while it's the same [cool] point -- it is a completely new product, if you think about it like that. And so, we do not want to distract and never wanted to distract from the benefit of -- that we're seeing in Decipher Prostate.But the clinical utility is ultimately what matters, and we're continuing to develop that test further and think of ways of enhancing that utility. But we've really refocused our energy now in bladder on the MRD test at this point. We think that the market opportunity for a muscle-invasive bladder cancer test in MRD, which has a clear path of reimbursement is greater. And we're going to launch a test in the first half of 2026. And so that's where you're going to see our investments in both our R&D and development activities and then ultimately, in our commercial activities as we put that test in the hands of the existing urology sales force.But beyond that, one thing you'll continue to see us do is, and we've talked about this quite a bit before is, work across the patient's care continuum. And so, as we can come up with other helpful diagnostic tests that have utility in either reducing unnecessary procedures or accelerating treatment or predicting the performance of surgery or therapeutic actions, we'll continue to do that. So, continue to consider that an important part of the urology road map.

[Operator]

Thank you moment for our next question, please. It comes from the line of Tejas Savant with Morgan Stanley.

[Yuko Oku, analyst]

This is Yuko on the call for Tejas. I wanted to ask a couple of questions on the C2i MRD assay. What remains to be done prior to launch in first half 2016? And what are the gating factors there? And is there any levers you could pull to pull forward the launch time lines?

[Marc Stapley, executive]

Sure. Thanks for that question. Yes, there's quite a few steps that we need to go through here. One, of course, is the integration of C2i, which is very much in progress at this point, and that team is now part of the Veracyte team. And then the systems and other integration activities will continue through the early part of this year. Then there's the launch of the product program itself, the muscle-invasive bladder test, which is entering into our normal product development process, and that's kicking off now that the team is part of Veracyte.And then we're going to have to continue to run samples on that test to further validate the test and then do the tech assessment that we need to go through in order to get reimbursement. And then there's that period of waiting for a response on that as well. So quite a few different steps, steps that we have quite a lot of experience in following and have been through a number of times before.To your question on, is there a way to pull it forward? If there was, we will. If there is, we will. We've provided a time line that we feel comfortable with, given all those steps. But along the way, if there's any opportunity to go faster, I think you can rest assured that the team is looking for it. And of course, that's a conversation we talk about a lot. So that's where we are right now. But no change in the plan of record first half of 2022.

[Yuko Oku, analyst]

And then I wanted to also ask about how many genomes have C2i sequenced to date? And as you think about volumes ramping you'll be generating significant amounts of data. How are you thinking about monetizing that data set over time?

[Marc Stapley, executive]

Yes. So good question. I don't actually have the number in front of me, but it's significant. C2i have been doing this for a number of years, five years or so. And as you've seen from a lot of their publications, they've looked at a number of different indications, bladder being one of them. And in each of those indications, they've got a significant amount of whole genome data. In terms of monetizing that data, I think of it very much in the same way as I think about the overall Veracyte Diagnostics platform. We've been generating whole transcriptomes in endocrinology, in pulmonology and in urology for a while, and C2i has been generating whole genomes. And so, we now have an incredibly rich data set available to us. We, of course, get interest from biopharma and expect to continue in the future. And I think, particularly with MRD as an asset, that continues to grow. That's not our primary focus. Our primary focus is very much on our diagnostics pathway. But opportunistically, as we have contact with biopharma who are interested in any of that data set I've described we'll follow up on those opportunities. We clearly have some in the pipeline right now. We've had some in the past, and we'll continue to explore that.

[Rebecca Chambers, executive]

And you can imagine a scenario where in the future, the C2i, MRD assay acts very similarly to Decipher GRID and Afirma GRID, where we are continuously generating clinical utility and other studies, which broaden our potential indication expansion and therefore, also subsequently help our commercialization efforts and managed care efforts. And so, I absolutely agree with Marc. But effectively, when it comes down to the diagnostic platform we have described, this kind of whole X approach, whether it's whole transcriptome or whole genome, really does allow us to monetize these markets more quickly and get a stickier response given the differentiated approach we've taken here. So just to add that to Marc's commentary. I think there's a couple of different ways we could see this play out, both of which are obviously quite positive. Thank you.

[Operator]

One moment for our next question, please. And this comes from Mason Carrico with Stephens.

[Jacob Krahenbuhl, analyst]

This is Jacob on for Mason. So maybe just starting with your guide, could you just help us think through what's embedded in your guidance for 2024. Maybe more specifically, what are the puts and takes that could play out in 2024 that gets you to the high end versus low end of your guide with respect to Afirma and Decipher growth? I know you said you're expecting testing and product revenue to grow 13% to 15%, but maybe just breaking that out a little bit more and giving us some more color would be helpful.

[Rebecca Chambers, executive]

Yes, happy to. So, you're absolutely correct. We're expecting testing and product revenue growth to be 13% to 15%, thereby absorbing a good portion of the biopharma decline of approximately 50%. When you break down Afirma and Decipher, I think the easiest way to think about it is they're at very different life stages of their life cycle. And as a result, as well as the comp on the Afirma side, obviously, when it comes down to it, the Decipher growth will be higher than the average of the two and Afirma will be in -- will be below the average of the two.We're not going to get into the expectation to a point range at this point in time. But I think the most important thing to know is we are very confident in our ability to penetrate both of these markets up to the 80% level. And while we have significant out-of-period headwind from prior periods -- significant, I can't get it out. We have significant prior period collections as a headwind, third times a charm, we are still very confident in the growth and overall trends of both of these products.I think importantly, and I mentioned this in the prepared remarks, for the first quarter, we do expect a slight difference between the two in seasonality, and that is worth noting. On the Afirma side, we have seen -- we saw obviously quite a strong fourth quarter. And so, we are expecting a sequentially down quarter for Afirma, maybe even a little more than we had seen in prior years, given some of the weather impact so far year-to-date. And Decipher, we are expecting to grow. And so just a little bit more guide, more color into the Q1 guide. I think perhaps that could also be helpful.

[Jacob Krahenbuhl, analyst]

Got it. Thank you. Yes, that's helpful. And then I guess just on Decipher Prostate more specifically, what are you seeing in terms of competition in the prostate market? Have you started to see any shift in competitive dynamics? Do you still feel like you're taking share? And I guess you guys noted that 35% penetrated in the market right now with the potential to reach up to 80%. How much of that is kind of dependent on this MolDx LCD coming through at the end of this year and into next year?

[Marc Stapley, executive]

Yes. I mean, to cover that second part first. Obviously, not a great deal. That is, as I mentioned, it's about 30,000 patients a year. So certainly, very important. It'd be great to get that LCD, be more great from the patient outcomes perspective to be able to benefit from the Decipher testing that way. But really, the -- if I think about it, the most important thing we're focused on is how we continue to drive Decipher Prostate and gain that market share. And more importantly as well, also to penetrate more of the market as we do that because honestly, at this point, with so many patients who have prostate cancer still not getting our test or any other test, I think that's definitely a concern from the patient perspective.So with the level of publications that we've seen for Decipher that we've generated, not to mention all of the clinical and research publications that I referenced today in the prepared remarks, plus the NCCN Level 1 guidelines, the vast array of experience that people have, not just in the U.S. but globally with Decipher -- it's -- we're doing everything that we can in order to drive further penetration and continue to be the market leader.So, I haven't seen -- I wouldn't say there's any change in competitive dynamics one way or the other. We're very focused on what we can do to have the most effective test. And then beyond the U.S., I mean, that -- those are all U.S.-related comments and U.S. market shares. But beyond the U.S., there's so much KOL experience outside of the U.S. in terms of experience with studies involving Decipher, we feel there's a pent-up demand for that. So as soon as we can get our Decipher product launch on PCR, which we're planning to do at the end of 2025, I think our expectations for the adoption there are a little bit more optimistic than they otherwise would be had we have to go and create a market from -- or a level of interest from scratch. So, lots of excitement on our side for Decipher going forward.

[Operator]

One moment for our next question, please. It comes from the line of (inaudible) with William Blair.

[Unknown Analyst]

First here on nasal swab, you guys published validation data in December. Just wondering if you can talk about the feedback you've received on that since publication. And then as a follow-up to that, how are you thinking about the TAM here, given this was validated on individuals that had some sort of smoking history.

[Marc Stapley, executive]

Yes, great questions. So, the data that we ended up publishing or getting published in CHEST in December, is data that we shared previously actually a couple of years ago. So, getting it into a final publication, I think, is an outstanding outcome and I congratulate our entire team and others that we worked with on that publication. It's great to finally see it out there.In terms of level of interest, I think the publication really does a couple of things for us. One is it helps us to really commence those reimbursement conversations and start to get ahead of that. We now have a peer-review publication in hand to do that. It also helps us have conversations with potential partners and others who might want to do some work with nasal swab in the future. So very excited about that.But really where I kind of hang my greatest kind of a sense of the level of interest in nasal swab so far is in NIGHTINGALE because, as I mentioned on the call, with close to 100 sites enrolling, the level of interest in those sites, if you think about what it takes from a clinical operations standpoint, to identify, gain interest from, contract sign up, initiate and then commence enrolling at nearly 100 sites, it's significant. And it can only come from those investigators and those institutions being excited about the prospect of the test itself and being a part of that clinical utility study.So that, to me, I think, is so far one of our greatest indicators of interest in nasal swab and we're excited to see how that goes and certainly have a desire to see the clinical utility come out of that study.

[Unknown Analyst]

Understood. You're staying on that topic.

[Marc Stapley, executive]

Yes. Sorry, you did a I'm sorry, you asked about the market size for TAM and smoking history. I should cover that. Yes. Just to be really clear, I mean, nasal swab is based on smoking patients who have a smoking history. It really measures the damage to the epithelial airway, one cause of that damage is, of course, smoking. To expand the TAM beyond that would require a study that includes nonsmokers. And that is not the biggest market we're looking at. By far, the largest market is those patients who are eligible for lung cancer screening and those who have lung modules incidentally found, which are $15 million and $1.6 million, respectively. That by far is the biggest market and a significant proportion of those are current or former smokers and would fit the eligibility criteria for nasal swab. And next step in the future could very well be trying to expand that TAM by doing the necessary studies outside of nonsmoking. We just don't know whether that's -- until you've done the study, you don't know whether that actually produces the same results or not. But by far, we focused the product initially on the largest proportion of the market.

[Unknown Analyst]

Understood. And switching over to Afirma. Just wondering if we should be thinking about any reimbursement dynamics for the test in 2024? And then any considerations longer term about pricing for this product?

[Rebecca Chambers, executive]

Yes. I'm happy to take that. So Afirma, if you rewind the clock back to 2021 with the co-change we did see the impact in 2022 of that. And then for the course of 2023, we did see, obviously, the benefit of resolution of many of those impacts of 2021 and 2022 tied to the co-change. And so, the reason why I go back throughout all of that history is the ASP for Afirma at this point in time based on those resolutions is quite elevated. And so, I think when it comes down to it today, we're in a great position. Our goal is to maintain that position. We see no reason why we can't continue to do so. We had some smaller managed care wins over the course of the back half of last year that really help us be confident that we'll be able to maintain ASP plus or minus a bit as we see in a given quarter.So, I think on the Afirma side, not any big dynamics to think through from a PAMA reset perspective, that doesn't come to bear until 2028 as well. So, we feel great about the work the team has done both on the managed care and the billing side and collection side. And I think we're going to be obviously quite focused about that going forward.Over the course of -- I think also it's worth highlighting on the Decipher side, obviously, less of a dynamic with a co-change like we had on Afirma, but I think a different portion of the story given it's more nascent and its coverage and contracted lives. And so, we do have a very good story on the Decipher ASP. We've gotten a number of wins over the course of 2023, and we're hopeful we'll have some more over the course of 2024 and 2025. And so, we're obviously hoping that we can continue to progress the coverage for Decipher, given effectively the Level 1 status that it has in the publication and clinical support it has.

[Operator]

Thank you. One moment for our next question. It comes from the line of Matt Sykes with Goldman Sachs.

[Matthew Sykes, analyst]

Congrats on the quarter. Is there any way to quantify how much benefit you see from your established commercial infrastructure with Decipher Prostate? And how much of that can be applied to your Bladder MRD test?

[Marc Stapley, executive]

Yes, it's a great question. I mean the urology -- the leverage that we're getting out of our urology sales force in prostate alone has been very significant. And I think you see that in the numbers. We added less than a handful of net total reps in last year, and you can see the significant growth that we got out of Decipher. One of the reasons we think -- there's a lot of reasons why we actually think an MRD-based test in bladder is the right test for us, not to mention the cohort that we've got, the work that's been done already. But really importantly, is leveraging that urology sales force again. And it goes back to the comments we made and I think it was in response to the first question, there is -- the benefit of having more and more menu available for our reps as they go out and they've got these fantastic relationships with the urologists from large group practices all the way down to the community, being able to offer the patients who are dealing with bladder cancer, which is a terrible prognosis in many cases and having something to offer to them to enable to determine whether or not their treatment is being -- has been or is being effective, it will be incredibly meaningful.So, we do think we'll be able to leverage the existing sales force that we have, and we'll have at that time without having to grow it substantially. While it might be within a practice there might be a dozen urologists and maybe one of them specializes in bladder cancer, and so, you might find that it's a different sell -- it's a different product sold to a specific specialty within that practice. The reality is we have incredible access to those practices in general. And so, we don't anticipate a great deal of extra investment required in order to sell our test in the channel.

[Rebecca Chambers, executive]

Agreed. And I would just add one more thing. Obviously, the Decipher franchise extends into the revenue cycle management and client services piece and all the infrastructure to order the test, which has been obviously now invested in and we will sustain and also benefit from office staff using historically, that should also help the commercial efforts on the MRD side, the knowledge and awareness of those types of interactions.

[Matthew Sykes, analyst]

Got it. That's really helpful color. I know we touched on it earlier, but this is helpful. And then how durable do you see Afirma growth as once the thyroid cancer diagnostics TAM has reached that 80% penetration? And do you have a specific time line to that penetration, Marc?

[Marc Stapley, executive]

We don't have a time line. But if you think about it, Afirma's been on the market for more than a dozen years at this point, and it's taken that far -- that long to get to the penetration that we've currently got with an 80% estimate out there, there's multiple years of growth still left in Afirma just to target the conditions that we currently cover and the indications that we currently have. And as you know, we've been investing heavily in Afirma. We invested in TERT we talked about during this call. We invested in the physician ordering experience and portal. We just launched the Afirma GRID. And so, time after time, we're creating new opportunities to engage with physicians and convince even more of them to use Afirma more often in more cases and so, we're gaining wins in terms of both existing accounts and new accounts. And so, it's hard to put a time frame on when that plateaus as everything eventually always does, but it's clear that we've got a lot of a fairly decent amount of headroom still to go even in endocrinology.

[Operator]

One moment for our next question, and it's from the line of Mike Matson with Needham.

[Joseph Conway, analyst]

This is Joseph on for Mike. I guess just looking at other kit development. You obviously -- you guys have a lot in your hands with Envisia and Decipher and now C2i, but just maybe wanted to ask a question more broadly, if there's any other disease areas you guys are focusing on procedure test development. Or I guess if it's more focusing on MRD versus a diagnostic assay. Just kind of wanted to get your thoughts on that.

[Marc Stapley, executive]

Yes, it's a great question. If you think about it, Veracyte's really come from that single product Afirma company to a broad cancer diagnostic company. And now with the addition of MRD, we can go even further. If you think about the growth factors that we've talked about. I'll start with geographical. So the success that we've had in the U.S. with our launch of our IVD products outside the U.S. and our clear road map of what really amounts to three or four products that we're going to launch over the next few years there, you can see that we've got a real opportunity to grow outside the U.S., and really demonstrate the model that we've adopted works. And that has been so successful for us with the extensive publications behind our tests, can benefit us outside the U.S. as well. So that's number one.The second one is across the care continuum. And I wouldn't say we're going to focus on any area in particular rather than the entire care continuum for patients who have cancer or are suspected of having cancer, all the way from nasal swap, which is focused on those patients who don't have a cancer diagnosis, but have a lung module and therefore a risk and helping to classify those patients almost think of that as like a part of a high-risk screening program. All the way through diagnosis, prognosis, prediction. You're starting to see Decipher move into that prediction space in a very meaningful way as there are more and more publications that talk about the virtues and the benefits of using Decipher that way. All the way through to treatment recurrence and monitoring. And so, as you think about it that way, we are able to cover a very broad part of the care continuum, everything but screening for healthy people, if you think about it that way.And then the third dimension is the indications. And Veracyte has thyroid, prostate, breast, bladder, lung. And now with MRD, you can think about how much more extensible that could also be across other indications. So, one of the great benefits of the platform that we've got, the large amounts of data that we generate is that we can -- that is extensible across other indications as well. Of course, there are always channel considerations you have to go through there and think about as well, and we do and will. But you can certainly see there's opportunities for us to expand beyond the current indications that we have. No clarity yet on what those might be, but that's certainly something we're very focused on.

[Joseph Conway, analyst]

Okay. Yes, great. Obviously, like the one-stop shop goal. But maybe just one more, looking at C2i, I guess their platform is CE marked in Europe. Just I guess, A, wondering what's the indication or use case for that? I imagine mostly used in clinical trials right now. But maybe if there's any strategic partnerships that are ongoing or prospects in Europe, that you guys are still pursuing after the acquisition?

[Marc Stapley, executive]

Well, there are some existing and of course, there's a pipeline as well, and we're very selective about what makes sense for us to continue to pursue. And as you can imagine, that's been a very key part of the acquisition and integration conversations. Our approach with the test, especially with the bladder test is going to be an LDT type of approach. So determined TBD, if we kit that as an [IBD] in the future, that's certainly not the plan right now as far as the initial focus is to launch it as a lab developed test in the way that we've described and leverage the platform that we've built there. So more to come, again, that is again another expansion opportunity. And when I talk about geographic expansion and how MRD can play in that, there is a lot of optionality for us in terms of how we might use that in the future outside the U.S.

[Operator]

One moment for our last question. And it comes from the line of Puneet Souda with Leerink Partners.

[Puneet Souda, analyst]

Thanks for the questions. So, Marc, just first one on -- I know C2i has been asked about, but just maybe what is the level of investment that you're expecting here this year? And wondering if you can provide anything for next year sort of before you launch this assay. And how should we think about gross margin given that this assay when it starts -- does it start scaling up, it does require multiple whole genomes initially and then whole genome with repeat assays, if my understanding is correct. And maybe just on that point, just help us also understand how do you want investors to appreciate Veracyte's position in the MRD market? This is a fairly competitive market in its emergence and there is a leader in the market already. So maybe just conceptualize so that we understand how Veracyte is going to be positioned there in MRD.

[Marc Stapley, executive]

Yes. If you don't mind, I'll answer the third question first, then I'll answer the first question, and then I'll let Rebecca answer the second question on gross margin. But -- and thanks for asking this, I'm glad we have an opportunity to go through this. I talked about this a month or so ago when we announced the acquisition of C2i. What we really like about their solution, not to mention the incredible team, but they have built a product that fits so well with the Veracyte diagnostics platform that we're referring to. It is a whole genome-based approach, which means we get that rich data for every single patient. And not only is it whole genome for that landmark, but it's whole genome for every subsequent sequence that we do. And so incredibly rich data. The test performs extremely well. It requires a low [input of] blood, 4 mil. You don't have to create this bespoke assay as well, which speeds up time to turnaround time, time to answer. And then a great performance that results in, as we believe, better outcomes for patients.So, there's so much about the C2i MRD product in particular, that we like that fits into Veracyte, not to mention that it's going to play really well into the bladder market where we have a channel and a clear path to reimbursement. So that's how I see. Now, it is a crowded space. But again, our approach to a specific indication that we have -- that channel is really, I think, a very significant differentiator in addition to all the other things that I just mentioned.In terms of the investment, we've done, I think, a really important thing here is we've acquired C2i and absorbed, refocused our investments and absorbed the project to develop the MRD test for bladder into our current portfolio. And as you know, we've done a really focused approach to portfolio management over a number of years, and that's enabled us to do this. And that's why we gave the guidance that we gave when we announced the acquisition that this does not change in one way our philosophy around profitability and cash generation in particular. And so, without giving an exact figure on what we're investing because not only have we acquired an MRD asset, we've also acquired AI capabilities that we were going to invest in any way, it's just, I think, fair to say it's absorbed in everything that we're doing.Do you want to talk about gross margin?

[Rebecca Chambers, executive]

Yes, happy to. And just one thing to add, Puneet, we have also said in the future, to answer your question for next year, in the future, we will continue to be generating positive cash flow. And so, I think to any extent, we'll be absolutely continuing to follow the financial philosophy we have shared with you all time and time again in the future as we go forward with MRD. And any other activities that we decide to pursue.With regard to gross margin, you're absolutely correct. It is multiple whole-genome assay over different periods of time. But we have -- we've looked at this very closely, as you would expect ahead of the acquisition. And we believe both between the ASP that we're expecting as well as the lab efficiencies that we think we can deliver. We're expecting to have a gross margin that's very reasonable, perhaps not all the way to our current corporate gross margin average but very reasonable and something that we think it more than is worth doing for the organization and can sustain a profitable business similar to how we have with Afirma and Decipher over time with obviously volume going through both the lab and the channels. So, it will take a little bit of time to ramp there. But I think over time, we will get to exactly where we want to be from a gross margin perspective, and we're confident to that end.

[Puneet Souda, analyst]

Got it. Okay. That makes sense. And then just briefly on the FDA's expectations to regulate the cancer LDTs. Any latest thoughts from your end? And anything, changes, spend-wise or OpEx-wise, from your perspective, that was to be implemented?

[Marc Stapley, executive]

At this point, no changes. One of the things I say about Veracyte is we're very well prepared for that because our lab developed testing process and our quality systems are very, very robust, well proven the -- the publications behind our tests as we've talked about at length are very extensive. And so, as I think about it, we're the kind of lab and we have the kind of tests that I think, fit well into any kind of model that they come out with. Clearly, we'll need to invest in the multistage process that ultimately gets launched. There would be some level of investment, but not -- I don't think as great as many others who've got to kind of create that backdrop that we've got would have to incur. And so, we're quite comfortable with where we are there. We've got the optionality. We've got the experience of IBD development. And so, I'm not overly concerned about the pathway. We're as involved as others, as you can imagine, in trying to help comment on that, respond to that and shape the way that that actually ultimately gets launched.

[Operator]

And as I see no further questions, I will turn it to Marc Stapley for final comments.

[Marc Stapley, executive]

Great. Thank you, Carmen. I appreciate it. So, as you can all see, we ended a very strong year in 2023, and we set ourselves up well for continued growth in 2024 and beyond. I believe our success will continue to hinge on three core pillars of execution, meaningfully expanding the markets we serve, utilizing our established Veracyte diagnostics platform across geographies, indications and the care continuum, embracing the best technology, adding new capabilities such as MRD and AI to our world-class platform and driving revenue growth with a discipline and a focus on profitability and continued positive cash generation. These tenants will allow Veracyte to continue to build a strong foundation for growth while achieving our vision of transforming cancer care the world. I would like to thank our entire team for their commitment, hard work and passion. It is fueling our progress in driving our results. So, thank you.

[Operator]

Ladies and gentlemen, this concludes our call today. Thank you for joining us. You may now disconnect.