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spk06: Good day and thank you for standing by. Welcome to the Verisight second quarter 2022 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 1 on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Shayla Gorman, Director of Investor Relations.
spk10: Good afternoon, everyone, and thanks for joining us today for a discussion of our second quarter 2022 financial results. With me today are Mark Stapley, Verisight's Chief Executive Officer, Rebecca Chambers, our Chief Financial Officer, Dr. Tina Nova, President of our U.S. CLIA business, and Dr. Julia Kennedy, Global Chief Scientific Officer and Chief Medical Officer. Verisight issued a press release earlier this afternoon detailing our second quarter 2022 financial results. This news release, along with a business and financial presentation, is available in the investor relations section of our website at Verisight.com. Before we begin, I'd like to remind you that various statements that we may make during this call will include forward-looking statements as defined under the applicable securities laws. Forward-looking statements are subject to risks and uncertainties, and the company can give no assurance they will prove to be correct. Further, we are not under any obligation to provide further updates on our business trends or our performance during the quarter. To better understand the risks and uncertainties that could cause actual results to differ, we refer you to the documents that Verisight files with the Security and Exchange Commission, including Verisight's most recent Forms 10-2 and 10-K. In addition, this call will include certain non-GAAP financial measures. Reconciliation of these measures to the most directly comparable cap financial measures are included in today's earnings release, accessible from the IR section of Verisight's website. I will now turn the call over to Mark Stapley, Verisight's CEO.
spk13: Thanks, Shayla, and thanks, everyone, for joining us today. I'm pleased to provide an update on our second quarter financial results, as well as our key growth drivers. As you saw in today's earnings release, our strong execution during the quarter resulted in impressive Q2 growth of 32% versus the prior year, with revenue equaling $72.9 million. I was particularly proud of our endocrinology and pulmonology commercial teams who worked tirelessly in the wake of an unexpected supply chain issue to ensure that our patients were taken care of and had access to our tests. More on that later. The largest contributor to our second quarter revenue was our Decipher prostate product. With growth of close to 1,200 tests as compared to last quarter, we saw the largest sequential increase in this product to date. Adoption is growing nicely, yet we still estimate that market penetration for this class of tests is currently less than 30%. This gives us confidence that there remains ample room for growth and for penetration to continue to meaningfully increase for a number of years. Decipher Prostate's adoption has been propelled in part by the growing body of literature demonstrating the test's ability to guide treatment decisions for men with localized prostate cancer. Last month, we announced findings from a multi-center randomized Phase III trial, which were published online in Annals of Oncology. This study demonstrated that the Decipher Prostate test can help identify patients who are at highest risk of cancer progression following prostatectomy and who would benefit from earlier, more intensive treatments. In May, we were delighted the American Neurological Association and the American Society for Radiation Oncology issued an updated clinical guideline that is favorable towards genomic testing, including the deciphered prostate test, to help guide care for men with localized prostate cancer. The guideline authors specifically cited extensive evidence, including from multiple Phase III clinical trials, which demonstrated that the deciphered prostate genomic risk score is strongly associated with prostate cancer outcomes. We believe this additional clinical data, as well as bolstered guidelines, will augment the already extensive body of evidence we have generated in support of our prostate tests. Moving to Affirma, fortifying and building our endocrinology business remains a key strategic imperative. As a result, our investment in the product and associated clinical evidence continued during the quarter. A new meta-analysis presented at the Endo 2022 Annual Conference showed that the Affirma GSCs real-world performance is consistent with, and even stronger in some cases than, the test clinical validation study findings. Additionally, a new study published in Thyroid demonstrated the accuracy of our Affirma medullary thyroid cancer classifier in identifying MTC, a rare but aggressive form of thyroid cancer, in preoperative samples. This classifier is already part of our Affirma GSC test. We believe that clinical evidence such as this, combined with our continued investment in product enhancements and the customer experience, will support Affirma growth next year of mid to high single digits. Regarding Affirma's Q2 results, we saw slightly lower volume growth than we expected. During the quarter, we were surprised by a key vendor that underwent a flawed ERP transition, significantly impacting their ability to process our customer orders on a timely basis. Our team mobilized quickly to identify and prioritize critical orders, to locate and assemble key components, and to transact thousands of shipments in-house while working with the vendor to optimize their activities for our customers. Through what I would only describe as heroics of our team, we were able to meaningfully minimize the impact to those customers, and most importantly, their patients. We believe that in the end, very few patient procedures were delayed, and while the true in-quarter impact to a firmer is difficult to quantify, we estimate that this situation lowered volume by approximately 4% compared to the prior year and our expectations. At this point, the vendor's internal issues are now largely resolved, and we are back to a near normal level and timing of shipments from them, with our team continuing to supplement as needed. Another standout in the quarter was our biopharma business, which generated key data as well as strong quarterly revenue. An oral presentation at ASCO detailed that our Immunoscore Immune Checkpoint, or IC, assay can identify patients who are likely to benefit from immune checkpoint inhibitors or ICIs in metastatic non-small cell lung cancer. Further, a publication in the Lancet Oncology also demonstrated similar results in metastatic colorectal cancer. These findings are important because while immune checkpoint inhibitors have revolutionized therapeutic management of patients in a number of cancers, current biomarkers are limited for identifying the patients who will benefit. We believe that the Immunoscore IC assay could help biopharmaceutical companies select the right patients for their immune therapies and help improve the success rate of their clinical trials, notably in combination trials including ICIs. We look forward to additional future publications incorporating our immuno-oncology assays. These exciting findings reinforce our confidence that immuno-oncology will continue to be an important part of Verisight's long-term strategy. Going forward, we are particularly focused on our multi-omic biopharma offerings, as we believe we have a differentiated asset. At the same time, and after thorough analysis of our immuno-oncology portfolio, we have decided to pause our commercial efforts for the Immunoscore colon cancer diagnostic test. Given the breadth of investment opportunities in front of us, with early-stage products at various phases of being launched or developed, paired with our acute sense of fiscal responsibility, we are prioritizing our focus and resources accordingly. Moving now to our long-term growth drivers, we were pleased to share additional performance data on our perceptor nasal swab test at the recent ATS meeting. These data demonstrated that our test could accurately determine lung cancer risk across a range of tobacco-related exposures, ensuring that it can be used reliably in people whose lung nodules were found incidentally or through screening. With respect to broad commercialization of nasal swab, we remain focused on securing a clear path to reimbursement prior to driving high-volume growth and generating clinical utility data to ensure commercial success, including finalizing patient enrollment in our Nightingale study by the end of next year. Activation of sites is progressing well, and while patient enrollment is lagging our expectations by about a quarter, we are starting to see momentum build. Early signs from the test and treatment results that we have on a small number of patients are encouraging, as we're already seeing a positive impact on treatment decision-making. Of course, we don't yet have the ultimate patient diagnosis, but our robust clinical validity data, which we have already shared, gives us confidence in the outcomes that we expect to see when we do. We are monitoring the data as it is generated and plan to take advantage of opportunities to publish favorable interim clinical utility results in an effort to drive the earliest reimbursement decision possible. We are excited to witness the positive impact perceptor nasal swab will have on patients and providers. Another key long-term growth driver is the transition of our tests onto the NCounter analysis system to fuel our global expansion. We believe the menu of IBD tests in development are exclusive diagnostic rights to a best-in-class instrument, and the team's extensive track record of developing IBD tests positions us extremely well to succeed in global markets. We already offer the Prosigna breast cancer test and are on track with our development submission timelines for our broader menu as previously detailed. With that, I will now turn the call over to Rebecca to discuss our financial results in more detail.
spk09: Thanks, Mark. As Mark said, our continued focus on execution drove strong quarterly revenue of $72.9 million, an increase of 32% over the prior year. We grew total volume to over 24,900 tests, a 19% increase over the same period in 2021, and a 7% increase compared to the prior quarter. We delivered testing revenue of $59.7 million, an increase of 18% versus the prior year quarter. Testing ASP was approximately $2,650 per test, roughly flat sequentially. As expected, ASP was again impacted by the 2021 AFIRMA billing co-change. Despite this, our confidence has grown that this is a temporal impact which should abate next year. Testing volume was approximately 22,600 tests with strong decipher urology growth driving approximately 10,000 tests. Affirma volume grew 3% as compared to the prior year. However, we estimate volume growth would have been approximately 7% without the vendor-driven supply disruption Mark mentioned. Second quarter product volume was approximately 2,300 tests resulting in revenue of $3.1 million up 16% compared to Q2 2021, despite a currency headwind of approximately 10% given prior year rates. Biopharmaceutical and other revenue equal $10 million, meaningfully above our expectations. This outperformance was driven by a large contract IBD manufacturing project, originally part of our second half forecast, which was completed ahead of the May 26 IBDR deadline, per the customer's request. Another good example of strong execution by our team. Moving to gross margin and operating expenses, I will highlight non-GAAP results, which exclude the amortization of acquired intangible assets and other acquisition-related expenses, but do include routine stock-based compensation. Non-GAAP gross margin was 66%, an increase of approximately 50 basis points sequentially, driven primarily by higher biopharmaceutical and other margin. Testing gross margin was 69% and product gross margin was 47%, both flat compared to the prior quarter. Biopharmaceutical and other gross margin was 53%, an increase of approximately 350 basis points sequentially due to project mix. Non-GAAP operating expenses excluding cost of revenue declined by $0.1 million sequentially to $49 million, as lower benefit expenses were partially offset by ramping clinical trial and project expense. Research and development expense increased by $0.6 million to $9.1 million, and sales and marketing expenses grew $0.6 million to approximately $23.1 million, driven by personnel expense. General and administrative expenses were down $1.2 million to $16.8 million, primarily due to lower professional fees compared with the first quarter. Non-GAAP cost of revenue and operating expenses included $6 million of stock-based compensation. We recorded a GAAP net loss of $9.5 million, which included a $3.3 million in tangible asset impairment resulting from the Immunoscore colon diagnostic test commercialization decision. Net cash provided by operating activities was $0.7 million, and we ended the quarter with approximately $164 million of cash, cash equivalents, and short-term investments. Turning to our updated 2022 guidance, we expect revenue of $272 million to $280 million or 24% to 28% growth versus a prior year on a reported basis. This range, compared to our previous guidance of $265 million to $275 million, reflects our strong performance in the second quarter, continued outperformance of our urology business, a firmer revenue growth of low to mid-single digits, and current currency rates. Q3 revenue is expected to be lower sequentially due to the impact of summer holidays on our testing, biopharma, and contract IVD businesses, as well as the large Q2 contract IVD order. For Q4, we are forecasting quarter-over-quarter growth. For the second half of 2022, we expect to see an increase in operating expenses driven primarily by higher R&D expenses. With the current inflationary environment and recession concerns on the horizon, We believe our diagnostic testing business, which makes up the vast majority of our revenue, will remain resilient. With this in mind, we are confident that we have adequate cash on hand to ultimately take the business to profitability, barring M&A. We believe this positions us to invest in our long-term growth drivers while ensuring that our cash profile is suitable for the foreseeable future. In closing, we are pleased with our performance this quarter. and remain focused on making the necessary decisions to drive long-term growth with a clear path to profitability. I will now turn the call back to Shayla.
spk10: Thank you, Rebecca. We'll now go into the Q&A portion of the call, and Tina Nova, president of our CLIA US business, and Julia Kennedy, global chief scientific officer and chief medical officer, will join us. Operator, please open the line.
spk06: As a reminder, to ask a question, You'll need to press star 1 1 on your telephone. Please stand by while we compile the Q&A roster.
spk00: Our first question comes from the line of Brian Weinstein with William Blair.
spk06: Your line is now open.
spk02: Hey, guys. Good afternoon. This is Griffin. I'm for Brian. Thanks for the questions. Maybe just to start on Decipher, could you just talk a little bit more about that growth outlook and runway in terms of ASPs and units? It's a growing part of the story. And then as we think about layering on bladder, could you just talk about what, if any, impact there was from bladder in the second quarter and how you're thinking about that in the second half?
spk13: Yeah, quick thanks for the question. I'll start and I'll invite... Peter, I'm not going to weigh in as needed, but the, you know, you saw again another quarter here of strong performance by the deciphered prostate business in particular, and, you know, cited a lot of reasons for that, including the continued evidence development, which, you know, we just got to a really good steady drumbeat here, and the penetration, you know, is a key factor. We said in the script that less than 30% penetration of these types of tests in the market, of which, you know, we believe Decipher Prostate has a significant share, majority share. And so, you know, we expect to continue to drive incremental penetration of this market with our test. And, you know, we're on a good momentum here, and there's no reason that we see ahead of us, honestly, for that momentum to slow down. So very excited about where prostate could go. And Tina, I think you want to add to that and feel free to talk about the bladder, which was the second part, the bladder test, the second part of Chris's question.
spk08: No, thank you. Yeah, I think we really saw a fantastic performance by our sales team in the last quarter. They continue to do a terrific job out in the field. And also, I think that the amount of data that we continue to release and show physicians that shows that our test is really makes a difference in the risk of progression after surgery. We just had an increase in some guidelines from the AUA and the American Society of the Radiation Oncology Update that showed that our risk score is strongly associated with outcomes and independent showing some data that came from SEER where we looked at 10,528 patients and showed the correlation between outcomes and what was predicted by by the cipher, so that data continues to really help. Bladder is a much, much smaller market. The test has a much smaller indication, and so although it's just starting out in the marketplace, it's not at the same level as the prostate test.
spk09: And with regard to what's implied in our guidance and what was recognized in the second quarter, Griffin, I would effectively say view that as a rounding error at this point in time. Obviously, to Tina's point, this is an exciting opportunity ahead of us. But just like other early-stage products, it takes quarters and years to really generate the incremental evidence and demand for this product. And importantly, given how wonderful the Decipher Urology franchise is operating at this point in time, we're very cautious to disrupt that through incremental bladder efforts. And so right now we want to make sure we're really focusing on biopsy and radical prostatectomy because it's really what's driving the growth here. So bladder is exciting over a three to five year period. In the next couple of quarters, it's not where I'd focus my attention. I'd really personally focus it on radical prostatectomy and biopsy.
spk02: Okay, that's great. And then just a second on biopharma growing part, and I've signed to that IVD contract payment here, but it's such a fundamentally different business post-Haleo DX. Can you just talk a little bit more about the nature of those revenues? And when you talk about those growing faster than the corporate average, understanding it's just a portion of the total biopharma revenues, but I would love to just get more color on that.
spk13: Yeah, thanks. And sorry, Griffin, I misheard your name at the beginning, but thanks for that question as well. The biopharma business, we've obviously put the three parts of the biopharma businesses together, and they are somewhat different, but there's a lot of overlap and commonality there too. And the reason we put them together is we can drive a lot of, you know, improved access to markets in the U.S. for the tests that came or the capabilities that came out of our Halo DX acquisition, for example, and vice versa. What a lot of the revenue that is focused on purely the biopharma line is coming from today is really our immuno-oncology assets, which is why I talked about those as being a key growth driver, key strategic investment for us in the future. And I'd like to see more of that penetrating our U.S. customer base, which we should expect to see in the future. Similarly, the incredible amount of data that we've generated on both the Affirma side and the Decipher side and the Lung side as well, being able to leverage those globally with our existing customer base is pretty strong in Europe as well. So whether it's clinically relevant biomarker identification, enhancing our customers' clinical trials through biomarkers or companion diagnostics work, there is opportunity globally to do a lot with the assets that we've gotten acquired here. On the IBD services side of the business, it's continuing to leverage the capabilities that that team has that we're actually deploying internally right now to develop our own assays, but also for third parties.
spk09: And on that last point, I would just add, our goal is not necessarily to grow the IBD services business. It's really to ensure that that business is enabling our long-term opportunity with the encounter instrument and products on a global basis. So that business is much more, we're much more keen to work on the manufacturing transfer than we are to really drive revenue growth through that line. Griffin, you mentioned the growth rate of the biopharma business, biopharma and other business, and I just wanted to clarify that we haven't necessarily given a long-term growth rate for that business, and we aren't going to be in the habit of doing so today. If you look at 2022, though, this is a human capital business, and we did call out some timing impacts in the first half of the year, so I would take those into account. And as a result of those timing impacts, we expect the second half to be sequentially lower, if you will, than the first half in terms of revenue, given that. Additionally, the seasonality of both of the businesses in the biopharma line given their human capital dependent, is obviously, as I stated on the call, pretty acute in the third quarter. And in aggregate, you know, we do think about this much more on an annual basis, on a quarterly basis, given it's a lumpier business than the testing or product business. So hopefully that helps with the modeling over the long-term basis as well as 2022. That's great.
spk02: Thanks for the questions. Thanks.
spk06: Thank you. Our next question comes from Punit Sudha with SEB Securities. Your line is now open.
spk12: Hi, guys. Thanks for taking the question. So, first one, this may be on, can you just update us the latest on the hospital access that you have for FIRMA and the pulmonary franchises? I mean, in terms of the sales reps, where do you stand in terms of face-to-face interactions? And do you still have, you know, sort of challenges there or just maybe give us the latest on that front?
spk13: Yeah, thanks, Vinny. I would say we're kind of pretty much back to business as usual here. The level of access that we're seeing across the board is what you would expect barring anything that, you know, any kind of local region by region lockdowns, none of which we've seen as of late. But if that were to happen again, then of course that would affect access. But absent that, I think our teams, it feels like our teams are getting access where they need to. And, you know, it fills almost business as usual. Tina, have you got anything you want to add to that?
spk08: No, I think that's exactly right. The one thing we do continue to see is some struggle with staffing, especially in the physician offices rather than the hospitals. And that is still an issue that we see. But except for that, we do feel like we've gotten away from COVID this last quarter for the first time.
spk12: Okay, that's super helpful. Yeah, staffing was my next question. But maybe just on Rebecca, maybe this is for you. And obviously, look, a number of moving parts in the business. You pointed out a pharma challenges that you had this quarter, and it looks like you have successfully resolved that going forward. There's maybe a catch-up coming from that. Decipher continues to do well. your biopharma colon test that's getting discontinued. So maybe just talk to us about, you know, how should we piece all of this together to think about sort of the, is 24 to 28% the sort of the growth rate we should be thinking about going forward, or maybe it could be better, you know, better than that.
spk09: Yeah, great. Good question, Puneet, and I'll do my best to answer it. With regard to the moving pieces in 2022, Immunoscore, at this point in time, given the amount of investment and the size of the commercial organization, was not a material revenue driver in 2022. So I wouldn't necessarily, you know, take that into account neither here nor there on a go-forward basis. Obviously, we won't have that revenue, but again, it will not be that material of a headwind. With regard to Affirma and the impact in the quarter from the supplier issue that Mark mentioned, We don't expect there to be a catch-up there because these patients had to go into their treatment decisions and treatment paradigms. And so, we aren't necessarily, you know, in the low to mid single-digit guide that we provided, we are not providing, that does not include a catch-up because that is not currently what we do expect. Decipher, we are expecting, as Mark mentioned, to have continued strong growth over the course of 2022. And I've already provided kind of the biopharma and other impact in the second half with regard to Griffin's prior question. Looking forward to 2023, we guided to a firma. The cipher we are very excited about and expected to continue to grow quite nicely, albeit, you know, law of large numbers, the growth rate declines as the numbers get larger. So I'm not necessarily going to guide to a growth rate there, but just we're early stages in penetration. We're incredibly excited about the continued penetration of this market and the performance vis-a-vis its peers. So all good news, just not commenting on the growth rate specifically. And obviously, BioPharm and other are going to be lumpy in any given period, but we do expect growth on a year-over-year basis, and the product business is early days as well, so growth. So I'll let you sum all that up and come up with an expectation for 2023 based on it, but I think you have all the puts and takes there accordingly.
spk12: Okay, that's helpful. And then last one maybe for Tina. I mean, when you look at the Decipher franchise today and sort of the competitive landscape, obviously you have a strong position in the marketplace. Data continues to be generated. Maybe just give us a sense of sort of, you know, thinking about this product longer term, you know, what sort of – You know, what sort of position in the marketplace that you can continue to maintain? It seems to me that it's leading the market. Are there any puts and takes, you know, competitively that you would point out where you can continue to gain more and more share in the marketplace? Just maybe talk to us about the positioning of the product and how do you see this more longer term? Because obviously this is a key important driver for VeriSpice.
spk08: Yeah, no question about it. I think that, you know, I'm very proud of the team. I think our sales team is absolutely top. And I think that we're good at hiring reps and I think we're really good at training. I think it's very, very important because the interaction between the sales reps and between the physicians is is extremely important because, as you know, prostate was behind the eight ball in sort of getting up to speed using genomics. And so there's still a lot of training that happens out in the field with the physician on the use of these tests that has not And I think that because we're still at less than 30% penetration, we still have a nice runway in front of us for the future. You have to continue to publish. You have to continue to add information. new data. You need to continue to have the best service that you can have, ease of ordering, reports, customer service, and what have you. All of those play just as much as an important role in the product itself. But I think that we're in very good shape for the future. I feel very good about our strong position right now.
spk13: Yeah, no, thanks, Tina. Pretty tight for that. I think You know, the level of publications and then, you know, guideline support and the breadth of indications for our Decipher product position us really, really well in addition to all the things that Tina said. To punctuate one point, I mean, our sales team, we look at various metrics for our sales team, and, you know, it's truly best in class in terms of the metrics that they deliver and the sales optimization efficiency, as Tina said, the relationships with physicians. There's no reason to assume that we can't continue to grow and maintain and gain share as we should given the investments that we're making in this product. And we're not going to slow down. I mean, this is a key focus area for us and will continue to be for quite a long time. Got it. Okay. Thanks, guys.
spk06: Thank you. Our next question comes from Matt Sykes with Goldman Sachs. Your line is now open.
spk04: Hi, everybody. Thanks for taking my questions. Good afternoon. Maybe if we could start out just on the issue you have with your vendor with their ERP. It seems very specific to them, but As you kind of experience that and just given the real-time nature of some of the decisions your patients need to make and some of the lost revenue that resulted in, does that cause you to kind of look across your vendor relationships and just kind of better understand what they might be going through? Maybe you understood the ERP implementation, but maybe not the impact of it. Just wondering kind of lessons learned from that particular experience as you manage your vendor relationships.
spk13: Yeah, thanks for that question. It's a really good one. Everybody's been experiencing supply chain disruption and issues including ourselves over many years, the last couple of years, and we've been able to deal with those very, very, very effectively and haven't had any impacts. And then this one came along that has nothing to do with global supply chain issues and more to do with a local challenge with a specific vendor. And our team was able to put in place the necessary prioritizations and our own internal processes to make sure that no customers, no patients were left as far as we could tell, with procedures that were delayed. Obviously, that's impossible to measure, but that's something that we strove for, and that became our priority. That distracts from being out in the field generating new business and spending your time with existing customers in the way that you normally do. And so that really was the effect. So I feel like the effect was less patient. impacting I'm sure there are some examples where you could find where you find that was the case but really not in the main and more to do with distraction for our sales team and everybody else who was focused on making sure our patients weren't impacted so you kind of got it you know we got ourselves into that situation and you know we found ourselves in that situation did a really good job of getting ourselves out of it as best as we could in the quarter now to your broader question Any business is, you know, continuously doing business continuity planning. There are some proprietary, you know, vendors with proprietary components that you just can't second source and there is no plan B, right? And that wasn't the case here. There are some vendors where, you know, and components where you need to really plan ahead to make sure your plan B is in place and able to be mobilized when you need it. And we all do that. We're doing that just like anybody else. The third one, which is really where this one fell into the category, was something that we could very quickly stand up internally ourselves to the extent we needed to and mitigate. So those ones fall down lower on the priority list of business continuity planning because you can mobilize quickly. So, of course, we all do that. I think more importantly, though, this one probably has our vendor looking at their own processes and thinking about you know, how do they implement system changes without things like this happening again?
spk04: Got it. Thanks for that call, Mark. I appreciate it. And then just, Rebecca, one for you, just on the OPEX, the trend has been flattening pretty much, I mean, certainly relative to the first quarter of this year and continues to come in below our expectations, which makes sense given sort of the spend that you did last year and the buildup of the Salesforce. Do you expect that OPEX trends to remain relatively stable over time? I know the G&A costs were some lower spent on professional services. Is that a one-off and should resume, or how are you thinking about the different components of OPEX, and should we expect that to really stabilize here in terms of the spend as the revenue continues to grow?
spk09: Yeah, thanks, Matt. I think it's a great question, and if you recall back to your conference, we did highlight that we are seeing a good amount of leverage through the sales and marketing line, and I do expect that to continue. specifically in the second half, we will have maybe a small uptick as T&E comes back more than it was in the first half. But I think outside of T&E, for the most part, we will see continued leverage through the sales and marketing line. On the research and development line, that is the line where we do expect to see relatively meaningful increases. And this is tied to Mark's comments primarily on nasal swab as well as on the IVD development. So both of those programs are continuing to ramp. We are enrolling our clinical utility study that is obviously critically important for us to increase our spend on. And so to the extent that you do see a meaningful increase in operating expense, per my comments in the script in the second half, the majority will be in research and development. On G&A, we do expect to see a slight uptick as well in the second half. We have some key IT projects, which will have incremental spend primarily, and we've added a little bit of headcount, but that's going to be around the edges. The vast majority of the gains will come from the R&D line.
spk04: Great. And just one last quick question for me. Just the decision to discontinue the Immunoscore colon cancer test, just maybe some background behind that decision. Was it a competitive landscape? Was it just the potential material revenue versus the cost you were putting into it? Just want to kind of understand. I'm sure you look across your broad portfolio. and make these decisions constantly, but just want to understand a little bit more behind that specific decision to get some color on your strategic thinking.
spk13: Yeah, that's good, and thanks for acknowledging. I mean, we do portfolio planning on a continuous basis as part of our strategic planning, and that's really what led to this rather than anything else. We looked across the level of investment that's needed, the level of development that's going to be required, the building of the sales team and commercial team, And, yeah, of course, you always look at the competitive space as well. Having said that, this is a very novel test. But where we see these capabilities that we have in immuno-oncology having the greatest near-term opportunity, near to mid-term and even long-term, is in our biopharma business. Now, diagnostics may spawn from that over time and probably will. But just the timing of, you know, those diagnostics, the launch and, you know, the penetration relative to the investment you need to make is obviously key, part of the assessment, the evaluation we go through. And so we did that on this product, as we do on every product, and reached the conclusion that we did. You know, I mean, clearly, and I want to acknowledge, I mean, you know, our team, especially in Marseille and Richmond, put a tremendous amount of effort into developing this diagnostic, but they're also putting effort into the assets that build our or support our biopharma business, too. And so none of that work goes to waste. It's all leveraged in that broader opportunity.
spk04: Thanks very much.
spk12: Yep.
spk13: Pleasure.
spk06: Thank you. Our next question comes from Tejas Savant with Morgan Stanley. Your line is now open.
spk11: Hey, guys. Good evening. Just a couple of cleanups on the guide here, Rebecca, for you to kick things off. So I know you'd mentioned the RevRec impact from the code switch last year. Is that tracking to plan in terms of what you had baked into the guide? And that slight trimming of the AFIRMA guide, you know, from mid-single digit to low to mid-single digit, is that just related to the vendor issue, essentially, that you saw in 2Q?
spk09: Yeah, thanks for the question, Tejas. Taking them one by one on ASP, yes, that is trending exactly how we had expected. And, you know, I think we even gave, as I mentioned in the prepared comments, we gained incremental clarity, if you will, and conviction probably is a better word than clarity, actually. Incremental conviction that that trend is going to abate by the end of the year. So we're obviously still working through the bits and pieces there and are reaching out to specific payers, but we have absolute conviction that that will, by the end of this year, abate, if you will. With regard to the supplier transition and the change in the guide from mid to high to low to mid, definitively, that is all around the supplier issue. We quantified that for you in the prepared remarks as well, and so the only real change in outlook there is the supplier issue.
spk11: Perfect. And then on FX, how material are your international revenues today? I know you added that. That was the incremental line in terms of the guide. And how much of a headwind are you really baking in in the back half of the year?
spk09: Yeah, given where rates are today, so international revenue, which is primarily Euro-denominated, as you would expect, is around 15%. And we have absorbed $2 million of incremental headwind versus the last time we guided in the updated guide today.
spk11: Perfect. Super helpful. And then on the Cypher prostate, Mark, have you seen any noticeable shift in momentum since the EUA Astro guideline update from May?
spk13: I'll ask Tina to respond to that.
spk08: We always see, you know, is it meaningful? It's really a combination of small pieces that come together. And so we've had that, and we had publications as well, and participating in all the major meetings this year as well where we had posters and oral presentations. It's hard to just pinpoint one thing as that.
spk11: Got it. And last one from me here for you, Mark. I mean, given some of the restructurings underway at some of your genetic testing peers, how are you thinking about sort of being a little bit opportunistic in terms of adding to your portfolio here? There's some interesting assets, obviously, that are being shopped around. So just curious as to your take on the landscape.
spk13: Yeah, I'm glad you brought that up. And, you know, I do want to kind of point out that we do feel that we're in a very beneficial position relative to, you know, the strength of our balance sheet and our P&L. and the work that we've done over the years to ensure that, you know, we get a reasonable ASP for our tests and that we're not overspending relative to what we're generating. And so, you know, we're very prudent and fiscally responsible in that regard. So that puts us in a good position. Rebecca talked about cash in the runway that we have, X, M, and A. And so, you know, we're very focused on the path to profitability here. And having said that, you know, of course, we'd be opportunistic in looking at the market and seeing what the opportunities are in the marketplace and thinking about those. But we do that anyway, and we do that continuously. So, you know, I would never say to you we're completely, you know, ambivalent about that. Not on the contrary. We're, you know, as we always are, we're watching what's going on and we're paying attention. But at the same time, we're very, very focused on execution of our business, which is in a good position.
spk09: And before we move on, just one last thing to add to my comments on FX. Obviously, with the Halio acquisition, we have a much more natural hedge across the P&L, given while we have a headwind on revenue, the operating expenses are effectively coming in lower than planned, given that same change in currency rate. So I just wanted to share that across the P&L, not perfectly on a one-for-one basis, but pretty darn close. We're pretty hedged. Great.
spk11: Got it. Got it. Very helpful. Appreciate the time, guys.
spk09: Thanks.
spk06: Thank you. Our next question comes from Andrew Cooper with Raymond James. Your line is now open.
spk01: Hi, everyone. Thanks for the question. A lot's already been asked, so maybe just pivoting a little bit, nothing tremendously new necessarily on the nasal swab efforts, but you mentioned wanting to get interim readouts and potentially as soon as possible and to drive that reimbursement. I guess, can you give us a little bit better sense for, you know, what point you need to be at in the study to say, hey, it's time for an interim readout. We've got, you know, enough patients enrolled, a long enough kind of timeframe to look at. What are the things you need to see? And, you know, when, if you could bracket best case, you know, worst case, can you give us some guidelines for when we should be thinking about seeing some of that data?
spk13: Yeah, and I'll go ahead and then, obviously, Julia, if there's anything you want to add on the kind of study design itself. But without getting into too much detail here, Andrew, for the study design, of course, we put in place milestones along the way where we get to look at the data and we get to see how significantly physicians are changing practice. And that's obviously one of the key things you want to measure here. We got an early look at that already, and it's a very small set of numbers, a set of patients. But, you know, as I said in the prepared remarks, so far the results are very encouraging. We'll see as time goes on. So there are multiple points along the way where you take a look, and depending on, you know, the results that you're seeing, that could help drive, you know, earlier results. earlier publication of some of that data. I don't know, Julie, if there's anything you want to add to that.
spk07: I think that's right. I mean, it's still early days. The data are looking encouraging, and we do plan on, you know, opening up the results at pre-specified times along the course of the study to check in and see how the data looks. So we'll be looking at it multiple times using a pre-specified protocol.
spk01: Thanks, Julia. Okay, great. I'll stop there. Thanks again. Okay.
spk06: Thank you. Our next question comes from Mike Madsen with Needham & Company. Your line is now open.
spk03: Yeah, thanks for taking my questions. So I want to ask, I want to decipher just on the bladder test, can you remind us what the TAM is there and then You know, just thinking about, you know, prostate over the next few years, I mean, 30% penetrated, a lot of large numbers. I mean, that's probably going to start to slow down some, but bladder should be kind of ramping up. So is there potential for that to kind of help sustain the growth of the Decipher kind of urology franchise, you know, kind of offset some of the slowdown in the prostate side maybe over the next few years, or is it just too small to do that?
spk13: Yeah, and I wouldn't be thinking about a slowdown in the prostate side over the next few years. I mean, what Rebecca was referring to, kind of the law of large numbers is denominator growth, but I see the momentum continuing for the foreseeable future here on prostate. On bladder, the market here is about a third of the size or so of prostate, so call it 80,000 patients a year, and our current test addresses roughly half of that market. But of course, you know, I would look to see us do similar things that we've done on the prostate side. And over time, you build the indications out until you cover as much as possible. And so we would do that. So yes, of course, I mean, as part of our urology franchise, bladder could be a contributor in the kind of more medium to long term. But as Rebecca said earlier, we're very focused on not disrupting any of the momentum that we have in prostate right now. So it's a You know, it's not a needle mover in the near term. Okay.
spk08: I would just say that the bladder test is much more a niche market. But we are looking at other studies that we will be starting over the next few years and looking at expanding that product over time.
spk03: Okay. All right. And then just, you know, given the kind of home run success we've seen with the Decipher prostate test, is there any kind of lessons learned from the commercialization strategy that can be applied to your other categories like pulmonology which seem to be kind of seeing a bit slower ramp or maybe just earlier stage it's not apples to apples but um it was there's something really unique about kind of the urology specialty or call point that's just allowed it to happen a lot more quickly than something like pulmonology
spk13: Go back, actually, I mean, the lessons learned across our entire portfolio go back to, you know, our strategy here, really. And that's always been the same, and it's been done very successfully in Affirma, and it's been done very successfully in Prostate. And that is you identify a clinical unmet need that fits into the physician's workflow. You generate a lot of evidence. You get KOL support. You get into guidelines. You get reimbursement. And you have a very efficient and effective commercial team that drives it, and you can continue to repeat that. Now, then you have, in addition to VeriSight, the added layer of being able to take those tests and make them available globally on our encounter platform as well. So that's really the general lesson learned, and then specific, I would say, to prostate. I mean, remember that there have been molecular diagnostics for prostate cancer for quite some time, and Decipher's done a really good job. You know, the Decipher product and the team has done a really good job of of coming into that market where a lot of the groundwork did exist and penetrate that market really, really well and create new groundwork to expand that market beyond where it had currently been penetrated. So, you know, and then where, you know, obviously pulmonology is a little bit different in that, you know, that groundwork hasn't been laid and we're doing that. And, you know, we're not the only ones, but we're doing that to a significant degree. So, you know, it's, you go indication by indication, unmet need by unmet need, and, you know, and the formula is pretty well understood at this point.
spk00: Okay, great. Thank you. Thank you. Our next question comes from Mason Carica with Stevens.
spk06: Your line is now open.
spk05: Hey, guys. Thanks for the questions. Maybe just starting with Decipher Prostate, on the commercial team, how many reps have you added year to date? And how many reps are supporting that test currently? And then if you could, could you provide some color on the efficiency of new reps versus some of your more tenured reps? Is there a metric that you could call out? And then how long does it really take for these new reps to get fully ramped and efficient?
spk08: Yeah, that's a great question. So we're at, you know, 40-ish around reps right now. And obviously we want to add a handful more. You know, the timing just depends on how things are going, et cetera, across the year. But, you know, I think that, you know, you just really have to work very hard on hiring. You have to work very hard on training. You know, I've been doing this for a long time, and I don't know if there's a secret number, a secret formula. I feel like it takes six to nine months for sales reps, no matter what they're selling in this business, to really get to a point where they feel comfortable and really start making a difference and paying for themselves. I think that's actually a pretty common timeframe.
spk05: Got it. Thanks for that. And then thinking about ASP of this test, how much room do you still have left to run in terms of penetration of the commercial payer market? Any color in terms of near-term opportunities or expectations around incremental coverage maybe over the next year or two?
spk08: Oh, absolutely. That's something we work on all the time. There is still more runway for us to get contracts in on the commercial side. There's no question about that. It's something we're very, very focused on. And every time we add these new studies, you can bet that we go back to the commercial payers and share that information with them. This area was just slow on the commercial side. The whole urology area was just very slow on obtaining commercial coverage. But, yes, there is more runway, and, yes, we continue to add new contracts every year.
spk05: Got it. All right. Well, that's it for me. Thanks.
spk08: Thanks, Jason. Thank you.
spk06: Our next question comes from Paul Knight with KeyBank. Your line is now open.
spk14: Hey, Rebecca, on the pricing, I missed the early comments there, but is it centered around the commercial payers on that ASP?
spk09: So, Paul, the comment on pricing was specific to AFIRMA and specific to the code change made in January or Q1 of last year and the impact that is going to have over the course of 2022 on the AFIRMA ASP. So, Nothing new with regard to that. We had commented last quarter that we had expected that impact over the duration of 2022. We are equally confident that it's now under the duration of 2022 and will not go into next year. So I think when it comes down to it, we have worked through this. We now just have to wait for a little bit of time to pass, but we're confident going into 2023, ASP for Affirma will not necessarily be the headwind tied to the CPT code change. If you look at ASP, you know, across the entirety of our testing business, it was roughly flat sequentially. And so, you know, obviously there's puts and takes across the board, but you can, you know, you have the AFIRMA detail that we've provided and we will get through this over the course of this year and look forward to next year and it not being a headwind.
spk14: Yeah, you're saying that X AFIRMA, it was pretty flat.
spk09: I'm saying it's flat even with the impact of AFIRMA. So steady state across the board year to date.
spk14: Thanks.
spk06: That concludes today's question and answer session. I'd like to turn the call back to Mark Stapley for closing remarks.
spk13: Thanks, operator. I appreciate it. In the current challenging environment, I'm incredibly proud of our team's execution of financial discipline in Q2 and today. We believe that this focus, as well as our portfolio of high-value tests that address key unmet needs, sets us apart in the industry. We remain committed to transforming care for patients across a range of diseases. We're doing this successfully in the U.S. and have a clear pathway and plan to bring our tests to patients in global markets. So thank you for joining us today, and I look forward to keeping you apprised of our progress.
spk06: The conference will begin shortly.
spk00: To raise your hand during Q&A, you can dial star 1 1.
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