Veracyte Makes Rapid Inroads into Genomic Cancer Testing

Even if the fast-growing Veracyte, Inc. makes its numbers for 2015, it will be about one 200th the size of LabCorp and one 150th the size of Quest Diagnostics.

Nevertheless, the news and buzz surrounding Veracyte these days is outsized, suggesting the South San Francisco, Calif.-based laboratory is capable of punching classes above its weight.

Founded in 2008, Veracyte has focused on creating tests that essentially prove the economic proposition laboratories must make these days: Their work must verifiably reduce health care costs and improve clinical outcomes. That was the intent of company co-founder and Chief Executive Officer Bonnie Anderson from the beginning.

"Veracyte was founded on the premise that we would always start by identifying the right clinical question—the question that reduces unnecessary surgeries and associated costs," said the 57-year-old Anderson. Prior to co-founding Veracyte, she spent more than a decade and a half at Beckman Coulter, where she initially focused on strategic marketing and then focused on creating products for overseas markets and eventually led the startup of the firm's Immunomics Operations.

In those latter roles, Anderson observed that she "really learned about creating, assessing and drawing conclusions around unmet needs in order to formulate those products."

That leads directly to Veracyte, which was started after Anderson took a year off to live with her husband on a sailboat. The company is currently focused on two areas of diagnostics that are of particular concern in the health care sector: Thyroid cancer and lung cancer. The former is perhaps the most overdiagnosed malady on the planet. Even a near microscopic presence of disease prompts millions of people a year to undergo a delicate surgery to remove an organ that could be kept in place—sentencing them to a lifetime of hormone therapy. Lung cancer issues are the polar opposite: Although smokers are the most likely to contract the disease, much tumor growth can occur without symptoms. When cancer is finally detected, it is often a struggle to keep the patient living beyond five years—and that discovery is often at the business end of a painful and invasive biopsy.

Anderson said the company operates on four premises, or pillars. They include being certain Veracyte is informing on the right clinical question; delivering clear value and clinical utility from its products; getting data published in peer-reviewed journals; and making the case to payers so they will write coverage policies to include the products.

Those pillars appear to be bearing their weight competently. Veracyte brought its first test to market within three years of its founding, had Medicare coverage a year after that, and went public just five years after it opened its doors.

Amanda Murphy, an analyst for William Blair & Co. in Chicago, noted in an interview that Veracyte's biggest strength is that it is able to "attack an underserved market with an opportunity to improve care." She added that the company's initial focus on the scientific evidence and need for patients—as opposed to creating a product first and then seeking a market—is one of its biggest engines of success.

"Too often, the reverse happens because companies are so married to their own technology," said Heather Creran, a laboratory consultant in Atlanta. "That bias is not conducive to good customer discovery or problem solving."

Meanwhile, the past year—and the last few months in particular— have been so brimming with news that it would seem wise for Veracyte's website to use a separate server for press releases. It has secured a $40 million private placement, had a positive study published in the New England Journal of Medicine for a product it acquired just months before, and Anderson was named one of Fast Company magazine's most creative people in business for 2015.

There are also the spectacular growth numbers for 2014. Revenue was up 75 percent compared to 2013. Guidance for 2015 suggests another big growth spurt this year, although the company posted a $29.4 million loss in 2014 and doesn't expect to become profitable in the immediate future.

"It's been a pretty exciting ride," Anderson said. "We've clicked off a lot of boxes."

The New England Journal of Medicine study focused on Percepta, Veracyte's lung cancer product that it obtained through the purchase of tiny Allegro Diagnostics last year for $21 million. The test was brought to market this past April.

Percepta can complement a bronchoscopy and lavage of a patient's airways. Inconclusive bronchoscopies are commonplace, and typically require patients to undergo a far more invasive lung biopsy. According to the American Society of Clinical Oncology, biopsies are the most costly tool used for lung cancer diagnosis. A recent study of 761 Medicare patients who underwent lung cancer diagnostics determined that $38.3 million was spent on the procedures. Of that sum, 43 percent, or $16.5 million, was spent on biopsies that were negative.

The Percepta studies focused on a similarly sized group: 639 patients in AEGIS I and AEGIS II clinical trials who underwent bronchoscopies to investigate lung nodules. Percepta was able to rule out cancer 91 percent of the time, compared to 75 percent for just the bronchoscopy. Combined, the two tests could make accurate predictions 97 percent of the time. In the study, 43 percent of bronchoscopies were non-diagnostic for lung cancer; 64 percent of that group underwent biopsies, and more than a third had benign nodules or lesions.

According to Murphy, Veracyte anticipates Medicare coverage for Percepta by next year, and meaningful contribution to company revenue by 2017. Based on the volume of inconclusive bronchoscopies performed annually, the market in the U.S. could be $300 million or more.

Similar studies have helped to validate the clinical case for Afirma, Veracyte's test for thyroid cancer. Thyroid cancer is fairly easy to detect, and five-year survival rates for all but the most advanced stages of the disease are nearly 100 percent. But treatment for the disease has been extremely aggressive, with many patients having their thyroids removed even with the presence of tiny cancer-like nodules—a phenomenon recently documented by surgeon Atul Gawande, M.D. in The New Yorker magazine.

Most thyroid cancer analysis occurs via fine needle aspiration of nodules, but that leads to an inconclusive determination in up to 30 percent of all cases, prompting a full surgical biopsy to obtain more information. The Afirma test analyzes 142 genes associated with thyroid cancer. A 2012 study in the New England Journal of Medicine concluded that the test had a negative predictive value of 94 to 95 percent for various forms of thyroid cancer.

Afirma retails for $4,875. It's reimbursed by Medicare at $3,200. But each test that is performed saves an average of $2,600 in other clinical costs for patients. That doesn't even include the cost of lifelong hormone therapy, according to Anderson.

Veracyte's 2015 guidance is between $48 million and $53 million in revenue. Its 2014 revenue was $38.2 million, representing at least a 30 percent increase yearover- year. Murphy forecasts that that growth rate is sustainable for now, "aided by realization of Veracyte's lung franchise in 2017 and beyond."

Takeaway: Veracyte is on the cusp of becoming a significant player in the field of thyroid cancer and lung cancer testing.