Decipher, Afirma And MRD Tests Will Broaden Future Markets

Key Takeaways

• Veracyte’s Decipher test expansion and updated NCCN guidelines could drive significant revenue growth and market share in the prostate cancer segment.
  
• Strategic operational changes, such as withdrawing from the French subsidiary, may enhance financial performance by reducing costs and improving net margins.
  
• Continued supply and manufacturing challenges, along with restructuring costs and revenue pressures, could impact Veracyte's revenue and profit margins significantly.

Catalysts

Operates as a diagnostics company in the United States and internationally.

• Veracyte’s expansion into the metastatic prostate cancer population with its Decipher test, expected to launch in the first half of 2025, offers significant revenue growth potential as the market for prostate cancer becomes more penetrated.
  
• The updated 2025 NCCN guidelines may solidify Decipher’s leadership as a gene expression test, enhancing its market reach and potentially increasing market share, positively impacting revenue.
  
• Afirma is anticipated to benefit from deeper penetration into existing accounts and sizable new customers, alongside expanded LCD coverage for Medicare Advantage patients, potentially boosting both revenue and net margins due to scale efficiencies.
  
• MRD testing, with its differentiated whole genome sequencing approach, is slated for commercialization focus in muscle invasive bladder cancer, leveraging Veracyte's existing channels and expected to contribute to revenue growth post-2026.
  
• Potential strategic moves, such as a withdrawal from funding the French subsidiary and streamlining operations, could improve financial performance by reducing losses and capitalizing on core testing capabilities, positively impacting net margins.

Veracyte Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veracyte's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.4% today to 12.0% in 3 years time.
• Analysts expect earnings to reach $71.4 million (and earnings per share of $0.82) by about May 2028, up from $24.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $102.7 million in earnings, and the most bearish expecting $40.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 58.1x on those 2028 earnings, down from 98.7x today. This future PE is greater than the current PE for the US Biotechs industry at 18.3x.
• Analysts expect the number of shares outstanding to grow by 1.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

Veracyte Future Earnings Per Share Growth

Risks

• The decision to potentially cease funding the French operations, including the Prosigna manufacturing facility, could lead to bankruptcy proceedings if no buyer is found, impacting Veracyte's revenue from that segment.
  
• Continued supply and manufacturing challenges for Prosigna products could cause a decline in product revenue and affect profit margins if Veracyte cannot secure a buyer or alternative means of production.
  
• There are pressures from decreased biopharmaceutical revenue and other associated income streams, impacting overall company revenue and possibly future earnings.
  
• Risks associated with necessary commercialization and training activities for new product launches could delay revenue generation, impacting forecasts for revenue growth.
  
• Potential onetime costs related to the restructuring of the French entity and other associated restructuring expenses could temporarily affect net margins.

Valuation

• The analysts have a consensus price target of $42.2 for Veracyte based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $51.0, and the most bearish reporting a price target of just $29.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $594.3 million, earnings will come to $71.4 million, and it would be trading on a PE ratio of 58.1x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $30.56, the analyst price target of $42.2 is 27.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.