Veracyte (VCYT) Q2 2019 Earnings Call Transcript

Veracyte (VCYT -0.87%)
Q2 2019 Earnings Call
Jul 30, 2019, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to Veracyte's second-quarter 2019 financial results conference call. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Angie McCabe, Veracyte's vice president, investor relations and corporate communications. You may begin.

Angie McCabe -- Vice President, Investor Relations, and Corporate Communications

Thank you, Don. Good afternoon, everyone, and thanks for joining us today for a discussion of our second-quarter 2019 financial results. With me today are Bonnie Anderson, Veracyte's chairman and chief executive officer; and Keith Kennedy, our chief operating officer and chief financial officer. 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 include those regarding our future plans, prospects and strategy, financial goals and guidance, product attributes and pipeline, drivers of growth, expectations regarding reimbursement and other statements that are not historical facts. Management's assumptions, expectations and opinions reflected in these forward-looking statements are subject to risks and uncertainties that may cause actual results and/or performance to differ materially from any future results, performance or achievements discussed in or implied by such forward-looking statements. And the company can give no assurance they will prove to be correct and will not provide any further guidance or updates on our performance during the quarter, unless we do so in a public forum. Please refer to the company's July 30, 2019, press release and the risk factors included in the company's filings with the SEC for discussion of important factors that may cause actual events or results to differ materially from those contained in our forward-looking statements.

Prior to this call, we announced our second-quarter 2019 results, which are available on our website at veracyte.com under press releases in the investor relations section. We also published a financial presentation which Keith will reference during his remarks. The presentation is also available on our website under events and presentations in the investor relations section of our website. I will now turn the call over to Bonnie Anderson, Veracyte's chairman and CEO.

Bonnie Anderson -- Chairman and Chief Executive Officer

Thank you, Angie, and thanks, everyone for joining us today for our second-quarter 2019 earnings call. We had another terrific quarter in which we continued our strong momentum and delivered exceptional results across the business. We generated record revenue of $30.1 million, an increase of 32% and genomic test volume of 9,663 tests, an increase of 26% over the second quarter of last year. In tandem with this growth, we improved our net cash used in operating activities to $2.5 million, an improvement of 21% over prior year.

Based on these results, which exceeded our expectations and our increased visibility into the rest of the year, we are raising our full-year 2019 revenue guidance to a range of 119 to $122 million. We're also improving our outlook for net cash used in operating activities to a range of 2 to $4 million for the full year and remain on track to reach operating cash flow breakeven before the end of 2019. I will now provide updates on the key metrics we are using to measure our success in 2019. The first is revenue growth.

Starting with pulmonology and specifically with idiopathic pulmonary fibrosis or IPF, Medicare coverage for Envisia genomic classifier went into effect in the second quarter and we began to ramp commercial expansion. We increased Envisia test volume, as well as the number of institutions ordering the tests by more than 100% sequentially from the first quarter of 2019 to 130 tests in 76 sites, respectively. And Envisia test volume represented approximately 15% of our total pulmonary product volume in the quarter. We remain on track to report Envisia test volume of 500 to 1,000 tests for the year.

In lung cancer, we achieved over $1 million in revenue for our Percepta classifier in the second quarter, which is nearly 160% increase over the prior year's quarter and a significant achievement. This pairs with other exciting news in the quarter, the commercial launch of our Percepta genomic sequencing classifier or GSC, which was developed using our RNA whole-transcriptome sequencing platform. Now in addition to down classifying patients with inconclusive bronchoscopies to low-risk so they may avoid unnecessary invasive procedures with a slightly higher sensitivity than the original tests, this next-generation test up classifies patients to high-risk to help guide next intervention steps, providing expanded clinical utility that aligns with current guideline recommendations. Adoption of our Percepta classifier is going really well.

Test volume in the second quarter increased to 142% from the prior year's quarter to 744 reported results and in only six weeks after its launch, we have already converted over 80% of our Percepta orders to the Percepta GSC. Additionally, biopharma services revenue of $3.5 million in the quarter was primarily the result of achieving key milestones related to the launch of the Percepta GSC through our collaboration with J&J. Our Afirma business also delivered a strong quarter where a wealth of positive clinical performance data helped further drive robust adoption of the Afirma genomic sequencing classifier. The Afirma GSC volume was 8,789 tests for the second quarter and 19% increase over last year.

We also experienced significant growth year over year in Xpression Atlas orders for thyroid cases deemed suspicious for cancer by the Afirma GSC. This increase was driven by physicians growing interest in using gene alteration data to tailor surgery and treatment decisions for their patients. Using information, we can provide from the same minimally invasive fine needle aspiration sample and at the same time as diagnosis. Our continued strong revenue growth reinforces the power of our integrated sales strategy through which our sales reps are leveraging common stakeholder relationships to drive adoption of multiple products in institutional accounts rather than us building a dedicated team for each product.

For example, from the first to the second quarter of this year, the number of sites using our two lung products, the Percepta and Envisia classifiers more than doubled. And the number of sites using all three products, nearly tripled. We believe this efficient highly effective approach is key to achieving long-term profitable growth. I'll now turn to our second metric of success, evidence development where we made meaningful progress during the second quarter.

This includes the third recent publication of an independent clinical utility study showing that use of the next-generation Afirma GSC significantly reduce the number of surgeries among patients with indeterminate thyroid nodules. In this case by two-thirds at the Ohio State University compared to the original Afirma test. Additionally, data presented at ASCO shows the potential of the Afirma Xpression Atlas to guide targeted treatment selection for patients with medullary thyroid cancer or MTC, a rare, but aggressive form of thyroid cancer from the same fine needle aspiration sample used in diagnosis. In the MTC cases, the Afirma XA was highly effective in identifying gene mutations that are the focus of new targeted therapies under development.

In fact, positive clinical trial data for two treatments targeting the RET fusions in MTC were also presented at ASCO. The role of Afirma testing in helping physicians overcome a range of challenges in the diagnosis and treatment of thyroid cancer also appears on the June cover of the highly regarded journal, Cancer Cytopathology, which is a publication of the American Cancer Society. In lung cancer, we unveiled clinical validation data for the Percepta GSC during the American Thoracic Society meeting in May showing the next-generation tests ability to down classify lung module patients to low-risk of cancer, while up classifying patients to high-risk with strong performance results that are consistent with guideline recommendations for next steps. And finally, the adoption of the Envisia classifier is being fueled by the publication of positive clinical validation and clinical utility data in the Lancet Respiratory Medicine in early April.

The findings demonstrate that the test helps physicians distinguish idiopathic pulmonary fibrosis or IPF, from other interstitial lung diseases without the need for surgery and that when paired with high-resolution CT results in patient clinical history, the test provided physicians with a higher level of confidence in making an IPS diagnosis. The extensive rigorous clinical evidence that we continue to build to support our test validity and utility is driving our success across all three clinical indications and is further establishing our scientific and medical leadership. Our third metric of success is pipeline advancement, where we also made solid progress during the quarter. With the launch of the Percepta GSC on our RNA whole-transcriptome sequencing platform, we are now in a position to advance our pipeline to inform treatment decisions concurrent with diagnosis in lung cancer.

Addressing additional questions across the clinical care continuum just as we have done with the Afirma Xpression Atlas in thyroid cancer. We are also advancing our pipeline to address unmet needs earlier in the clinical care continuum in the fight against lung cancer. Specifically, we are excited about our progress in developing the first genomic test to detect lung cancer in noninvasive samples collected from the nose. Our nasal swab test will utilize the same proven field of injury science that powers our Percepta GSC, whereby, lung cancer can be detected in current and former smokers by evaluating genomic changes in the epithelial cells lining the respiratory system.

We believe our nasal swab test that is in development has the potential to significantly improve the early detection of lung cancer, which in 2018 was estimated to kill approximately 1.8 million people globally. Our development efforts are facilitated by -- our collaboration with J&J through the combination of our robust buyer repository of patient consented, well-curated clinical cohorts, as well as their medical and clinical expertise in the early detection of lung cancer. We look forward to sharing early data for our nasal swab test, along with our plans for positioning the test in the clinical pathway of care before the end of this year. Our fourth major success is financial discipline.

Here too, our team has continued to excel. Our net cash used in operating activities for the second quarter of 2019 was $2.5 million or 21% improvement over the second quarter of last year. Through our continued strategic investments in activities that fuel the business, along with our careful spending, we remain on track to achieve operating cash flow breakeven before the end of this year an accomplishment that very few in the genomic diagnostic field have attained. More importantly, our goal is to achieve long-term profitable growth.

Finally, we continue to strengthen our leadership team and we're thrilled to name Keith Kennedy as our chief operating officer in addition to his current role as chief financial officer. Together, with Dr. Giulia Kennedy, our chief scientific and medical officer, and John Hanna, our chief commercial officer, we have a top tier executive team that is prepared to lead us in the next phase of growth. We also announced two key hires during the second quarter.

First, Dr. Sangeeta Bhorade joined Veracyte as our new medical director for pulmonology. She was previously a professor of medicine and medical director for the Lung Transplant Program at Northwestern University's Feinberg School of Medicine. Also, Dr.

Freddie Bowie joined us as vice president of corporate and business development, brings significant experience most recently at Foundation Medicine. Lastly, I'm thrilled that in June, Veracyte was awarded a San Francisco Bay Area Top Workplace 2019 honor for the sixth executive year. This recognition reflects the dedication of and contributions by our more than 300 employees who come to work each and every day with a focus on making a real difference in the lives of patients and our key -- a key driver of our success. I will now turn the call over to Keith to go over financial results for the second quarter of 2019.

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

Thank you, Bonnie. As Angie mentioned earlier, our second-quarter 2019 financial presentation is available under events and presentations in the investor relations section of our website. Turning to Page 3 of our financial presentation. Our performance against six financial key performance indicators or KPIs for the second quarter of 2019 as compared with the prior year's quarter, including select highlights for each metric at the bottom of the page, are as follows: Revenue of 30.1 million increased 32%, excluding 3.5 million of biopharmaceutical services, revenue of 26.7 million increased 20%.

Genomic volume of 9,663 reported tests increased 26%, gross margin of 71% increased 700 basis points, excluding biopharma services, gross margin increased 400 basis points from 63 to 67%. Operating expenses, excluding cost of revenue, increased 20%, net loss of 2.5 million improved 60%, net cash used in operating activities of 2.5 million improved 21%, and at June 30, we had cash and cash equivalents of 193 million. Turning to Page 4 of the presentation. Our performance against these six KPIs for the year-to-date period ended June 30, 2019, compared to the same prior-year period showed strong comparable performance.

The next six pages outline the sequential and year-over-year results underlying each of the six financial KPIs. A few observations. As illustrated by the revenue and genomic volume trends on Slides 5 and 6, we continue to see positive momentum across the business. Our lung portfolio represented approximately 875 tests or 9% of our genomic volume this quarter.

Turning to Page 12 in our 2019 guidance. As Bonnie stated earlier in her remarks, we are increasing our revenue guidance to a range of 119 million to $122 million. At the midpoint of the range, this represents a 31% increase over last year. We are tightening the range of our previous guidance for annual net cash used in operating activities to 2 to $4 million.

At the midpoint of the range, this represents a 78% improvement over last year. Generating positive operating cash flow remains a key goal for us, and we expect to achieve operating cash flow breakeven before the end of this year. Our loss from operations in the second quarter was 3.1 million, which included 3.5 million of depreciation, amortization and stock-based compensation expense. To add some color on our outlook for 2019, we expect the following.

Our revenue and operating cash flow guidance, includes 10 million in service revenue, 9 million from J&J, and 1 million from Loxo Oncology. We expect gross margins, excluding the impact of biopharma services revenue to be within the 65 to 67% range and up from our previous expectations of 64 to 66%. We expect our average quarterly spend for sales and marketing to stay within $1 million band around the average quarterly spend of $13 million. And our average quarterly spend for our combined G&A and R&D spend to stay within $1 million band around the combined average quarterly spend of $10.5 million.

I'll now turn the call back over to Bonnie.

Bonnie Anderson -- Chairman and Chief Executive Officer

Thanks, Keith. In summary, we had a terrific quarter in which we continued to execute, driving revenue and genomic test volume growth across the business. Our first-to-market Medicare coverage genomic classifiers and biopharma collaborations are contributing to strong revenue growth and our multiproduct sales strategy is enabling us to drive this growth cost-effectively. We also advanced our pipeline, launching our next-generation Percepta classifier in lung cancer while progressing our nasal swab program for early lung cancer detection.

Our world-class scientific capability and technology are positioning us to answer additional clinical questions along the clinical care continuum and our recent capital raise gives us strategic flexibility as we make the promise of precision medicine a reality for patients. I would now like to ask the operator to open the call up for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Sung Ji Nam from BTIG. Your line is open.

Sung Ji Nam -- BTIG -- Analyst

Oh, sorry, I was on mute. I apologize. Thanks for taking the questions.  Maybe starting out with Envisia, love to hear any feedback you're getting. You've seen a nice growth there initially and then, as you look at the number of sites using both Envisia, what's the overlap between despite their using both tests versus using each separately? And then also curious about what your strategy is in terms of selecting sites for Envisia given, are you targeting kind of the IPF -- major IPF centers there or are you picking more of a kind of a broader kind of community type of settings that might benefit more from -- might realize the value proposition more for the fact?

Bonnie Anderson -- Chairman and Chief Executive Officer

Well, Sung Ji, thanks for joining us, and thanks for that very rich question of multiple levers. We'll try to work through all those. Envisia is definitely getting off the ground very well. This test addresses such a big unmet need because other than surgery when HRCT is not confident for diagnosis recognizing that UIP pattern, which really only happens in general, 25 to 30% of the time, there is no alternative.

So bringing this test-to-market, we knew there would be high demand and high unmet need and we're very pleased to see the level of interest. We also always anticipated that we would get sort of that extra leverage in pulmonology and in fact, if we go back to the strategic rationale of doing our Allegro acquisition when we did in 2014, it was partially the result of the fact that our next pipeline product to bring to market was also in pulmonology. So we've always seen that that synergy would be there. Nevertheless, as you also point to, there are different often clinical specialists that focus on one disease area versus the other, and so we recognize that as well.

And I have to point to -- in fact, I'm going to ask John Hanna who's here in our room with us today, our chief commercial officer to speak briefly to this at the field level. But we've actually designed a structure of our sales team to include specialists and levels of people that can address these both collectively unifying the pulmonology call point. But also at a specialist level as it addresses unmet needs that are slightly different and perhaps different specialists that treat IPF, ILD patients versus lung cancer. John, do you want to add a little bit of color to that?

John Hanna -- Chief Commercial Officer

Yeah. I'm happy to. Thanks so much Bonnie, and thanks for the question. We're seeing a tremendous amount of synergy at the field level inside these pulmonary practices where they're performing lung cancer diagnostic bronchoscopies, but their colleagues are also treating and managing interstitial lung disease in the practices.

And so, once we're within the account, we have a relationship and our specialist can expand the business beyond lung cancer into ILD, it becomes a really effective way to grow. And as Bonnie shared, we grew by over 100% quarter over quarter in the Envisia volume and a lot of that is due to the ease of us kind of getting in to those practices and then expanding the use of our product portfolio across that pulmonary practice once we're there.

Sung Ji Nam -- BTIG -- Analyst

And then just one follow-up. It's nice to see that Veracyte continues to focus in operational and financial discipline. But given the recent strengthening of the balance sheet, we'd love to hear your thoughts in kind of what the cash deployment strategies or priorities are over the next, I guess, few years? Thank you.

Bonnie Anderson -- Chairman and Chief Executive Officer

Yeah. Yeah. I mean, I think as $1.4 billion company we have the right level of cash on our balance sheet for the market cap of the company. Things can only come up and you want to have the strength there.

And we certainly use a portion of it to pay down the debt essentially so we're debt free, so that's all good. And I think also we're in a really great position having executed so well across these multiple clinical indications and with a strategy that is working very well sort of, not just in gaining leverage at the field level and how we're structuring and how we're executing on that. But also, the leverage of our scientific approach, the building up of clinical cohorts all these things that can be repeated. So we think we're in a great position if strategic options would come along, we now have the cash to take advantage of that as well.

So it just positions us I think as it should in the marketplace with lots of opportunities and options that we can act on.

Sung Ji Nam -- BTIG -- Analyst

Great. Thank you so much.

Operator

Your next question comes from Puneet Souda from SVB Leerink. Your line is open.

Puneet Souda -- SVB Leerink -- Analyst

Hi, guys. Hi, Bonnie. Congrats on the quarter. So first and obviously to Keith as well for having the additional new role, now I get to ask him may be twice the questions.

Bonnie Anderson -- Chairman and Chief Executive Officer

I like that.

Puneet Souda -- SVB Leerink -- Analyst

If I could ask, Bonnie, just on in terms of the biopharma collaboration that's been a positive driver for you and then obviously included in the guide for the year as well. So wanted to get a sense of potential leveraging of these bio repositories of lung and thyroid into more broader collaborations and sort of what efforts are you doing there and how should we think about that opportunity longer-term for you?

Bonnie Anderson -- Chairman and Chief Executive Officer

Right. Well, it is an excellent question, I think as we, maybe unlike others in the space, we did not expand into bio-pharmacist services specifically to drive a new segment of the business onto itself. We were very much looking at taking the indications that we are in and leveraging our assets, our capability, our position and clinical diagnostic testing and leverage that into relationships with biopharma that would bring additional value. And that value can be created as you can see in many different ways in our Loxo collaboration.

It's being driven by the fact that we are a clear market leader in the thyroid cancer testing space, the mere volume of the doctors we touch every day, the samples we bring in to our laboratory, coupled with the fact that every sample we run is run on our whole RNA whole-transcriptome platform, allows us to gain more knowledge around those thyroid cancer samples and thyroid cancer in general than anyone else out there. So we are interested in targeted therapies as it relates to these rare variants that often would be more difficult to find. We were at stopping point given the mere volume of our commercial sample repository. In the case of J&J, it was really tapping our joint interest in tackling the issue of people dying with lung cancer.

Both companies focused on early detection. J&J looking at early detection and intervention therapies that can impact disease and the strong collaboration that we built through the acquisition, of course, and then onwards into the work we're doing with them today around their work and field of injury. And how we can advance less invasive sample collection tools to address broader and broader and broader market opportunities over time. So I think the collaborations can take on different shapes and sizes, but it all comes back to us building something here at Veracyte that is another value creation lever for the business.

We believe that Envisia is another opportunity as we go forward. I mean it's very early with Envisia because we're just now getting ourselves established in the marketplace. But there's no question that there's going to be many stakeholders looking to improve the diagnosis of IPF. Whether it'd be in early drug trials, in patient enrollment and trials or just better management of patients and prescriptions of therapy for those cases.

And we are really the only company and very nicely positioned to have an impact there. And so I think as we go forward with Envisia over the next 12, 24, 36 months, we will be gaining a lot of credibility as a market leader and really changing the whole diagnostic paradigm for this disease in these patients. And we hope we can help get them diagnose earlier, on treatments earlier and help to advance better therapies to market and it'll all be win-win for everybody.

Puneet Souda -- SVB Leerink -- Analyst

Great. And then, maybe a broader question now. You have three products in the market. It's just if you could share your thoughts about the product expansion and how you're sort of thinking about that? And maybe how potentially Veracyte could look potentially like three to five years from now, anything you can share there would be helpful.

Bonnie Anderson -- Chairman and Chief Executive Officer

Yeah, thank you, Puneet for the question. I appreciate it. Yes, I think that our strategy -- we're really only a 11-year-old company. We were very focused for many of those years around building out a base of products now with three clinical classifiers.

We've actually brought five of those products to market because two of them are already second-generation tests, but building a strong hold at the point of diagnosis of disease. We think that entry point into the marketplace is very attractive because it allows us to be working with doctors and health systems and specialists alike to improve on the diagnosis of disease. And then with technology that we're tapping, be able to answer other clinical questions, downstream clinical questions at the same time of diagnosis. So the fact that we have built all of our clinical bio repositories and all of our knowledge around the broad-based disease at the stage of diagnosis, we've got patients with the disease without the disease, expected of having the disease, early disease, late disease, metastatic disease, you name it, that's all in our arsenal.

And then, combining that with the richest whole RNA transcriptome data and having the capability scientifically and machine learning and all of that pipeline development that we have on the data side. We've been able to show that entering in the thyroid space, in the diagnostics space has allowed us to answer downstream questions at the same time a diagnosis that is now impacting surgery decisions and treatment decisions for these patients. And thyroid cancer is not the poster child for targeted therapy and early decisions around treatment, but other indications that we're in are. And so we believe this strategy is really powerful and the tools that we're using allow us to do that.

And so as we expand in lung cancer with our second-generation Percepta tests, our plans there, as you know, are not only to move earlier with earlier detection, but also help inform aggressiveness of disease and stage and treatment decisions as well. And this is all laid out. This is not new, but it's all laid out in our value chain pipeline story that we often talk about. And with Envisia, I think the minute we brought the product to market to make a diagnostic decision, physicians immediately ask us, can we help them answer the prognostic question as well? Can we discern, which patients are likely to progress faster than others because that will guide interventions and aggressiveness of interventions.

All of these decisions are now really within our reach because we are sitting on a very comprehensive technology. We have built a lot of depth scientifically across many of the technology disciplines and we have a proven track record and a playbook to follow as we go about doing that. So I think there's a lot of -- you'll see a lot of these tests advance and as you do, you'll see us move up and down the clinical care continuum and potentially change the timing of and the way that these kind of decisions are answered over the next three to five years, I think will be a very different company.

Puneet Souda -- SVB Leerink -- Analyst

That's very helpful. Thank you.

Operator

Your next question comes from Brian Weinstein from William Blair. Your line is open.

Brian Weinstein -- William Blair -- Analyst

Hey, guys, good afternoon and thanks for taking the questions. So just let me start out with something on pricing. Can you just give some directional insight into your expectation for recognized revenue per test by product and how that is -- how do you expect that the trend through this year? And then also, kind of longer term just how those reimbursement -- how the pricing is going to trend up and then how we should be thinking about the pacing of that for Envisia and Percepta if there's any kind of new thoughts on that as that continues to grow?

Bonnie Anderson -- Chairman and Chief Executive Officer

Thanks for joining and asking question. Keith?

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

Yeah. Thank you, Brian. As I talked about last quarter outlook at the revenue rate per reported test just at a high-level. And on Afirma, our underlying guidance implies $2,700 revenue per reported test and $1,300 for each Envisia and Percepta.

Those are plus or minus, but those are round numbers that gets you to the midpoint of that range. And I would expect that obviously Afirma, we completed the journey on the managed care side. We still have obviously last quarter, we had TRICARE that we added. We continue to add things, but as you already got 270 million covered lives, it doesn't move the needle as much when you add three to four plans, but we're continuing to make progress on Afirma.

Percepta and Envisia, we're going through the journey there. We got coverage -- our effective coverage as Bonnie mentioned on Envisia for Medicare on April 1. We've had coverage for Percepta. So we're covered on all three products on Medicare, but those commercial journeys will happen over the next couple of years.

As we develop the clinical evidence and adoption at the facilities and physician level.

Bonnie Anderson -- Chairman and Chief Executive Officer

Yeah. We always have believed that the evidence will drive guideline inclusion and guideline inclusion is the biggest lever at driving the rest of the commercial payer coverage. It's -- we're in a unique -- different position with the two lung programs, given that those patients are roughly half Medicare, and so there's a lower volume distributed among all of the commercial payers. So the timing of when we actually lean in on a given payer to request and work with them on coverage.

You just want to make sure, you have enough members using the tests in those regions before you approach them because you don't want them to reach out to their provider base and not have more than one doctor aware of the tests. So when it's early that's always a little challenge, but I think we are on track to continue. We continue as we have this quarter to proliferate incredible evidence. We continue to get our evidence published in top-tier journals and that will continue and I would expect over the course of the next 12 to 24 months, we will begin to move the needle meaningfully and the coverage of Percepta and Envisia at the commercial level and that will start to march that average reimbursement price up the ladder.

Our reimbursement from Medicare Envisia is a little bit higher than where the other products are. I think we said publicly that it's sort of at the high end of that 3 to 4,000 range we have given. But ultimately as these tests all reach their peak in reimbursement, we will be in a terrific position of expanding margins and a great financial story as a result.

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

So Brian, as you're thinking through this, we have done a really nice job on the cost of revenue side. So our costs of revenue for these tests have come down around $700 and that was 800, close to 900, in the not too distant past. So when you're thinking about $1,300 in revenue for these new products, there's going to be this period here where we're going on that commercial journey as we get up to the Medicare rate of 3,000 to $4,000 for these tests. Where we're going to spend more on our capex and we are total net profitability like we have in Afirma, but we do believe that will be a defined period of time and we'll talk more and more about that as we move through the quarters and into next year's guidance.

Brian Weinstein -- William Blair -- Analyst

OK. Great. That was a great detailed response. I don't think that you specifically said you guys have backing into everything else that you kind of talked about.

There's no change to the expectation for the year, genomic custom volume growth of 20 to 25%. Correct?

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

That's right.

Bonnie Anderson -- Chairman and Chief Executive Officer

That's right.

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

So that should imply somewhere between 39 to 40,000 tests. We have about -- we have two less days in the next quarter than we had in this quarter. So it's probably about 300 tests or about 4% on a sequential quarter basis. You're looking on a day's basis, but we're looking at around 10 to -- 10,500 tests a quarter sort of average for the rest of the year.

Brian Weinstein -- William Blair -- Analyst

OK. Great. And then last one for me, with where you guys are in your sales force right now, do you think that there's any need to expand the sales force in any way over the next kind of six or 12 months are you guys happy with where things are today?

Bonnie Anderson -- Chairman and Chief Executive Officer

Yeah, yeah. Thanks for the question. Brian, as we've always said, I mean we have a model that will -- we will continue to expand our sales team. But what we're doing is expanding the sales team in cadence with how we want to drive revenue growth -- volume growth -- test volume growth, which will drive revenue growth with a little bit of tailwind.

And then doing that at a pace where we can keep the operational spend in check. And that's actually the model and the recipe we're following to get to the positive results on cash flow. And we think it works very well. John actually has a very detailed model and the hiring is done at particular times in the year.

We know it takes four to six months to get these reps upto speed and we always build that in as we're building the hiring plan in advance of delivering the future growth. But it's a pretty home model and John has done a terrific job of leading all that. So thanks for the questions.

Operator

Your next question comes from Steve Unger from Needham. Your line is open.

Steve Unger -- Needham and Company -- Analyst

Great, thanks. Hi everybody.

Bonnie Anderson -- Chairman and Chief Executive Officer

Hi, Steve. Thanks for joining us today for your, I think, first call

Steve Unger -- Needham and Company -- Analyst

Thank you. And just to start off, I was just curious if you could give us a little bit more color on the ordering trends for Xpression Atlas? It sounded like you're starting to see that populate most or even the majority of Afirma ordering? And then could you just give us some color as to with the new Percepta GSC, how would that product inform treatment?

Bonnie Anderson -- Chairman and Chief Executive Officer

Yeah, very good question. So I'll start with Xpression Atlas because whether Xpression Atlas is -- today that's an Afirma product because the variance that are curated and validated and reported off of the Xpression Atlas tests are all done as part of the Afirma testing portfolio. And so there, some of the variance actually can drive decisions around to extent of surgery. So not everything that that is a variant informs treatment, of course.

But now that we can inform on all of these at the same time that we're moving 70% of the patients to a benign call or finding that our solution is resonating with more doctors out there. And that more of the patients that they are testing, they are willing to send for Afirma testing because just our portfolio advancers has grown and the second generation tests has certain subtleties of performance improvements over certain subtypes of cells. So that's all going very well. But the Xpression Atlas was launched last May.

These new products that are answering a very specific clinical question sort of takes some time to resonate. We came off of the early meetings this year, AACE and ENDO, where I think for the first time probably at ATA last year in the fall, we had the first ever focus on targeted therapies in thyroid cancer. So you have to keep in mind that this whole field is still very young in thyroid cancer because we had the silver bullet of radioactive iodine that has been predominately the treatment of choice. These new therapies though that are pan cancer therapies are being tested in areas of recurrence of disease where it looks like they're having quite a positive impact.

So going forward that standard of care could change. In terms of Percepta GSC and where we will head there and informing treatment decisions, it's really going to be a repeat of the strategy that was played out with Afirma. It's taking the platform that we are running the Percepta GSC on. Be able to curate the targets that are interested in targeted for lung cancer therapy and see how we might be able to package our solution in lung cancer to answer those questions at the same time that we're answering questions on diagnosis.

It's really about shortening the time frame, eliminating the follow on procedures to get more samples and being able to do it all quickly to get the patients on the best treatment that they can get on as fast as possible. And now that the Percepta has moved over to the next-generation platform, we have the opportunity to start that journey as well.

Steve Unger -- Needham and Company -- Analyst

Got it great. And then, as far as the biopharma services milestone payment from J&J, it looks like you got the Percepta milestone. What is the next milestone that you added to guidance? What is that related to? And what quarter do you expect that to hit the P&L?

Bonnie Anderson -- Chairman and Chief Executive Officer

Our milestones were driven across two products, the Percepta GSC, which you might imagine are the ones that have accelerated. Given that we did accelerate that program when we announced the collaboration being a part of all of that and then we have other milestones that relate to the advancement of the nasal test. And I believe one of those milestones, I believe, is what we're targeting to achieve this year.

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

In the third quarter.

Bonnie Anderson -- Chairman and Chief Executive Officer

And then there will be additional milestones yet to come that will relate to the nasal program moving along.

Steve Unger -- Needham and Company -- Analyst

Thank you for the correction Keith. That was the third quarter you expected?

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

Yeah. So we expect to recognize 2 million in the third quarter from J&J. We do not currently expect to recognize any revenue in the fourth quarter, but we'll see how things develop.

Bonnie Anderson -- Chairman and Chief Executive Officer

And we expect because these are milestone driven this revenue and the biopharma side can be very lumpy and unpredictable. So we'll be continuing to keep our focus on the product growth areas, the growth of our key clinical products. And then we'll try to give you some specifics like Keith just did on when these boluses of revenue could fall from services side.

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

And then I would add just because you are sort of new to the story and we're recognizing $250,000 in service revenue from locks of each quarter. And we will expect to recognize to recognize in Q3 and Q4 and next year as well. So just keeping that since we're talking about Johnson & Johnson, they really just don't leave that off the table either.

That's great. Understood. OK. Thank you.

Bonnie Anderson -- Chairman and Chief Executive Officer

Right. OK. Thank you very much for joining us today.

Operator

[Operator signoff]

Duration: 52 minutes

Call participants:

Angie McCabe -- Vice President, Investor Relations, and Corporate Communications

Bonnie Anderson -- Chairman and Chief Executive Officer

Keith Kennedy -- Chief Operating Officer and Chief Financial Officer

Sung Ji Nam -- BTIG -- Analyst

John Hanna -- Chief Commercial Officer

Puneet Souda -- SVB Leerink -- Analyst

Brian Weinstein -- William Blair -- Analyst

Steve Unger -- Needham and Company -- Analyst

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