Genomic testing firm Veracyte Inc., of South San Francisco, has inked a definitive agreement with Seattle-based Nanostring Technologies Inc. for the global rights to Nanostring’s Ncounter platform. The deal – for $50 million in cash and Veracyte stock, plus up to $10 million in potential milestone payments – will allow Veracyte to develop and commercialize diagnostic tests on Nanostring’s Ncounter Flex system.

In addition, Veracyte gains the rights to Nanostring’s FDA-cleared Prosigna breast cancer prognostic test and Ncounter Dx Lymphmark assay. The latter is currently available for investigational use only. Veracyte will also serve as distributor for Ncounter Flex for diagnostic uses. As part of the transaction, key players on Nanostring’s global sales, marketing, medical affairs and distribution teams will join Veracyte. Nanostring will retain exclusive rights to market Ncounter products for research and investigational use.

$40 billion global market

The strategic agreement positions Veracyte to expand its footprint in the global genomic testing market, estimated at more than $40 billion. The U.S. FDA-cleared Ncounter system offers a wide range of testing capabilities with its ability to simultaneously analyze RNA, DNA or protein targets in up to 800 genes.

“Nanostring has developed a versatile, world-class diagnostics platform, which we believe will enable us to realize our vision of becoming a leading global provider of advanced genomic testing,” said Bonnie Anderson, Veracyte’s chairman and CEO. “We are especially excited about the opportunity to bring our noninvasive nasal swab classifier to a global market, where it can help save more lives in the fight against lung cancer.”

For Nanostring, the deal provides financial support for other product areas. “This is a unique transaction that sharpens our business focus while significantly strengthening our balance sheet,” said CFO Thomas Bailey. “This transaction immediately improves our cost profile while sustaining investment in our key growth initiatives.”

Brad Gray, president and CEO of Nanostring, said the company plans to focus on commercializing its Geomx digital spatial profiler, among other business opportunities. The company is also developing technology to look for antibiotic resistance via a license with researchers at the Broad Institute of Harvard and MIT. The method, dubbed GoPhAST-R for “genotypic and phenotypic AST through RNA detection,” draws on knowledge that bacteria react much more quickly to antibiotics than is suggested by their growth rate, the readout of current antibiotic susceptibility testing methods.

Under the agreement, Veracyte will pay Nanostring $10 million in cash when it releases Veracyte tests for use on the Ncounter platform. The company said the deal should bring in modest revenue of $6 million to $8 million in 2020, with a neutral impact on cash flow.

Envisia to launch on Ncounter in 2021

First up on the Ncounter will be the Envisia genomic sequencing classifier (GSC), used to diagnose idiopathic pulmonary fibrosis, which Veracyte hopes to launch in 2021. The nasal swab classifier will follow in 2022, after its debut in Veracyte’s U.S. CLIA laboratory in early 2021. The company also plans to offer Prosigna testing at the lab on the Ncounter platform.

“In five to 10 years, we expect to offer a comprehensive menu of kit-based tests on a distributed instrument platform, with an exclusively licensed worldwide footprint across all major markets,” Anderson told analysts on a late Tuesday conference call. “This will enable us to drive test volume growth as we target a more than $40 billion global market for our current and pipeline products.”

She added that Prosigna and Lymphmark could bring new opportunities in companion diagnostic partnerships.

During the call, Veracyte CFO Keith Kennedy said the deal should accelerate long-term target test volume and revenue growth rates to 25% to 30%. “[W]e believe this transaction will afford us the opportunity to offer a broad set of diagnostic tests priced for local markets while maintaining 70% to 80% gross margins, which we feel is necessary to build the infrastructure to address these markets and to attain profitability.”

Right time for this deal

Asked why Veracyte was seeking rights to Ncounter now, given its long-time presence on the market, Anderson pointed to a growing test portfolio. “The thing that drives global market expansion is not what instruments are available. It’s who has the menu that can proliferate multiple tests that are serving unmet needs in big indications,” she said. “Not only are we coming forward with tests that have already been developed in thyroid, lung cancer and interstitial lung disease, probably the biggest fuel for taking action now is we want to be able to take advantage of the very large global opportunity we have with our nasal swab test, in early lung cancer detection.”

In clinical data released this fall, the nasal swab test demonstrated high sensitivity in low-risk patients with known lung nodules and high specificity in high-risk patients. The novel test uses “field of injury” science, which detects genomic damage linked to lung cancer in current and former smokers from cells collected in a sweep of the person’s nasal passages. Veracyte is developing the test on its RNA whole-transcriptase sequencing and machine learning platform, which leverages genomic and clinical data to answer specific questions.

For the third quarter of 2019, Veracyte reported $31 million in revenue, up 32% from $23.5 million in same period the prior year. Genomic testing volume jumped 24% year over year to 9,941 tests, buoyed by 112% and 72% volume increases in Percepta and Envisia GSC tests, respectively. Volume in the company’s Affirma test climbed 17% to 8,925.

Veracyte previously reported 2019 revenue guidance of between $119 million and $122 million. Kennedy said the Nanostring transaction is not expected to change that.

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