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Thank you for standing by, and welcome to the GeneDx Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Sabrina Dunbar, Chief of Staff. Please go ahead.

Thank you, operator, and thank you to everyone for joining us today. On the call, we have Katherine Stueland, President and Chief Executive Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the fourth quarter ended December 31, 2023, and shared guidance for the full year 2024. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today's call, including about our business plans, guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 20, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results. Please refer to our fourth quarter 2020 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measurements and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. And with that, I'll turn the call over to Katherine.

Thanks, Sabrina, and thank you all for joining us. 2023 was a pivotal year for us at GeneDx. We're on a stronger path forward and closer to our goal of reaching profitability in 2025. Last year, we centered our entire team on three goals: one, increasing utilization of our industry-leading exome and genome; two, improving our average reimbursement rate; and three, dramatically reducing our cash burn. The combination of these three organizational goals ultimately ensures that our teams were focused on what's clinically best for patients and what's best for the financial health of the company. And that focus paid off. Our teams worked with deep commitment in the fourth quarter and delivered $58 million of revenue, driven by more than 68% year-over-year growth in exome and genome test revenue, expanded our adjusted gross margins to 56% and ended the year ahead of our expected cash position, demonstrating a 51% year-over-year reduction in burn. We're proud of our team's performance, and we're prepared to rinse and repeat that same level of commercial and operational execution. As we look to 2024 and based on what we're seeing so far, you can continue to expect this level of focus on exome and genome revenue growth, gross margin expansion and disciplined cash management. The investments that we're making, whether it's in commercial, operations, medical affairs, our product and technology are directly tied to these goals. In the fourth quarter, we realigned our sales strategy to focus on account profitability. We have right-sized our sales territories and further refined our commercial tactics and tools with account profitability in mind, and we're seeing good progress. Our strategy continues to include efforts that drive exome conversion with current customers, but we're taking a more precise yet high impact approach with new customer acquisition, mainly targeting pediatric neurologists. We continue to see better traction and faster growth ramps with these new ordering providers compared to lower productivity accounts, including general pediatrics. We're also keeping our operations team focused on the biggest levers for our P&L. Reports out, billing operations and COGS reduction, among other efforts to ensure we maintain our turnaround time. Our product and tech team is working on our strategy to further scale our operations, improve our customer experience, open up access with the EMR integrations, automate our billing operations and drive greater efficiency in every aspect of the business. The total addressable market in pediatrics is large, and while we are the dominant provider of whole-exome sequencing today, we've only penetrated about 3% of the total addressable market of $3 billion in the US-only pediatric setting. It's a market that we're developing in pediatric neurology where clinical evidence and health economics strongly support the transition to exome analysis. We will also expand further into the general pediatric setting over the coming years as guidelines and payer policy continue to evolve to become more ready for commercial expansion and execution. On the other side of that is an entire $10 billion market in the US only for adult conditions that we'll be working to develop over the mid and long-term, and along the way, there's a growing data opportunity in rare disease drug development. We've steadily added biopharma partners and have 20 active programs, mainly with biotech companies who are relying on us to find patients with a specific variant for clinical trial purposes. We're expecting that business to continue to grow at a similar pace. We think there's great promise in the role that diagnostics can plan rare disease drug development. In fact, the New York Times recently highlighted a new gene therapy for children with hearing loss. They featured an 11-year-old boy who had no ability to hear until researchers at the Children's Hospital of Philadelphia gave him an experimental gene therapy from our partner, Akouos and Eli Lilly Company. The boy was able to hear sound for the first time ever and now the company is expanding its research to several other centers. And just a few weeks ago, FDA Commissioner, Dr. Robert Califf said the agency will need to get creative about regulatory pathways, given the tsunami of rare disease and gene therapies that the FDA is anticipating. Rare disease treatments are reliant upon rare disease diagnosis, and that's what we do best at GeneDx. We believe this market is developing and are well-positioned to be the genetic testing partner of choice for these companies. Looking forward to 2024 guidance, we expect a similar growth trajectory as demonstrated quarter-over-quarter in 2023 as we continue to focus the teams on driving exome and genome utilization and improving our reimbursement rate. With that in mind, we expect to deliver between $220 million to $230 million in revenue this year, and Kevin will provide some additional commentary. With a growing proportion of our test mix shifting to exome, we will continue to unlock greater gross margins, effectively converting more of the market to better volumes, and with the continued decrease in cash burn, we will end the year with strong operating leverage to put us on the precedence of profitability heading into 2025. And with that, I'll hand the call over to Kevin.

Thanks, Katherine. Fourth quarter 2023 revenues from continuing operations grew to $58.1 million compared to $45.9 million in 2022 and $50.4 million in the third quarter. That is an increase of 27% year-over-year and 15% sequentially, driven by exome. Our team resulted over 15,600 whole-exome and genome tests in the fourth quarter, which generated revenues of over $39 million this quarter from the exome portfolio. That's an increase of 68% year-over-year and 15% sequentially. Adjusted gross margin from continuing operations was 56% in the fourth quarter of 2023, up from 41% a year ago and up from 48% in the third quarter. The margin expansion during the quarter is driven by favorable mix shift towards exome and continued cost per test leverage. The fourth quarter did have certain non-recurring items, which positively impacted adjusted gross margin by approximately 400 basis points, so the underlying rate is 52% for the fourth quarter. On mix, exome and genome represented 27% of all tests resulted in the fourth quarter of 2023, up from 16% a year ago and up from 23% in the third quarter. The exome portfolio continues to operate north of 60% gross margin, which means the total gross margin will continue to benefit as exome picks up greater share of our overall test volume and replaces lower-margin products. On cost per test, the team is driving scalability and cost efficiency across both the wet and dry lab processes and while we are very pleased with where exome and genome costs are today, several initiatives are in our pipeline to further improve the cost base over time. Automation and AI across clinical interpretation and analysis offer large untapped long-term opportunities ahead. Now, let's move down to operating expense. Total adjusted operating expenses were $49.4 million for the fourth quarter of 2023. That is a reduction of 46% year-over-year. We once again delivered reduced costs as we further separate from the legacy Sema4 business. Our team has a relentless focus on improving operating leverage and efficiency throughout the business, and that will continue into 2024. And on the bottom-line, total company adjusted net loss for the fourth quarter of 2023 narrowed to $17.8 million, that is an improvement of 76% year-over-year and 16% sequentially from the third quarter. Our fourth quarter net cash burn, excluding any financing proceeds, was $32.9 million, which improved 51% year-over-year and improved 22% from the third quarter. The net cash burn this quarter included $5 million in scheduled payments under the 2022 legacy Sema4 payer settlement, $3 million to discharge operating payables for the exited reproductive health business, and $1 million in severance payments related to the previously announced cost reduction initiative. Excluding these items, representative cash burn from continuing operations was $23.9 million in the fourth quarter and we expect the net cash burn to continue to decrease as we couple high-margin growth with our cost reduction initiatives. Cash, cash equivalents, marketable securities, and restricted cash was $131.1 million as of December 31st, 2023. And as a reminder, in October 2023, we announced that we entered into a five-year senior secured credit facility with Perceptive Advisors. The agreement provides for up to $75 million in capacity, consisting of an initial tranche of $50 million, which was drawn in October 2023 and an optional second tranche of $25 million, which is available to us through December 2024, subject to certain criteria. And now turning to guidance for 2024. We expect to deliver revenues between $220 million and $230 million for the full year 2024. Historically, we see the first quarter as our seasonally weakest and the fourth quarter is our seasonally strongest in terms of both revenue and gross margin. We expect to continue to expand gross margin and land full year 2024 adjusted gross margins in excess of 50%. For comparison, full year 2023 was 45%. We anticipate using $75 million to $85 million of net cash for full year 2024. We've now delivered seven consecutive quarters of cash burn reduction since the acquisition of GeneDx and expect to drive quarterly sequential declines in cash burn throughout 2024. And finally, we once again reiterate our expectation to turn profitable in 2025. With that, I'll now turn it back to Katherine for any closing remarks.

Awesome. Thanks, Kevin. I'd like to acknowledge that on February 29th, it is Rare Disease Day, and it serves as a reminder of why we do what we do. Our overarching goal is to create a vibrant company that drives a new standard of care using genomics, ensures financial success and profitability, and creates meaningful shareholder value. Our team is fully committed to that. I'd like to thank our employees for their deep dedication and passion to serve the providers and patients who put their trust in us. And I'd like to thank our shareholders who continue to support us as we transform GDX for growth, for scale, and for profitability, all in service of an ever-growing population of patients and partners who benefit from our work. And with that, I'll turn the call over to the operator for Q&A.

Certainly. [Operator Instructions] Our first question comes from the line of Brandon Couillard from Jefferies. Your question please.

Thanks, Good afternoon. Katherine the exome volume mix shift certainly played out in the fourth quarter. Do you think that 27% of volume is a good baseline off of which to think about for 2024? How do you expect that to evolve as you move through the year? And where do you think that could be exiting 2024?

Yeah, so I'll kick it off and let Kevin comment as well. We do think that's a good baseline. I think looking back to where we were a year ago, we are really, really focused on continuing that exome conversion. And I think in the fourth quarter, we really started to see even stronger Salesforce performance on that. And so we're building off of that momentum moving forward and really continuing to drive continued conversion. Again, it's part of the reason why we're focusing our efforts with pediatric neurologists. That segment, from a customer perspective, is just primed to be able to convert faster. So, we feel confident we'll continue to expand that throughout the course of the year.

Sorry, go ahead, Kevin.

No, go ahead. I was saying I have nothing to add to that, so fire away.

Okay. Kevin, you talked about realigning the Salesforce in the fourth quarter to target more profitable accounts. Can you just unpack how you go about that, how you have Intel in terms of profitability by account, and should we expect any other Salesforce tweaking? Do you expect to add headcount capacity in 2024 outlook for the commercial organization?

Yes. What were your outlook for the commercial organization? Yeah, so what we did was we took a look at where there is volume, and we took a look at where there is favorable payer policy and where there's unfavorable payer policy. So those were the main factors that we took a look at in terms of being able to really better define account profitability. And as we put that lens on it, it was super clear that there were just some territories that they're not going to be productive or profitable in the near-term and therefore not worthy of a dedicated sales rep. So we actually scaled back some of the territories. Of course, where there may be an account that's an outlier in some of these lower profitability segments, we have a rep who's able to extend and be able to ensure that we're maximizing that. But we're happy with where we landed in terms of $3.5 million of revenue per rep for 2023. That was an improvement over the prior year. And with the new territory cuts, we feel really confident that we're going to be able to grow at that same rate that we saw last year with the team that we have. We also are really taking a look at the inpatient setting to ensure that we can continue to drive utilization. It's a really small segment of revenue today, but it's really healthy revenue for us and then it's institutional like. So, we're not having the noise that you see from commercial payers. And that's mainly with rapid full genome sequencing. So we've got a small and targeted team to really drive enterprise sales in patient setting. So I don't expect that we're going to have any major sales force expansion this year. but where we can be opportunistic as we start to see additional progress with the team, we may add in that enterprise team that we'll see. It's a longer sales cycle.

That's helpful. Last one for Kevin. Could you unpack the 400 basis point gross margin benefit in the fourth quarter, what that was attributable to? And then, how much of the cash burn, I think you said $75 million to $85 million for the year. What's incorporated in that for legacy restructuring, some of outlays, what have you?

Yes. So the fourth quarter, the benefits included the reversal of certain bonus and other incentive accruals that we had built up throughout the year and determined would not be payable. Some of those ran through COGS. And we received some favorable reimbursement on our stop-loss insurance. Frankly, earlier in the year, we had some very high extraordinary claims that went through expense related to COGS, and we saw some relief in the fourth quarter that came through. So when you adjust out those benefits, I think it's fair to say the operating run rate was about 52% in the fourth quarter, which, frankly, we're very pleased with. And then on the full year guide for cash burn, as a reminder, December of 2024, we will have a scheduled payment the next scheduled payment on the 2022 settlements between Sema4 and one of its payers. So that number is burned by that next scheduled payment and then anywhere from $2 million to $5 million of other payments to put the entirety of legacy Sema4 to bed. If you look at the Q4 cash burn, excluding the settlement payment that we made in December of '24 and severance and some old payables as Sema4, Q4 was $23.9 million. I think that's more representative of what's our run rate today. And we have every confidence that as the business grows and in particular, with high-margin exome business. We'll continue to expand gross profit. And we continue to drive down operating expense. So you should expect us to see a reduction in cash burn sort of with each sequential quarter in 2024.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Matt Sykes from Goldman Sachs. Your question, please.

Hey, guys. This is Prashant on for Matt. Just with the key competitor in rare disease off the market, do you anticipate being able to capture some of the market share? And if so, what's your strategy to try and capture some of those share gains?

Yes. It's a fantastic question. We absolutely feel confident in our ability to be able to step in and provide our services to – to that market. I think in particular, a lot of the focus that we saw with some of the rare disease testing was exactly in the market that we're aiming to drive greater utilization of exome in, which is the pediatric neurology setting. And so we're grateful for the efforts of others, who have really gotten pediatric neurologists to start ordering genetic testing. Historically, they hadn't. So we now have customers who understand how to order testing, which patients should utilize it. And we have a growing body of evidence, including data that we presented at the American Epilepsy Society last fall, that shows that exome is going to drive a higher diagnostic yield than panels. So these are customers who we have been converting already. We have a proven ability to convert them from panels to exome, and we'll continue to drive, I think, our market brand to those clinicians and be able to convert the business throughout the course of the year. All of that really would be upside in terms of our outlook for 2024.

Got it. Thank you. That's helpful. And then what is the current split between NovaSeq 6000 and Xs that you have? And how large of an impact will that transition have on COGS and how long will it take to start realizing cost savings, given the upfront cost of replacing machines?

Yes, the Xs represent -- the new machine, the X represents about 20% of our fleet. It will take us through the end of the year based on our scheduled deliveries to replace the entirety of that fleet. We've got two machines live with the second only going live in November. And so there's not yet a full quarter effect on the benefit to COGS for that second machine. We're seeing good experience. And I'd say, more importantly, the larger flow cell that has come out, we launched subsequent to the end of the year. So in February, that went live. And so really won't start to make an impact on COGS until the second quarter, at least from a full quarter perspective. So we've got two machines live and intend to replace the remaining or the fleet over the next year or so. The benefits, I'd say, more importantly, will start to be seen once we are producing at scale with all of those machines and with that larger flow sale in place, which, again, just went live for us in February here. So, still to come.

Got it. And then just a last quick question on what's the process of retiring a panel? Could you just elucidate that? And how long does it take?

Certainly. I mean, first, what we've done is establish a set of criteria for determining whether or not we should be keeping a panel. And it starts with what's best for patients. And then there's a number of factors that we take a look at to really assess whether or not the gross margins are there. It's the type of panel where it's actually primed for conversion to exome, and we should just be driving exome first versus clinic and who may be used to ordering via a panel. And so we established this rubric. We identified about 350 tests that we determined we could retire. We did retire them earlier this month. And that will be a process that we continue to utilize as we drive more and more utilization of exome and genome it represented, I would say, a small portion of utilization. So, it really was maintenance for us to be able to keep those up and running. So, once we've made that determination, it usually takes several months just to be able to put the product and tech teams in place to ensure that we're communicating with customers, ensure that we have a good strategy for ensuring that there isn't a discontinuation of care and that we can kind of have a warm transfer to whatever that new test is, if it's a new panel or if it's an exome or genome. It's something we intend to continue to drive and feel like we're developing kind of a strength with that being a muscle organizationally.

Thank you. And our next question comes from the line of Dan Brennan from Cowen. Your question please.

Great. Thanks for the questions. Congrats on the quarter. Maybe first one would be, I think, maybe Brandon, I think asked on the first question. You exited the year in the fourth quarter, I think 27% mix as you kind of commented on exome/genome. So, I believe you said that is a reasonable point for all of 2024. I'm just wondering why that wouldn't continue to move higher?

We'll continue -- it's a good starting point, Dan, and thank you for the clarifying question. We think it's a good starting point. We intend to continue to increase that mix percentage throughout the course of the year.

Yes. Yes, Dan, to be clear, we think it's the right exit point. But absolutely, with each sequential quarter, we should expect to pick up some mix there towards exome and genome for the each passing quarter throughout the year.

Is there like a level, I mean, we can play with the math? Is there a level that it's an exit year at 30%, 35%? Or is it up to us to kind of back into that?

Yeah. I think the way we've always viewed it as in order to reach profitability, we've said that that rate needs to get closer to 40% of all tests being exome and genome, and we're anticipating that point of breakeven early 2025. And so I think something in the mid-30s by the end of this year to exit the fourth quarter is likely the right landing spot, and we'll evolve towards that with each passing quarter of 2024.

Great. Thanks for that. That's helpful. And then I think the guide, right, is for greater than 50% or plus gross margin, so the 4Q underlying was 52%. Is there a reason if mix is going up, is there a reason why the fourth quarter, 52% shouldn't be like the floor for 2024? Or is there something else going on with the mix shift that could drag gross margins down?

No. Look, overall, the comparison is 45% for full year 2023. I think we just want to see a little bit more data come through before we rely on Q4. Historically, Q4 seasonally has been our strongest, both in terms of revenue reimbursement and therefore, gross margin. And so we want to see a little more data come through before we call Q4 and ongoing trends. Certainly, we're optimistic that there is more room to improve average reimbursement rates and further conviction that we can continue to drive down COGS. And with each percentage point we pick up in overall test mix, it should benefit because the exome portfolio continues to operate mid-60% gross margin, but we just want to see a little bit more data come through before we call Q4 the new normal, if you will. But extremely confident we'll end the balance of the full year at 50% or higher.

Got it. And then maybe the final one, just biomarker bills, like, is there -- just how could those impact you to the extent these 15 states, you begin to see payment rates and there's another, I think, fix states behind it. Just is it -- are you already getting paid pretty universally. Just any color on the level of test today in those 15 states to the extent you were to see commercial coverage go up to 100%? What kind of impact could that have? Thank you.

Yeah, there's no doubt, Dan, that any improvement in underlying policy coverage is a net positive for us to the extent payers or state systems pick up exome and genome coverage. That should be a net positive to us, we expect it to be a net positive to us. At the same time, we want to make sure we're not getting ahead of ourselves. So it's a long way between enacting a biomarker bill or putting in place a positive coverage decision and getting paid. And so we want to make sure we have the operational experience and more so can see it translate into actual cash collections before we start to rely on improved reimbursement. But recent momentum with respect to policy and in particular, these biomarker bills it's a great thing for patients. We believe ultimately and should be great for our business. Our expectations are built into the guide, and we'll learn more for the year once there's more clarity on how some of these will be enacted in practice.

Got it. Terrific. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Mark Massaro from BTIG. Your question, please.

Okay. Hey, guys. This is Vidyun for Mark. Thanks for taking the question. So I think you've walked through in some detail what you're expecting for 2024 in terms of exome conversion. Aside from that, it sounds like you might be expecting a somewhat back half way the year. I think you've also highlighted picking up that competitor business' upside, just. Maybe just walk us through any other puts and takes to discuss for the 2024 guidance? Thanks.

Yes, I'll start. I'd say, Vidyun, the low end of the guide represents about 13% year-over-year growth. That's consistent with what we just delivered. And we want to acknowledge that exome and genomes are still relatively new technologies for some physicians. We're expanding markets, that takes time, and we've learned some lessons from 2023, and we don't want to get over our skis with respect to the expectation on the rate of change to exome beyond what we can clearly see in our data. And I'll just remind you that offsetting exome growth is roughly 30%, or $60 million of full year revenue today comes from non-exome tests. And so as these non-exome tests, which, as you know, were relatively low gross margin, non-core to our strategy, they will be running off in some fashion. And so we expect to see some declines in volumes and revenue from non-exome tests, offsetting volume growth. And so try to ensure that we acknowledge that in the guide that we provided.

Yes. And just to add a little bit of color. I think our original guide from 2023 was heavily back half of the year weighted. And what we are anticipating this year is kind of the steady growth. We really want modeling similar to what we saw in terms of actuals in 2023. As Kevin said earlier, I think seasonally, our strongest quarters are usually Q2 and Q4. But it's, I would say, continued steady growth throughout the course of the year.

Okay. Perfect. Thanks so much. And then just a quick follow-up. Kevin, maybe you can dig into EMR integration a little bit, just how you're thinking about potential upsides in that opportunity. It also sounds like you guys have consolidated the menu a little bit. Just how should we be thinking about that?

Yes. So starting with EMR, I would say, it's something that we do routinely, and we will continue to focus on that to open up access. So I put that in as kind of table stakes in terms of how we operate, how we make it easier to work with us, how we continue to smooth out the customer experience. So that is something that we'll continue to invest in because it honestly pays for itself. And in terms of test retirement, we're really pleased, as I mentioned earlier, that we were able to retire the 350 or so tests. And we feel like we have a healthy test menu and a very focused sales team and operations team that's going to continue to drive the conversion to exome and genome. And as we keep making progress with that, we'll continue to, I think, have a healthy approach to reviewing that test menu to retiring tests over time. We want to make sure that we can continue on the steady growth rate, we feel like we're in a position of strength in terms of the overall commercial strategy. And how that links up to our operations team, there's a really beautiful handoff that we're seeing between those two teams that keeps everyone really focused on near-term execution. So we feel like we're in a great place in terms of getting volume in the door, get it reports out and continuing to get good volume, continue to focus on that account profitability and drive us forward towards profitability in 2025.

Excellent. Thanks for taking the questions.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Katherine Stueland for any further remarks.

Awesome. Thank you so much, Jonathan, and thank you to everyone for joining us. We're excited about 2024, and we'll be at upcoming conferences in the coming weeks and look forward to seeing you all then. Thanks so much.