WGS - NASDAQ

Ladies and gentlemen, thank you for standing by, and welcome to the GeneDx First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to introduce Commercial Chief of Staff, Sabrina Dunbar.

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 first quarter ended March 31, 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, April 29, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from the reported results. Please refer to our first quarter 2024 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measures 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. We're excited to share the strong results from the first quarter. With the continued execution from our team, we're raising our guidance for the year, bolstered by our view that we can sustainably deliver profitable growth in service of a critically important unmet need for diagnosing rare disease to an ever-growing group of patients and their families. We have transformed GeneDx over the past few years, but it's also fair to say that our entire industry has changed tremendously in that time. The companies that are thriving are those that are focused on their distinct strength and in our case, it's our industry-leading exome and genome. Our team is working with exceptional focus, purpose and care to put an end to the diagnostic odyssey by delivering the most comprehensive answers to clinicians and their patients. We're proud to say that we've hit yet another milestone. We've interpreted more than 600,000 clinical exomes since 2012. To give you a sense of how we've accelerated the growth, we interpreted half of those in the past 3 years and 100,000 since the fall. These exomes contribute to our proprietary data assets, which enables more definitive diagnoses for more patients. That data asset is key to our competitive advantage and is only getting stronger with our growth. We organized our entire team around 3 goals in the middle of last year: one driving exome utilization; two, improving our average reimbursement rates; and three, reducing cash burn. This focus is paying off. In the first quarter, we delivered more than $61 million in revenues, 61% in gross margins and an eighth consecutive quarter of cash burn reduction. As a result, we're raising our annual revenue guidance to $235 million to $245 million. We'll continue to expand our gross margins out of Q1, and we're reducing our cash burn guidance, which Kevin will walk through. There's a lot that went well in Q1. Our commercial and medical affairs teams are driving exome and genome as the standard of care in the pediatric setting. This increased utilization positively impacted our product mix, which came in at about 30% exome and genome with this representing over 70% of our total revenue. Over time, we expect to drive substantially all of our volumes and revenues to exome and genome through our product mix this quarter is a sign of early success on this path to a 2 test future. We continue to drive market leadership with 80% of all clinical exomes being run at GeneDx. The providers that we're targeting fall into 2 categories: geneticists and pediatric specialists, including pediatric neurologists and pediatric developmental specialists. We're focusing on deeper penetration in existing accounts as well as new customers. Improving reimbursement was also a bright spot to the team in the first quarter. We saw faster than planned improvements in our average reimbursement rates, which also positively contributed to the strength of the quarter. We still believe there's room to improve that over time. We're operating with a strong bias towards cash management efficiency and scalability, and we've seen market improvements as we integrate new tools and technologies, streamline processes, introduce machine learning features and drive down COGS and our lab. Our team also retired more than 400 tests to simplify our menu in line with our strategy. We continue to say that our flagship exome and genome products have the rare attributes of being both what is best for patient care and best for our business. Today, 1 in 10 Americans have a rare disease with 50% of the being children. We know that the expanded utilization of testing reveals that far more people are impacted by genetic diseases, and we are committed to serving this growing patient population in the future. Our sites are set on diagnosing all hereditary disease in as many families as possible. So over time, we'll introduce GeneDx to broader pace of population through informed health decisions through every stage of life. But for now, our team is focused on helping and the diagnostic honesty for as many children and families as quickly as we can and that purpose motivates our team each and every day. And with that, I'll hand the call over to Kevin.

Thanks, Katherine. First quarter 2024 revenues from continuing operations grew to $61.5 million compared to $40.7 million in the first quarter of 2023 and $58.1 million in the fourth quarter of 2023. That is an increase of 51% year-over-year and 6% sequentially. Our team resulted over 16,500 whole exome and genome tests in the first quarter, which generated revenues of $44 million in the first quarter from the exome and genome portfolio. That's an increase of 96% year-over-year and 12% sequentially. Both volume and collection performance contributed to the growth. Adjusted gross margin from continuing operations was 61% in the first quarter of 2024, up from 34% a year ago and up from 56% in the fourth quarter of 2023. The margin expansion during the quarter is driven by all 3 of continued favorable mix shift towards exome, improved exome average reimbursement rates and continued cost per test leverage. On mix, exome and genome surpassed a key milestone representing 30% of all tests resulted this quarter. That's up from 17% a year ago and up from 27% in the fourth quarter of 2023. We continue to believe that over time, nearly all heritable disease diagnosis will be run on an exome or genome backbone and that our total gross margin will continue to benefit as these high-value prop tests pick up greater share of our overall test volume and replace lower margin products. On average reimbursement rate, we've amplified resources in line with the 3 focus areas Katherine outlined. One such imperative was improving exome reimbursement rate through denial reduction. In the first quarter of 2024, our average reimbursement for the exome and genome portfolio after all denials was approximately $2,600, which compares to approximately $2,500 in the fourth quarter of 2023. We are encouraged with the uptick here, but the reality is that nearly half of all exome claims are still being denied. A large portion of all denials are administrative in nature for claims not meeting a variety of nonmedical requirements designed by payers. And we're working hard to ensure upfront order, document collection and claims submission processes evolve to enable insurance-specific workflows to improve our probability of success. Another large portion of our denials might abate over time as Medicaid policy continues its momentum towards broad coverage for exome and genome. And already in 2024, 2 states have expanded coverage for rapid whole genome in the NICU and in the outpatient setting, New York State added exome coverage to their medical plan effective April 1, 2024. That brings us to 28 states covering exome in the outpatient setting and 11 covering rapid whole genome inpatient. We applaud those states for taking this important step, but there is still a long way to go towards ensuring nationwide equitable access for all patients who need it. On cost per test, the team has done a great job. Lower input costs and wet lab process improvements are the headliners this quarter, but we continue to believe that automation across clinical interpretation and analysis offers mostly untapped long-term potential to drive scalability and cost efficiency. Now moving down to operating expense. Total adjusted operating expense was $45.4 million for the first quarter of 2024. That is a reduction of 26% year-over-year and 6% sequentially. Having again delivered reduced costs, we're approaching what I consider to be a normalized OpEx base for the business. Our team has built the muscle memory for efficiency, and we will not stop looking for ways to improve operating leverage throughout the business. On the bottom line, total company adjusted net loss for the first quarter of 2024 narrowed to $8.5 million. That's an improvement of 83% year-over-year and 52% sequentially. Our first quarter cash burn was $17.2 million, which improved 71% year-over-year and 48% sequentially. I'd call out that net cash burn this quarter included approximately $6 million to fund the company's annual 401(k) employer match, approximately $2.9 million in what can be considered onetime payments related to previously reserved legacy Sema4 refund requests and $800,000 in severance payments related to our previously announced cost reduction initiative. We've now delivered 8 consecutive quarters of cash burn reduction and expect to drive sequential declines in cash burn each quarter of 2024. Cash, cash equivalents, marketable securities and restricted cash was $113.9 million as of March 31, 2024. And as a reminder, in October 2023, we announced that we entered into a 5-year senior secured credit facility with Perceptive Advisors. The agreement provided 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 through December 2024. Now turning to guidance. As Katherine said, we are raising previously issued revenue guidance and now expect to deliver revenues between $235 million and $245 million for full year 2024. We're raising previously issued adjusted gross margin guidance and now expect to land the full year adjusted gross margin at 60% or higher. We are improving the low end of our net cash burn guide and now anticipate using $70 million to $80 million of net cash for the full year of 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.

Wonderful. Thanks, Kevin. The shift from single-gene testing to multi-gene testing began more than a decade ago. And now we're successfully shifting the rare disease market from multi-gene panels to exome and genome. This takes time and the dedication of a team that wants to win for the growing member of patients and families who rely on us, and it's all made possible by the shareholders who support our growth. I'd like to thank our team and our investors for the opportunity to prove that we can set a new standard of clinical care while running a really good business. We know that the path to profitability is one that not many companies in our space have achieved, and we are fully committed to making that happen to ensure we can help more and more families and return value to our shareholders along the way. We'll now open the call up for questions.

[Operator Instructions] And our first question comes from the line of Dan Brennan with TD Cowen.

Obviously, congrats on another good quarter. Maybe before a few questions on the quarter and the guide. Obviously, we had the FDA issued the LDT guidance today, and I'm just wondering any comments from management about what you thought of it, what stood out, how it might impact the company?

Certainly. We were happy to see the 500-plus page document come out earlier today after a lot of speculation. Net-net, we think that this is a good opportunity. We have been planning for this new era of FDA regulation. In fact, we've hired a Head of Regulatory, who is joining the team. So I think we are well prepared to ensure that we can comply with FDA and having been operating in the lab for 20-plus years and having complied with CLIA,CAP New York State. We have a really, really strong system and very good, I would say, regulatory and quality systems already in place. So we're looking forward to moving into this new era.

Got it. And then maybe -- sorry, Katherine, maybe just one quick follow-up to that and then maybe just one quick one on the business. But from like a competitive standpoint, the fact that existing LDT gets -- LDTs get grandfathered in. So a, had you guys earmarked some costs associated maybe with running PMAs or anything of that sort that maybe now you might not have to do? And then, b, would you expect it could raise the hurdle because you're on the market? And for other players that want to come in, does it at all make it harder for future plays to compete?

Yes. We think that this is an important opportunity for us. As we said today, we've run more clinical exomes than anyone. We've got such a robust what we believe is the largest rare disease data asset running exome and genome. So we think that it's a really important opportunity for us to be able to set the standard as we move into compliance with FDA. And we think that there should be a high bar as it pertains to others being able to enter the market. But we're still going through the 500-plus pages and working with our consultants and our regulatory and clinical teams to best determine exactly how we're going to move forward, but we've baked in costs associated with it. So we're feeling good about the opportunity ahead.

Got it. And then I'll just ask one on the business. Obviously, there will be many of them to follow. But you reiterated guide for profitability by '25, although you did raise the gross margin guide pretty materially this year. You lowered the burn this year. So is the profitability guide the fact that it stays like -- something must have changed in that profitability guide. Is it for a quarter in '25? Is it full year? Just any more color about the impact in '25 versus the benefits you're seeing come in better than expected in '24?

Yes, Dan, look, we're super pleased with Q1's performance. I think that's representative in the improved outlook that we provided for the remainder of the year. We said all along that the full year 2025, we expect to be profitable, and there will be a quarter in there in which we make that turn. We haven't specifically called out the timing there. Overall, I think we're standing behind our overall commitment that the full year on balance will be profitable and that there'll be a quarter within that year where we make that sustainable turn.

Congrats.

[Operator Instructions] Our next question comes from the line of Mark Massaro with BTIG.

Congratulations on another good quarter. This looks like it's the fourth consecutive quarter of sequential revenue growth. And I know you didn't provide guidance for Q2. But with this rising mix shift to exome and genome and your sales force aligned to sell those, which come in at a higher price. Is it reasonable for us to extrapolate that you could have sequential revenue growth perhaps throughout this year?

Yes, I think that's fair, Mark. I continue to call out that the fourth quarter is typically our seasonally strongest quarter, and I see no reason for that to change this year. So in line with that, I do want to call out that we expect and have delivered consistent robust revenue growth in exome would expect that to continue. But at the same time, the non-exome portion of our portfolio, we don't want to surprise anybody if we see volumes and revenues decline in those testing lines. That would be in line with our strategy to overall replace those testing lines with exome and genome.

Okay. And maybe just a clarification question. I think I heard you talk about a $2,600 exome genome panel ASP, up from $2,500 in the last quarter. Did you provide a metric on the patient -- on the denial rate? I assume you probably had some improvement in denials or collections in the quarter? And then can you speak to any lift from new payers like whether it's Medicaid or some commercial payer coming on?

Yes. All of the improvements in that average reimbursement rate would come vis-a-vis a reduction in denials. There's been no changes to underlying contracted pricing. And so reduction in denials with the denial rate just north of 50% in the first quarter.

Okay. Got it. And then related to that, I mean, what do you think long-term run rate could be for exome genome ASPs? I know if you're at around the $2,600 level today, I think you're getting paid more than 2x that from other health plans. So I guess, where do you see perhaps a normalized run rate, even if it's 2 to 3 years from now?

Yes. Look, I think over time, you might expect a reduction in the denial rate, potentially some reduced contracting rates such that the $2,600 we experienced in the first quarter, I consider to be a new floor for us to work off of over the next several quarters and couple of years.

Okay. Got it. And maybe last one for me. You guys exceeded my revenue projections by well over $11 million. So I must not be a good modeler or you guys are just executing well. I guess can you speak to, if you had any success converting accounts from Invitae in the quarter? And then related to that, I know that LabCorp put in a bid and won the assets to acquire Invitae. Can you just speak to what your expectations are from any potential of perhaps converting some of those Invitae accounts later this year?

Perfect. Yes. So the rare disease business at Invitae is in part centered on one of our core targets in terms of providers that we're focused on. And that's the pediatric neurology market. So we have been targeting them. And as we've talked about, as we pulled back from general pediatricians to really double down in that space. That's where we're seeing really good success, both with new customers who haven't been ordering genetic testing where we convert them rapidly to utilizing our exome out of the gate. And then we have seen success in pediatric neurologists who have been ordering panels, including panels from Invitae and getting them to start ordering our exome. So we have seen success there and expect that we'll continue to convert that entire market in that segment from panels to exomes. I think LabCorp has obviously made an important acquisition and that hereditary cancer business that Invitae builds is certainly kind of the shining star there. The rare disease panels business, we think, over time, will become obsolete and we'll be converting all of that to exome and genome. But that's a core part of our strategy as we think about expanding utilization of that the most comprehensive test that's providing rapid turnaround time as quickly as panels, and most patients not having an out-of-pocket. So we'll continue to turn the crank on that from a commercial and medical affairs perspective.

Okay. Sounds good. Congrats on the quarter.

Our next question comes from the line of Matt Sykes with Goldman Sachs.

Congrats on the quarter. Maybe, Katherine, just kind of a high-level question. But you had mentioned in the press release the data, and I know you had released earlier that you presented at the American College of Medical Genetics comparing exome versus CMA. I know converting people from CMAs to exome is part of the challenge here, education awareness. That data set, in particular, how much do you think that will help in that education awareness? And do you need to continue to provide data similar to that to convince people to start with exome first? And how much more education awareness do you feel like you need to do?

Yes. It's really important data for us. When we think about kind of refocusing in the future on the general pediatric segment. So what we started to see last year when we did enter the general pede segment was their tendency to utilize CMA. And therefore, the data that we've been able to generate is super helpful in terms of being able to not only go to payers, but ensure that we can continue to educate clinicians who are ordering CMA. We have seen, since we have refocused our commercial strategy away from the general pediatricians and to the pede neuros, as you would expect, our CMA volume has shifted. So we think this is really important for the longer-term strategy of being able to educate that broader pediatric -- pediatrician segments. But over the next several years, we're really going to be doubling down on pediatric neurologists, pediatric developmental specialists. And in those settings, there's less utilization of CMA. So we think the data that we've generated is really, really good for the longer-term strategy.

Got it. Very helpful. And then just on the exome genome test mix, it looks like you guys have kind of averaged around 300 basis points per quarter in terms of improving that mix towards exome genomes. Is that a number that we should -- could kind of extrapolate for the balance of this year with maybe a higher step up in Q4 because of seasonality. Just given the importance of margins, just trying to figure out the cadence of this test mix, how regular it is, how predictable it is and how you look at driving that mix shift higher in terms of increases on a quarterly basis?

Yes. I think certainly, sequential increases is absolutely fair. So anywhere in that range of 1% to 3%. I think we've said all along that all else equal, a test mix of roughly 40% would get us profitable at sort of consistent gross margin profiles in our OpEx profile. And if you think about a turn to profitability in 2025, sort of a steady march up towards that point is what we'd expect.

Got it. And then just for my final question, just on reimbursement. Maybe just remind me, and apologies if you've said this before, but just sort of the percentage of patients that you face that are Medicaid eligible, just given the traction you've had in some of the states that have passed that. Just want to get a sense for the context of the Medicaid population. And then secondarily, Kevin, you mentioned half of exome claims are still being denied, and I know you addressed some of the denials on an earlier question. I was just wondering that in terms of like moving that denial rate down, is that like a body problem in terms of just hiring more people to do that largely administrative work? Or do you feel like you can move the needle on denials with the current staff and OpEx spend that you have today?

Yes. On the first, roughly 15% to 20% of the business volume-wise is institutional. And so the remainder then of the exome and genome business is split between commercial insurance and Medicaid. And there's roughly a 50-50 split in that insurance channel between commercial and Medicaid. With -- as we've called out, 28 states covering outpatients in 11 on the rapid whole genome product in patients. And so a disproportionately higher denial rate today in the Medicaid populations for wherever volume is sourced from those states without coverage. And then on addressing front-end processes, no, not necessarily a body problem or something that we can solve just by throwing more bodies at it, more so ensuring that upfront workflows from the ordering system through the time of claim submission are specific and unique to individual patient insurance products rather than a one-size-fits-all process, what we see is vast disparity in the medical necessity requirements as well as administrative requirements to ensure that exome and genome claims ultimately get paid. And so some work to do to make sure that processes are accustomed to those unique workflows is what has to happen. That's more technology-based and process-based than just adding people if that makes sense.

Our next question comes from the line of Matt Stanton with Jefferies.

A lot has been covered in terms of the guidance increase, both on the revenue and margin side and reiterating the targets or 25%. But Kevin, I would just love to get your kind of high-level thoughts just visibility you have in the business today and just maybe how much that's improved over the last few quarters here.

Yes. I -- look, we've invested a lot into the team. And in 2023, learned a lot of lessons with respect to commercial execution. I think the team is well poised to now understand what call points work for us. And we have the right size and skill set across the commercial organization. So I think it provides some of the confidence that allowed us to raise our guidance this earlier in the year. And we think it's a substantial raise in guidance and look forward to using some of those lessons learned over the past year or 2 as we've developed the strategy to start to expand the utilization of exome and genome the team has what it needs to execute on our plan. And so looking forward to seeing the results as the year progresses.

And then maybe one quick one, just an update on the sales force realignment you did in last quarter to target more profitable accounts. And then any color around the enterprise sales team. I know it's a bit longer cycle, but just any update around some of those changes you've made more recently?

Sure. Yes. You've got the sales force scope absolutely right. We've got 54 sales reps and about 9 medical [indiscernible] to our focus on the outpatient opportunity, which is predominantly with our exome. And we put that into place in the fourth quarter in anticipation of 2024. We're really happy with the performance of the team. We feel like we've got the right incentive comp program in place. And I think this based on what we're seeing year-to-date by way of volume in the door, percentage of mix, we're feeling really good that the team is executing that they're focused on the right accounts that they are importantly motivated by their incentive comp plan. So I feel great about the team and continuing to drive forward with 2024. So good momentum with the sales force. And you're absolutely right on the enterprise side of things. We have a small team that is going in and doing enterprise-wide sales for that NICU opportunity. NICU is, I think, an important market for us, but it's a different type of sales approach. We think that it's a really good way to be able to try a different sort of consultative sale with the C-suite and really be able to get some of the health economics data in front of these hospital systems. There are a fixed number of beds in the NICU setting. So we think it's a way to be able to introduce genomics at more of a system-wide level. And to your point about it's a longer selling cycle, that's exactly why. But we would hope to see in 2025, some -- a greater percentage of volume and revenue coming in from that NICU segment. But this year, we're anticipating it will [indiscernible] from last year.

Thank you. I will now turn the call back over to CEO, Katherine Stueland, for any further remarks.

Thank you so much. We appreciate all of the great questions and engagement. We'll continue to provide updates on our progress, and we look forward to seeing you at upcoming investor conferences. So thanks so much. Have a good night.