WGS - NASDAQ

Good day, and thank you for standing by. Welcome to the GeneDx First Quarter 2025 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]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Sabrina Dunbar, Investor Relations. Please go ahead.

Thank you, operator, and thank you 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, 2025. Before we begin, please take note of the cautionary statement. We may make forward-looking statements on today's call, including about our business plans, updated 2025 guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, April 30th, and we're 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 first quarter 2025 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 will turn the call over to Katherine.

Thank you, Sabrina, and good morning, everyone. Our team's work surpassed our expectations and delivered a strong first quarter with revenues exceeding $87 million and our third consecutive quarter of profitability. We're raising guidance for the year to $360 million to $375 million successfully building on last year's momentum and strengthening our industry leading position centered on diagnosing any genetic disease as early as possible with whole exome and genome sequencing. Our healthcare system today is broken. We're waiting for children to get sick and letting their disease continue to progress for far too long, severely limiting their chances of living longer and healthier lives. It still takes on average five years for a child with a genetic disease to get an accurate diagnosis. That's unconscionable given what we can do today. Our tests are not just diagnostic tools. They're proactive solutions that can transform how we approach genetic diseases. For patients, that means less time and diagnostic purgatory and more time on the right path to care. For the healthcare system, it means fewer unnecessary procedures, reduced misdiagnoses, and a significant decrease in cost. We believe that integrating exome and genome testing more proactively as the standard of care isn't just better medicine, it's smarter policy, particularly at a time when valuable healthcare dollars is a national priority. Our technology enables the shift from reactive to proactive care, benefiting both individual patients and the health care system as a whole. In the outpatient setting, we've expanded into new clinical indications. And in the NICU, we've laid the foundational infrastructure to translate our leadership into that critically important setting where fewer than 5% of babies even get a genetic test. But our sites are set on helping adults too. Our growth strategy ties directly to guidelines, reimbursement, and biopharma solutions, so you'll always hear us talk about volume growth and average reimbursement rate hand in hand. Not all exome and genome tests are created equal, and there's a reason eight out of 10 clinicians who order exome testing choose GeneDx. Fueled by more than 800,000 exomes and genomes, our rapidly growing data asset and clinical expertise set GeneDx apart. We continue to deploy innovative technologies at scale to enhance our products and create the best-in-class patient and clinician experience at GeneDx. Our winning growth strategy continued to support our commercial success in the outpatient setting where we grew our market penetration of pediatric neurologists to 14%. Our business remains best positioned to capture the opportunities ahead and we're seizing our advantage to accelerate market development. In the inpatient setting, we continue to build upon the foundational infrastructure we began putting in place in Q4 2024. We recently launched our ultra rapid genome sequencing product, which delivers results in as soon as 48 hours. Our integration with Epic continues to progress, enhancing our ability to provide rapid and accurate diagnoses at the bedside. Our collaboration with the University of Washington and Seattle Children's called Seek First published data in the first quarter that demonstrates up to 60% of babies in level IV NICU should receive a rapid genome test. Clinical research, collaboration, and product innovation prime commercial markets, and we anticipate that the combination of these factors will support a NICU volume ramp in the second half of the year. We're setting the standard for genomic interpretation and analysis, while ushering in the next phase of genomic medicine. By generating critical early evidence through the GUARDIAN study, GeneDx is championing one of the largest long-term opportunities in diagnostics, genomic newborn screening. Our leadership in both the science and the implementation of this technology across multiple sites is proving that not only is it feasible, but it's also scalable. And we're sharing this knowledge with flagship programs across the country as strategic advisors. Our approach to newborn screening enables standardized interpretation, a key to ensuring consistency in both access and quality across geographies. Our first mover advantage is real and we're already seeing the impact through growing interest among policymakers, momentum building across states and clear signs that genomic newborn screening is becoming a reality. With the continued momentum and growth in our core exome and genome testing business, we announced our plans to acquire Fabric Genomic, a pioneer in AI-powered genomic interpretation. With the addition of Fabric Genomics, we will open a supplemental channel to extend the clinical excellence of GeneDx's data, analysis and interpretation by delivering decentralized interpretation informed by our centralized intelligence. We are optimistic about the strategic fit of this acquisition, which will also unlock scalable platform economics for GeneDx's bottom line, adding a recurring software based revenue stream to our existing high margin testing business. As genomic testing adoption grows worldwide, Fabric Genomics cloud native platform will expand GeneDx's ability to serve a global market with tailored commercial models aligned with foreign regulations. And with Fabric Genomics decentralized interpretation architecture, we will layer on an incremental offering for the NICU with the interpretation as a service product plug in for in-house testing. These supplemental opportunities support our mission of offering genetic diagnoses to all patients who could benefit with additional flexibility in how we reach those patients both domestically and internationally. Beyond the Fabric Genomics acquisition, GeneDx is integrating AI across our business with a focus on making our enterprise as efficient as possible, scaling our interpretation platform and data asset, while ensuring accuracy and leveraging the totality of our data to drive healthcare innovation more broadly. Only 5% of rare diseases have an approved therapy available. And as more biopharma companies invest in genetic based care. Our rich data is critical to inform drug discovery, and we will be the partner of choice to leverage genomic data for therapeutic development. For the families, every patient deserves a care plan upon diagnosis, and AI can help us deliver on that. Whether the path forward for a newly diagnosed patient is a drug, physical or cognitive therapy, dietary change, or other changes in medical management, our AI technology will help us route patients on the right care path immediately at diagnosis. Central to our success is the value that we create for families and for the health care system as a whole. We have the rare ability to drive better clinical outcomes for those with genetic disease, while also relieving the health care system of unnecessary costs. Further strengthening our model is that we can do this as a profitable company, ensuring that we can purposefully reinvest in our technology and continue to deliver the highest quality product. We can do it better, faster, and more cost effectively than any other lab in our space. With that, I'll turn it over to Kevin.

Good morning, everyone. Thanks for your time. First quarter 2025 revenues were $87.1 million, exome and genome revenues grew 62% year-over-year contributing $71.4 million this quarter. Exome and genome accounted for 40% of all tests in the first quarter with volumes from these flagship products up 24% year-over-year. March as a standalone month saw an acceleration in volumes relative to the first two months of the year and exited the quarter ahead of expectation, bringing us into Q2 with a strong foundation to continue momentum. In fact, if not for the effects of a brutal January and February climate change disruption, volumes would have been slightly up compared to Q4, despite typical seasonality, which usually results in Q4 being the strongest and Q1 the lightest of any quarter of the year. I should also note that calendar wise, Q1 had one less sales day compared to the fourth quarter. In addition to growing off the base we delivered to start the year, we'll be layering on what will effectively be new growth curves across multiple fronts, including the NICU and with new indications in both the pediatric and adult outpatient settings. We've continued to balance demand from a clinical standpoint with discipline, targeting volume with a high propensity to get paid rather than taking in volume for volume sake. That said, we've launched into some new focus areas for our commercial team, most recently immune deficiency disorders in April, which is a new call point that being the pediatric immunologist. Compare that to cerebral palsy launched earlier in March, which you can consider another indication in the bag at an existing call point, the pediatric neurologist. We'll be closely monitoring uptick in reimbursement performance as adjudication experience accumulates. And the NICU remains mostly untapped. Our ultraRapid became orderable in April and is being well received in terms of its two day turnaround time and price point. We'll be exiting the pilot phase of Epic Aura in May and also bringing new compelling health economic data to the field in the coming weeks to drive this market. We're addressing a large unmet medical need here and the progress to expand access to testing across a widening spectrum of conditions is underpinned by our ability to provide valuable service to biopharma, leveraging our unique data assets to enable faster, cheaper more effective therapeutic development. What has been a nascent biopharma business for us is still in the very early innings, but it is beginning to gain traction. We're demonstrating to partners that rare diseases are rare and that GeneDx is in a unique position to find patients, reduce development time and cost and improve probability of success. In terms of reimbursement, the hard work to reduce denials continues to bear fruit and you see that in the underlying rates and continued positive beats on past estimates. In the first quarter, average reimbursement rate for Exome and Genome after all denials was approximately $3,400 up from approximately $2,600 in the same quarter last year. On the Medicaid front, there are 14 states that cover Rapid Genome inpatient and now 33 states covering exome and or genome outpatient, with New Mexico the new add this quarter. Adjusted gross profit from continuing operations in the first quarter was $59.7 million which is up 56% year-over-year. That translates to an adjusted gross margin of 69% in the first quarter, up from 61% a year ago. We entered this year focused on extracting the next leg of scalability and cost effectiveness through the introduction of automation and AI across the dry lab processes. While the team is making steady organic development progress here, our optimism regarding further cost efficiency is only enhanced with the pending acquisition of Fabric. Over time, we envision taking the best of features and technology between our homegrown platform and Fabrics in order to create the most powerful AI driven interpretation platform possible to lower cost and turnaround times. The impact of these synergies should be considered more of a 2026 into 2027 events as commercial integration and support will be our focus for the balance of the year. And down to the bottom line, adjusted net income for the first quarter 2025 was $7.7 million, our third consecutive quarter of profitability as we continue to drive increased leverage in operating expense to service the business. On the balance sheet, cash, cash equivalents, marketable securities and restricted cash totaled $160.2 million as of March 31, 2025. Cash flow for the first quarter included $4.1 million in net cash generated from ordinary operations and $13.9 million in proceeds net of fees from the issuance of 150,000 shares of common stock in connection with ATM sales. Now turning to guidance. We're raising our top line guidance to now expect total revenues between $360 million and $375 million for full year 2025, inclusive of $3 million to $5 million of [indiscernible] revenue contribution from the acquired Fabric business. That's assuming a second quarter 2025. We reaffirm our expectation to deliver at least 30% growth in exome genome volume and revenues for full year 2025. We're raising our expectation for full year 2025 adjusted gross margin to between 66% and 68%, and we reaffirm our expectation to maintain profitability each quarter and for the full year of 2025 on an adjusted net income basis. I'll hand you back to Katherine for any closing remarks.

Q1 marked our third consecutive quarter of profitability, reinforcing the strength and scalability of our business model. Through disciplined execution and strategic investment, we're growing with purpose, accelerating our impact while extending our lead. This quarter also marked our 25th anniversary, offering a powerful moment to reflect on the 800,000 exomes and genomes we've sequenced, patients we've helped and the scientific breakthroughs we've delivered. But the real story is what's ahead, returning decades of progress into a foundation for what comes next. The future of healthcare is about preventing illness. That means knowing as early as possible if you have a genetic disease. This is the genome future and we are leading the way. With that, we look forward to your questions.

Thank you. [Operator Instructions]. And our first question comes from Bill Bonello of Craig-Hallum Capital Group. Your line is open.

Hey, good morning guys and thanks a lot for taking my questions. Not to take away from what was in our opinion an overall very good quarter. The focus this morning is obviously going to be on the volume growth and the color on the weather and the days in the quarter was super helpful. I'm just curious, we've absolutely seen over time that Q1 is the toughest volume quarter for almost every lab. So that sequential trend is pretty normal, but we haven't necessarily seen it for GeneDx before and we've never seen this a sequential decline before. I'm just curious, do you think that's kind of a function of the fact that you were just growing really rapidly off a low base in the past? I mean, why and that may be kind of mask the normal trend? I mean, why do we see the trend now when we might not have in the past? And then a couple of follow ups, if I can.

Yes. Look, historically and as a reminder, I've been with the company eight years. There absolutely is a historic pattern of Q4 into Q1, a step down in volumes. What we typically see absent any weather events is patients and their physicians trying to get appointments squeezed into the month of December before copays and deductibles naturally reset for most patients on January 1. And so that has a pull through effect into January and February despite weather. There's no doubt. The way the calendar plays out this year, there's actually just one less day available to it. And there's no doubt that early in the year January into mid-February, it's just a tough setup in terms of the wildfires in California, snowstorms throughout the Mid-East and Midwest, and all over the country. I think there is something to, of course the fact that we're coming off a smaller base in the prior year. We obviously blew past seasonality then. The way we look at the first quarter is it played out exactly as we expected. Our guide, we reaffirmed the plus 30% in terms of volume absolutely maintains and is intact. And consistent with discussions last quarter, I'll remind everyone that the plan was purposely built to say the second half of the year will be stronger than the first, really just in timing of new initiatives and launches we have planned. So we spoke to some of those in terms of color in the commentary. Good progress in setting all the foundational pieces for the NICU, whether it was a buccal swab launch in Q4, the ultraRapid, which really just became orderable in April after this first quarter. So it's got the two day turnaround time and a great price point to it. That really is just an April event. And we're making great progress with the Epic Aura implementation, sort of exiting pilot phase here. And so ready to launch and tackle the NICU, had always signaled that the second half of the year ramp. We'll see some volumes late in the second quarter, but it's really a ramp in the second half of the year and beyond. And that absolutely remains right on track.

That's super helpful. And then just a completely different question follow-up, but there was kind of a big bump in G&A expense and you guys had been signaling that operating expense, we should look for it to increase a little bit. But anything particular on the G&A front? I don't know if that's related to Epic or if there's any unusual items, et cetera, that we should know about?

Yes. A good portion is Epic as well as general support costs. Considering the pace in which we're growing, looking at the percentages of total OpEx and then the components, absolutely comfortable that we've always viewed this as a highly leverageable business in terms of OpEx. And with the introduction of new team members and importantly tools and automation across the organization, fully expect that we'll continually drive down OpEx as a percent of revenue in a meaningful way for quite a long period to come. Overall, the Epic infrastructure, we've always signaled about $5 million of plus cost in the G&A line alone on an annual basis.

Okay. That's really helpful. I'll hop back in the queue. Thank you, guys.

Thank you. And our next question comes from Dan Brennan of TD Cowen. Your line is open.

Great. Thank you. Thanks for the questions. Maybe just starting on the NICU for the back half of the year, Kevin and Kathy, could you speak to a little bit like what the visibility is that supports the second half acceleration, whether a backlog or sales feedback, anything of that sort? And if you can include some early feedback from Epic Aura so far, that since it's already been on, I guess in the pilot stage?

Yes, so far, Dan, everything is on track with Epic Aura. We're really pleased with our initial integration. And the sales team has been, I think we've talked about this in the past. We had kind of a waiting room of clients that are lined up. So, we've got a really solid approach to being able to make sure that we can continue to bring additional clients online and start driving volume in. The first integration has gone on track, and it's been, we've had a lot of good learnings that we can apply into the others to ensure that they can move rapidly as well.

Okay. Maybe on pricing, so Kevin, almost 3,500 in the first quarter, ex the prior period, maybe closer to like 3,100, 3,200. How should we think about pricing playing out like in Q2 and for the rest of the year? And can you discuss potential levers for upside?

Yes. And I think it's important to note, maybe the distinction between those true up estimates versus anything that might be considered one time or discrete. Go back to the fourth quarter, we had what we signaled was a discrete benefit in the fourth quarter. That being a bit of a special multi-year and very material appeal win from one of the large national payers. I view that very differently than ordinary course true-ups in estimates. Frankly, the GAAP calculations take a six month look back, disaggregating to really get to an estimated cash collection position. And what that means in reality is every month we're dropping off an older month from six months ago in that calculation and picking up a newer month. And so those calculations will pick up estimate changes or true ups or frankly true downs in periods where collections are not meeting previous estimates. What you've now seen from us is, I think it's six quarters, something around there of positive true up adjustments running through any quarter. This quarter was no difference, roughly $6 million. And I don't consider that to be discrete or non-recurring which is why we didn't call it out as such. But more so in indication that we remain in a prevailing period of improving the revenue cycle to reduce denials hence every month dropping off an older month where we were collecting less than we are today. And so consistent with maybe some past comments on where to take that reimbursement rate from an outlook perspective moving forward. I think it's the new floor in which we're going to continue to build off of versus expecting something lower to hit next quarter in terms of a sharp drop off not being able to rely on those true ups. We've had them pretty consistently in this range of, call it $3 million to $7 million every quarter. And I think we're still in the mid to early innings of improving the overall revenue cycle. Still getting paid, only about half of the time, a little bit more than half of the time now on insurance adjudicated claims. And we think that's nowhere near optimized than normal with the vast majority of denials still coming in as administrative or procedural denials. And so things that I would call within our control to rectify and fix through engaging with payers. And so that hard work is going to continue, which should further lead to a reduction in denials and overall improvements in that average reimbursement rate going forward.

Great. Thank you. Maybe I can sneak in one or two quick ones. You talked about a strong March and a good start to the quarter. Any color on how April has gone?

Yes. Momentum has carry forward. March and April playing out as expected, which is certainly plays into the expectation seasonally that we're now through the bad weather months. We're through that carryover effect of people pulling appointments into December before co-pays and deductibles. Volume playing out as expected, which led us to the conviction that we should reaffirm our guide, which was a full-year plus 30% or higher on volumes.

Great. And then just final one, you talked about newborn screening and pharma in the prepared remarks. When could those become kind of part of the revenue stream here? Is it '25, '26, just any visibility on that? Thank you.

Yes. I think for newborn screening, we're seeing legislation in Florida that has been introduced and has made it, I think, through the house. But from a broader perspective, we see newborn screening as being a contributor to revenue streams most likely in the '27 time frame. Unlikely before that, there could be some possibilities as we think about the fabric opportunity and how we might be able to bring on some revenue through those sorts of efforts, but those are going to be smaller efforts in the beginning. I think we're just really encouraged to see states taking action like Florida. They're really trying to set the model to get ahead of disease manifestation. So I would keep expectations super modest on newborn screening until we really start to see some traction out there.

Great. Thanks a lot.

Thank you. And our next question comes from Mark Massaro of BTIG. Your line is open.

Hey, guys. Thank you for taking the questions. I wanted to start on Fabric Genomics. So my understanding is that this is provides another revenue opportunity for you with interpretation as a service. Can you just give us a sense for how you're thinking about pricing these services or these interpretations? Can you speak to the gross margin profile if they might be accretive to where you are today? And then I saw that you maintained the profitability on an adjusted net income basis each quarter this year, which is great. I just want to get a sense for what the potential cash burn might look like for fabric this year?

Sure. So I'll start, and then hand it over to Kevin. So I think part of what excites us about fabric is, its ability to really help us continue to provide a valuable service, putting our data into their interpretation platform for any health system that wants to do their own in-house sequencing. And we've seen that over the past few years, and we continue to see it as an opportunity moving forward. So it enables us to really play a part in that from a service and from an economic standpoint. Furthermore, it helps us on the international capability, where we can essentially expand into international markets very cost effectively and in a way that complies with foreign regulation. But then again, as we see new born screening coming on board as well that Florida opportunity that I mentioned, that gives us the opportunity to be able to help them accelerate it and have standardized interpretation. So we're really excited about what this, the acquisition of this asset can mean to accelerate the business. I'll let Kevin comment on the economics of it.

Yes. From an overall profile perspective, very different model, of course, than the full service GeneDx lab. Today, that fabric business operates at near 70 gross margin, and that's through either interpretation-as-a-service or software-as-a-service. So think of highly recurring sticky revenue streams certainly at a lower dollar point than a full diagnostic test that we offer. But with that lower price point also comes the fact that that business is not bearing the cost of running a facility, operating a wet lab, reagent costs, really just providing click services from a software perspective and/or dry side interpretation and analysis to deliver a report. So high margin, but of course, a bit the model to be a bit more recurring and high volume. From a burn profile, a couple of million dollars a quarter, it's 22 people in terms of the overall size of the workforce. We will begin integration activities once we close on the deal, which we expect in the second quarter. I think where we see immediate opportunity is there really has not been any meaningful commercial investments into selling the product. And so the team has accumulated a great set of clients and logos. If you look at the existing customer base, very impressive client base, but very much undersized with respect to commercial might. And we're optimistic that the GeneDx capabilities with respect to commercialization can pull through into certainly a higher revenue base, but also have an expanding effect on gross margins and confident that the deal is accretive to us on the bottom line in 2026.

Excellent. That's very helpful. And then, I wanted to ask, it sounds like you've got ultraRapid orderable here in April, either you just launched that or I would assume you just launched it. But bottom line here, were you factoring in ultraRapid into your guidance when you provided the guide on the Q4 call? Or do you think there could be upside from ultraRapid in the back half of this year to the guidance?

We contemplated it in the original guide, but of course always with the back half of the year. So nothing contemplated in the original guide for Q1 or Q2. There's a bit of an education process out in the field. We've now worked through that. The test has been horrible here just for a few weeks. I think the upside would come in what we see as ultimate mix between the ultraRapid or what today I'll call Rapid. And so we have two product lines now for the NICU. One is the two day turnaround time at a premium price point. The other is a five day turnaround time at a lower price point. We actually believe that the price point there on both products is best-in-class in terms of offering cost back to clients. And so the upside would be, if we see ultraRapid take more than expected mix share over the five day turnaround time, there'll be some pricing benefit there.

Yes. And I would just say on the NICU opportunity, it's all of the product attributes in addition to Epic Aura. So Epic Aura is an enabler, but being able to have that five day turnaround, the 48 hour turnaround, being able to ensure that the reports coming out are coming with a very clear care plan for the neonatologist and the family. It's that full suite of services that is going to be the reason that we're winning in the NICU. So Epic is one piece, turnaround time is another piece, but it's that full end-to-end service that is going to enable us to realize that opportunity. And, again, fewer than 5% of babies today are getting a genetic test. So, it's a huge area of focus for us and it's that all in service and product strategy that we've got that's going to ensure that we're able to really deliver value in that setting.

kay, great. And then maybe one last one for me. I guess, Kevin, do you have a sense -- apologies if I missed it, but do you have a sense for roughly what the weather impact was from the snowstorms and the wildfires in one less day?

Yes. I mean, the one less day is just tangible. And so one day's worth of reports is a few hundred. From a weather perspective, look, I don't want to over or understate it. It absolutely was a reality that we planned on certainly terrible weather in January and February, we do. This year happened to be extraordinary in terms of actual logistical disruption, probably worth a day or two in terms of tangible carryover for the quarter.

Okay. Thanks very much, guys.

Thank you. And our next question comes from Tycho Peterson of Jefferies. Your line is open.

Hey, thanks. Wondering if you're able to kind of break out what you're expecting for new indications this year. You mentioned immune deficiencies, you've got cerebral palsy, you've got hearing loss. And then are you able to quantify where you think mix will go for ultraRapid as well?

So the blend of the new indications versus what I'll call the existing base is just all contemplated in the basket to get us to the 30% or higher guide that we just reaffirmed, which would of course call for something greater than the 24% we just posted in the first quarter in the second half of the year. I think it's a bit early to tell what the impact is. Like we just launched immune deficiency disorders a couple of weeks ago, so the team is out in the field. And either case, what we're talking about is changing standard of care and entrenched behaviors at physicians who've been ordering multi-gene panels, things like CMA. And so a bit too early to tell, but absolutely gives us confidence that there will be supplemental growth beyond what we've already been accumulating, which has been primarily over the past 18 months, two years in introduction of the new call point of pediatric neurologists. Still very much a long runway of growth there. So, of course, don't want to overlook the fact that we are going to continue to farm that call point, activating new docs and driving more same store sales from that. Really consider things like immunologists and cerebral palsy, and there'll be more throughout the year and coming years as supplemental to that existing base, which still has a lot of opportunity to go far.

Yes. And as a reminder, there's 10,000 rare diseases that we're able to diagnose. So we're -- it will continue to be just a rolling set of indications as we think about, where we're going. One of the things that I mentioned on the call was, in the -- to starting to focus on adults as well. There are many children who grew up having epileptic seizures, who did not get a diagnosis, who are now adults. There are adults who are starting to have seizures, so we want to make sure that we can also start helping those patients as well. And with a clear tie to reimbursement, we think that's another great opportunity that we're focused on as well.

And on the ultraRapid mix question, look, we see a place in the market for both product lines. Obviously, the two day turnaround time offers benefit for those kids that are in acute need, but there's an economic reality. I think we actually believe that the health economic argument in savings is actually greater with the premium price two day product, but it's incumbent on us to now get that health economic data out into the field. And the team now has everything they need to be equipped to go have those conversations with hospital administrators and the C-suite at hospitals. And we will be busy with that over the coming months. So too early to tell what the actual mix between the five day and the two day products will be with, of course, the more that drives into the two day time provides uplift in terms of revenue at that higher price point. And at the same time, we think offers hospital systems even greater value with respect to both the clinical and economic benefit.

Yes, that's kind of what I was getting at because it's kind of be the majority over time for ultraRapid. Kevin, can you maybe just on gross margin guidance? You were 69% in the first quarter guiding 66% to 68%. Maybe just talk about some of the gives and takes there, especially given that you're launching higher priced products here with ultra?

Yes. Look, it was a raise. So we wanted to raise guidance because we ultimately feel really comfortable with both the reimbursement profile as well as the trajectory on COGS. I think we remain absolutely optimistic that we can further drive down COGS per test. But as we talked about in the past, feel fairly well optimized from a wet lab perspective. The dry side lab is where we see opportunity for cost reductions that takes the deployment of some technology. And so in all things that we provide from a guidance perspective, tend to take a prudent conservative view and don't want to overpromise until we actually see some of those technologies deployed into production. And so you can rate it as fairly conservative, while at the same time we bumped up the range of gross margin up, we think in a meaningful way. Want to see some experience accumulated on those new indications to see if we're getting as well reimbursed, and we won't know that until we go through a natural cycle of producing the test, submitting to insurance and then seeing that the claims come back. And it's too early to tell even on that first launch of CP, just not mature enough to have the data to know whether or not reimbursement will be as high. So left some room, to be able to continually come back and beat and raise on that component throughout the year.

And then any kind of guess on where you might end the year on denial rates? I guess, you've got the Epic integration, can that help? And then the biomarker bills you flagged as well. I mean, how important are those in kind of improving the denial rates?

Yes. Driving down denials and improving that reimbursement rate is multifactorial. The progress on State Medicaid programs absolutely helpful. We're serving all 50 states, whether they have coverage or not, running through COGS and taking zeros for the states without coverage. And so any state that picks up policy coverage, we think is great for patients, it's great for our business, and we think we're saving the Medicaid program dollars through the utilization of these tests. So picked up another state this quarter in New Mexico. Obviously, it's not the biggest population center in the country, but they're all important. And I think also would note that the first quarter is not fully baked with respect to states in the past that have picked up coverage. So go back to my comments that every month we're taking a six month look back and dropping off an older month and picking up a newer month. And so even those states that enacted coverage in the fourth quarter or to start on January 1, have yet in our calculations to reach full maturity. And so we're still contemplating in those estimates periods where we might have been taking zeros and are no longer. It's what gives me the confidence to say that rate we just posted, while yes, it has some true up adjustments, those adjustments are more so ordinary course and should stay with us rather than something discrete or one-off. Ultimately, we've been able to improve the denial rate a few 100 basis points each quarter in that underlying rate, and I'd expect that to continue for a few quarters or for the remaining quarters of the year. We're nowhere near optimized with the denial rate now probably in the mid-40s across all volume and we absolutely think we should be getting paid something closer to 80% of the time over time.

Okay. And then just last one for Katherine on pharma. You flagged making progress there. What should we be watching for over the remainder of this year?

Yes, I think it's a steady drumbeat of additional partnerships. And the nature of those partnerships, we're essentially doing patient matching, so eligibility for clinical trials. We have a new tool called GeneDx Discover that we introduced late last year. That's actually helping pharma companies really take a look at the true prevalence of some of these diseases, and it's been really rewarding to hear back from them that they are indeed saying that the prevalence for diseases are higher than what they anticipated. So that's fundamentally changing the way that they're thinking about their businesses. So, continued partnerships, throughout the course of this year. We're not going to change the outlook on contribution to revenue. I think we continue to see it as, as Kevin said on the call, early innings, but it's great to continue to see the contracts coming through DocuSign, on the regular. So we're happy with that momentum.

Thank you.

Thank you. Our next question comes from Matt Sykes of Goldman Sachs. Your line is open.

Good morning. Thank you for taking our questions. This is Will on for Matt. Just wanted to build on the Sunshine Genetics Act commentary earlier. While it's early days, it seems like support is growing for the whole genome approach. So have you seen any signs of a shift towards whole genome versus exome testing? And what are the differences in COGS between those two tests?

Yes, so you're reading that correctly. When we first started talking to folks in Florida, it really was about inpatient and outpatient. And the gentleman who's sponsoring this bill had lost his son to a rare disease. So, when we started talking about the GUARDIAN study, it really kind of captivated his vision for being able to accelerate this. For, as I said in my commentary, we're waiting for these kids to get sick. Newborn screening helped in the GUARDIAN study identify a positive diagnosis in 3.2% of these babies who otherwise would not have been diagnosed until they were likely at least five years old. So, we're excited about the momentum that is building there. And we do think that as we have been testifying in the State of Florida, related to that legislation, we think that there's an important opportunity. I know they're kind of putting themselves forth as being the standard and other states should be paying attention to that, and the federal government should be paying attention to it as well. So, we hope that other states will follow, and we think in our state-by-state conversations that we have with Medicaid and policymakers, we'll continue to talk about GUARDIAN and we'll continue to point to Florida as being the model for what excellence looks like in terms of putting genomics, at the forefront and getting ahead of these kids getting really sick.

Yes. The overall cost to produce Genome is slightly higher today. Most of that actually is just pass through costs on reagents. So could you some help from our partners there in bringing down consumable costs, if you look at exome versus genome. But the gross margin profile between the two product lines, fairly similar. We're at this point relatively agnostic on whether it's an exome or genome coming in. Both are good for our business. Both are good answers for physicians and their patients. The majority of that exome genome line for us today is exome, but that's frankly just where payers have been in terms of overall reimbursement. Do we expect that to change towards parity and ultimately the majority being whole genome? We do. Our ticker symbol should be reflective of that. We certainly see a world where all hereditary disease is diagnosed off of a whole genome and we're well prepared to lead that market. We lead the exome market today with 80% or higher market share of clinical exomes and genomes with the majority being exome and are well positioned to lead the market as it makes its transition to whole genome, which we fully expect. And our data assets and capabilities and interpretation platform all very much geared to service that market.

That's super helpful. Thank you both. And then just acknowledging there's a lot of uncertainty around policy changes now, but given your exposure to Medicaid, just wanted to get your thoughts on any risks around potential Medicaid cuts to your business? Thank you.

Yes, there obviously continues to be an acute focus on reconciliation in DC. I've been spending a lot of time there. I will say the health of children in the United States continues to be something that everyone can agree on, despite all the noise that's out there. So, as we continue to work through, I think the coming weeks and likely months on, on the government getting to reconciliation. We continue to believe that this remains exactly how Medicaid was designed for, ensuring that the most vulnerable Americans, young children who are sick will have access to good healthcare.

That's helpful. Thank you.

Thank you. And our next question comes from Brandon Couillard of Wells Fargo. Your line is open.

Hey, thanks. Good morning. Kevin, in terms of the weather impact in the quarter, wouldn't you expect to actually recoup those tests in 2Q? Or are you just assuming that those are foregone at this point? And then for the Hereditary Cancer line, will there still be some residual contribution into the second half as you wind that down?

On the latter, I'd expect hereditary cancer to be zero or near zero in the second half of the year. So only some more residual effects here for the remainder of the second quarter. Yes, it's a great point in terms of the weather impacts on appointments different than a routine clinical lab where people might miss things like annual physicals and then not get back to it. These kids are symptomatic and sick. And so, any missed appointment, you would expect to see that recovered. The issue here though is with the scarcity of expert geneticists and pediatric specialists who order these tests today, i.e. a pediatric neurologist or geneticists, they're just long wait times to get back into the office. And so if you happen to miss an appointment, it may be weeks or even months before you can get back into the office. Frankly, that scarcity of docs who can order these tests is something we're working hard to solve for. A major move we think ultimately would be to open up the pediatrician as an order for exome and genome. To do that, we've got to drive down complexity. We've got to make the user experience seamless, drive down costs and speed, and that's what GeneDx has been working a decade to do. So, yes, would expect all those appointments to come back, but in this particular setting, sometimes it takes weeks or even months to get back into a specialist office.

Very good. Thank you.

Thank you. I'm showing no further questions at this time. I'd like to turn it back to Katherine Stueland for closing remarks.

Excellent. Well, thank you so much for joining us today. We look forward to seeing you in the coming weeks and the coming months at conferences, and we'll talk to you soon.