GeneDx Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 5 speakers on the call.

Operator

Day and thank you for standing by. Welcome to the GeneDx First Quarter 2023 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. You will then hear an automated message advising you that your hand is raised.

Operator

Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your speaker, Tricia Trueheart, Head of Investor Relations. Please go ahead.

Speaker 1

Thank you, and thank you to everyone who is joining us today on this call. I'm Tricia Truehart, Head of Investor Relations at Gene Diaz. On the call today, we have Catherine Stuhland, President and Chief Executive Officer Kevin Feeley, Chief Financial Officer and Jennifer Brendel, Chief Commercial Officer. Earlier today, GeneDx released financial results for the Q1 of 2023 ended March 31, 2023. A copy of the press release and our Q1 earnings slide deck are available on the company's website.

Speaker 1

Before we begin, I'd like to remind you that management will make forward looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward looking statements. Actual results may differ materially from those expressed or implied in the forward looking statements due to a variety of factors. Additionally, these forward looking statements, particularly our 2023 financial guidance, our expectations for revenue growth, Gross margin and profitability over the next several years and our expected cost savings and reduction in cash burn Involve a number of risks, uncertainties and assumptions. For a list and description of the risks and uncertainties associated With GeneDx's business, please refer to the Risk Factors section of our latest Form 10 ks filed with the Securities and Exchange Commission and the other documents filed by us from time to time with the SEC.

Speaker 1

We urge you to consider these factors And you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. During the call, we may discuss certain non GAAP financial measures. For reconciliations of the non GAAP measures to GAAP financial measures As well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 9, 2023. GeneDx disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward looking statements, whether because of new information, future events or otherwise.

Speaker 1

And with that, I will turn the call over to Catherine.

Speaker 2

Thank you, Tricia. I'm excited to share our progress so far in 2023. But to begin, I'd like to take a step back and remind you why we're here at GeneDx. Over the past decade, we've seen a massive conversion from single gene testing to multi gene panel. GeneDx has played an instrumental role in ushering in this new era, while also pioneering an even more comprehensive set of services with whole exome And hold genome testing.

Speaker 2

With more data supporting the clinical necessity of exome sequencing versus multi gene panels, GeneDx is now poised to lead this conversion to deliver more comprehensive, more definitive answers to more patients. Today, we're focused on rare disease testing in the pediatric setting, where the current standard of care is generally a lack of testing, usually resulting In a multi year diagnostic odyssey for children and for their parents. In fact, on average, it takes 8 years to diagnose a rare disease. We know that exome and genome testing dramatically shortens that timeframe from years to weeks. And we also know that these pediatric rare diseases are not at all rare when taken as a whole.

Speaker 2

Think of how cancer is actually a constellation of hundreds of diseases. Similarly, there are 7,000 rare diseases that together are nearly as common as cancer. Consider that 1 in 8 women will be diagnosed with breast Cancer. Well, 1 in 10 people have a rare disease, half of whom are children. In fact, we estimate that each year over 1,000,000 infants and children in the U.

Speaker 2

S. Alone would benefit from whole exome or genome testing. Unfortunately, we're not alone in our mission to expand care. Medical societies such as ACMG, NSGC and the American Epilepsy Society are calling for exome and genome sequencing as a first line test and major national payers are moving to cover highly validated Whole exome and or whole genome testing given the costly alternatives. Of the 450,000 exome GeneDx has tested over the past decade, A quarter of them have been completed in just the past year.

Speaker 2

Momentum is building. As we look to the future, we expect the whole and genome tests will become increasingly standard of care for patients with broader diseases such as cardiovascular and neurodegenerative disease, allowing us to expand into the adult population. But today, job number 1 is expanding utilization of our services, primarily in pediatric testing with an emphasis on converting physicians use of exome as well as panel tests that serve as stepping stones to Exome testing. So let's dive into our 2023 progress. I am pleased to say that we've generated over $40,000,000 in revenue in the first We saw increased volume across all of our testing coming in at nearly 53,000 tests this quarter, giving us confidence that the market is growing.

Speaker 2

And patients and physicians are turning to genetic testing and to GeneDx more and more. The growth in all test lines from Q4 to Q1 gives us conviction that the strategy is working and these volume gains will materialize into revenue growth. Furthermore, our focus on accelerating use of exome is working. Our progress is reflected in the robust increase of volume and revenues of whole and genome test, which delivered $22,400,000 of the $40,000,000 in revenue, representing a 22% increase in whole exome revenues We continue to see the momentum of growth in our Exome volume and revenue in April, and we Expect to see margin expansion throughout the course of this year as these tests deliver a gross margin of approximately 60%. Given the timeframes from ordering to revenue recognition, we expect to see revenue and gross margin shift in the second quarter results and build towards a significant amount of growth in the second half of this year.

Speaker 2

There's 5 factors that will enable this acceleration. First, we're continuing to strengthen our commercial footprint and strategy. Our team is focused on converting physicians to tests that are better for patients and better for our business. This includes the increased volume of certain non exome tests that are strategically important As physicians become comfortable with broader genetic testing, we see them as stepping stones to Exome. We are educating clinicians that Sound testing provides a higher diagnostic yield compared to tests like CMA, FMR1 and multi gene panels, which leave many patients behind.

Speaker 2

We're also targeting non geneticists who may be new to genetic diagnostics. We're encouraged by data that show that 30% Physicians who ordered their first exoma GeneDx in Q1 were new customers to GeneDx and orders among neurologists and pediatric Specialists were significantly higher compared to last year. We've taken the 1st part of the year to continue to invest in our commercial team. We expanded sales territories from 58 to 66 across the United States and also added dedicated cross functional teammates for each sales rep to support growth. That includes medical science liaisons, client relationship managers and our managed care team.

Speaker 2

We've also built our incentive plans to drive conversion of orders from panel test to exome sequencing. 2nd in our acceleration is marketing. Our team is focused on meeting the clinician where they are in and outside of the clinic. We're talking to them at conferences, generating data through publications, Increasing brand awareness efforts and launching a variety of initiatives in Q1 to aid in education, engagement and ultimately build share and accelerate growth. Our cross channel activities drive awareness through advertising, e mail campaigns and social media presence, Bringing brand recognition to GeneDx's offerings and differentiation from others as we build and expand the market.

Speaker 2

In fact, we've doubled traffic to our website since Q4 of 2022 and we expect to continue to build on that. 3rd, We're continuing to contribute to clinical research, which is also providing insightful data into the value of exome sequencing for patients. We recently presented new data at the ACMG Annual Meeting, which demonstrated the diagnostic advantages of exome sequencing over Chromosomal microarray or CMA. In the poster, we compared reported copy number variants or CNVs On more than 8,000 patients who had CMA and exome sequencing and showed that exome sequencing has a much higher diagnostic yield as it covers both sequence variance and CNVs, where CMA is limited to detecting only CNVs. CMA is a commonly used test that is a current standard of care driven by outdated guidelines and these critical data presented at ACMG are guiding our conversations to Convince clinicians why they should order Exome first.

Speaker 2

During this research and driving adoption takes time. 4th is our focus on product improvement to improve our customer experience and operating efficiency. We've been working to automate and shorten our turnaround time to facilitate quicker results for patients with the same high quality. Automation is also key to decreasing our COGS and expanding gross margins. We've also introduced buccal swab collection for genome sequencing, including our rapid testing option, which enables easier collection of parental or relative samples for Trio testing, which has been shown to increase the diagnosis rate by nearly double.

Speaker 2

The 5th factor goes beyond our own efforts. Our work is amplified by medical societies and in particular payers We're taking notice of the favorable clinical and health economic benefits of exome and genome sequencing. Both UnitedHealthcare and Cigna Have adopted favorable coverage of genome sequencing recently, and we are working with physicians to be sure they're aware of these policy changes. Recently, state coverage groups are continuing to make meaningful progress. North Carolina Medicaid published updated clinical coverage policy to add coverage for exome sequencing in the outpatient setting becoming the 28th state to do so.

Speaker 2

One of the many key barriers to the adoption of testing is what to do with the results. For so many, getting an answer is a relief, and we're committed to going a step further by working with the broader ecosystem of biopharma payers and advocacy groups to help connect patients to the best possible treatment for them. Our opportunity to partner with biopharma is significant. We're seeing deal flow generated Various therapeutic areas based on the clinical and genomic data assets, which are part of our Syntrellis platform. In the Q1, we signed data agreements with 5 companies focused on rare diseases or neurological disorders, including Farming Group.

Speaker 2

We also launched a new Centralis product called Data Explorer, which helps our internal teams more efficiently gather data and deliver these opportunities. We believe these agreements are highly scalable and have high gross margins with high value to our partners and patients as well. With strong performance year to date, we're on our way to reach profitability in 2025. We're clearly in an Exciting moment in healthcare to accelerate the delivery of personalized and actionable health insights to inform diagnosis, direct And with that, I'd like to pass the call to Kevin.

Speaker 3

Thank you, Catherine. With another quarter passed since our 2022 restructuring, we're seeing a meaningful financial improvements across all aspects of our business. I would like to first take you through revenues and gross margins from continuing operations and then address spend and cash burn on a total company basis. I'll wrap up with 2023 guidance, which we are reaffirming. During the Q1 of 2023, pro form a revenue from continuing operations was $40,700,000 compared to $38,000,000 in the Q1 of 2022.

Speaker 3

The increase was driven by 22% growth in whole exome sequencing revenue. Total test volumes are up 8% sequentially and 29% year over year. The Q1 revenues are reflective of a few transitory effects to be aware of. First, the annual reset of insurance deductibles and co pays. The Q1 typically brings a reset to patient insurance plans and that creates a seasonal decline in average reimbursement rates that then ramp up as the year progresses.

Speaker 3

2nd, we adjusted some direct billing rates for certain long standing clients. We made that change to match current pricing in line with our plan and in order to accelerate growth while also maintaining a favorable gross margin profile. 3rd, test mix. Our sales team intentionally built up volumes on certain non exome tests that are often the precursors to a client ordering whole exome sequencing. These carry lower average reimbursement rates and lower gross margins compared to exome sequencing tests.

Speaker 3

But as Catherine mentioned, we think of them as stepping stones to our higher value exome. Pro form a adjusted gross margin from continuing operations in the quarter was 34%. Adjusted gross margin for whole exome sequencing was approximately 60% and whole exome sequencing represents 17% of total volume in the Q1. As the March April volume mix that Catherine highlighted makes its way through production and has resulted, we expect accretion in our blended gross margins. Beyond mix shift and seasonal effects, which will naturally expand gross margins through the year, our teams are working to implement a number of projects aimed at further improving both turnaround times and COGS throughout our lab operations.

Speaker 3

These include, but are not limited to, the introduction of next generation alumina equipment, consolidation of our library preparation processes via Twist Biosciences and the implementation of Further automation and AI across a number of end to end production, report writing and genetic counseling steps. Additionally, there are promising initiatives underway across revenue cycle management to optimize the strong and improving coverage policy environment for whole exome in order to ensure we're properly reimbursed. You should also expect us to continue to monitor the clinical and economic performance of our tests and simplify the test menu where we see the ability to improve both patient care and expand gross margins at the same time. We have a best in class operations and product and technology team that is hard at work lowering cost and optimizing the customer experience. Total company adjusted net loss in the Q1 of 2023 inclusive of all activity including the now discontinued legacy SemaFore Diagnostics operation was $48,800,000 compared to an adjusted net loss of $59,700,000 in the same period of 2022.

Speaker 3

The Q1 is an improvement of 34% compared to an adjusted net loss of $72,500,000 for the Q4 of 2022. Our ongoing cost mitigation efforts are delivering and we have improved our cash burn by 31% year over year To approximately $59,000,000 in the Q1, of which a substantial portion is related to discontinued operations, We expect the quarterly burn rate to reduce through each sequential quarter of this year. Operating expenses have come down in line with expectations and we aren't done. Expenses and in particular G and A expense will continue to reduce as we completed the separation from discontinued operations in the Q1. We'll finalize some remaining integration activities between GeneDx and the legacy business in the Q2 and continue our sharp focus on gaining efficiencies across all aspects of our Total cash and cash equivalents and restricted cash were $214,100,000 as of March 31, 2023.

Speaker 3

In April 2023, we received the final tranche of $7,000,000 from the registered direct offering that was part of the $150,000,000 capital raise in January 2023. Turning to guidance. We reaffirm our previously issued 2023 guidance of $205,000,000 to $220,000,000 in revenue and we expect to expand the gross margins in 2023 beyond. We believe we are fully funded to profitability in 2025 and we expect to use $95,000,000 to $110,000,000 of cash in 2023 for Inclusive of servicing obligations of the exited business activities, we expect to use $130,000,000 to $145,000,000 in 2023. Finally, last week, we affected a reverse stock split at a 1:33 ratio.

Speaker 3

Accordingly, all common stock shares per share amounts and additional paid in capital amounts For all periods presented today and filed in our 10 Q have been retroactively adjusted where applicable to reflect the reverse stock split. As of March 31, 2023, we had 24,193,436 shares of common stock outstanding. It is important to note that in April 2023, we issued an additional 1,378,328 shares As milestone payments previously disclosed as part of the GeneDx acquisition and the closing of the registered direct offering. And with that, I will turn the call over to the operator for Q and A.

Operator

Thank you. At this time, we will conduct a question and answer session. Please standby while we compile the queue. Our first question comes from the line of Brandon Cottier, Jefferies. Brandon, your line is now open.

Speaker 4

Hey, thanks. Good afternoon. Catherine and Kevin, I think you spoke to some of this in your prepared remarks, but if we just look at the single And multi gene tests in the quarter, just help us reconcile the volumes being up with the revenues down, so we have realized ASP trend Behind that, do you expect that realized ASP to improve or normalize as we move through the year? And strategically, what's kind of, I guess, the rationale of using The sales team, as you described it, driving those non XM tests as a stepping stone, that seems to be, I guess, a newer aspect of the commercial Thanks.

Speaker 2

Absolutely. So pleased that overall volume was up across the board, but Indeed, the sales team is incentivized to be able to really sell exome. And one of the key strategies to getting clinicians there does include moving from CMA, FMR1 and autism Testing. So, as we're spending a lot of time educating them on some of the data that came out last fall, at ATHG at AAN on why exome is a superior test and why CMA and guidelines calling for CMA Maybe outdated. We are continuing to see that momentum is building in April and expect that the exome growth Momentum will continue beyond April into Q2 and the rest of the year.

Speaker 2

I think As we look at the percentage of revenue that Exim drives, it's a huge aspect of Our strategy here, but we're also ensuring that we can really meet clinicians where they're at, give them the data. It's one of the reasons why the Cell team that we've invested in, to really spend time educating them on, relatively new data as it pertains to exome, Why they should be taking the step forward to get there sooner? And we also see that clinicians Start with exome and they want to see that it's working. They want to see that the message that we're delivering that 4 out of 5 Patients have 0 out of pocket for exome with us. They want to say that that's the case.

Speaker 2

So we expect this Momentum to build in the second half of the year and that ASPs will include on the trajectory that we've set out to be able to achieve.

Speaker 4

Okay. That's helpful. And then Kevin, any more color you'd be willing to share with us in terms of the pace and magnitude of Gross margins as we move through the year. And what should we think about as the top 1 or 2 drivers of that, whether it's mix, Better reimbursement, lab efficiencies, how would you just back rank those?

Speaker 3

Yes. So, consistent with Our reiteration of the full year guidance, we'd expect the full year to average out above where we ended 2022. We exited the 4th quarter at 41% adjusted gross margin. I think the way we see that playing out Is sequential growth from through each quarter of the year towards Something towards the mid-40s. The main drivers of that really is Continuation of COGS improvement efforts that we have underway, I gave a few examples of those in my prepared remarks.

Speaker 3

We do expect to see Seasonal sequential improvements in ASPs as the year progresses and then the overall effects of mix shift towards higher margin tests. So we really take does take the combination of all of those, but see us getting back towards 4th quarter gross margin profile in the second quarter and then beyond that to be able to reaffirm our guide that the full year will be Above where we exited 2022.

Speaker 4

Okay. And then, how much of the cash burn in the Q1 was Tied to restructuring and do you expect those outlays to be fully behind you by the end of 2Q? Thanks.

Speaker 3

Yes. A substantial amount was included in the Q1. We still have some remaining payments To go, although there are shutdown activities of the SemaVore diagnostic business are now complete, there is some further pay downs of Accounts payable, and some facility leases that will remain with us into the future. But I think the way we look at the burn was very much pleased with where we ended the Q1. It was in line with our plans.

Speaker 3

Overall operating expense improved substantially. If you look at The bottom line on an adjusted basis, really just taking out non cash items of depreciation and stock based compensation, A 33% sequential improvement on the bottom line versus the 4th quarter. More impactful items Further reduce our burn include finishing up some integration activities that were left over, following the acquisition of GDX and getting them off Of its previous ownership in IT systems and merged with Semaphore, we'll see those activities really Wind down in the Q2 and then continued focus on taking down G and A, but overall pleased with the leverage we're driving in OpEx and expect to see sequential improvements with the Q4 coming in, in the neighborhood of $20,000,000 of burn for the Q4 of

Speaker 4

Very good. Thank you.

Operator

Thank you very much. And I would now like to turn our call back Catherine Stulen for closing remarks.

Speaker 2

I want to just thank the customers and patients who Trust us. I want to say thank you to our teammates, who we rely on to serve our customers and most definitely to the shareholders, So thank you very much and we look forward to talking with you all soon.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now

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GeneDx Q1 2023
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