GeneDx Q4 2023 Earnings Call Transcript

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February 20, 2024

There are 8 speakers on the call.

Operator

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

Operator

Please go ahead.

Speaker 1

Thank you, operator, and thank you to everyone for joining us today. On the call, we have Catherine Stuland, President and Chief Executive Officer and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the Q4 ended December 31, 2023, and shared guidance for the full year 2024. Before we begin, please take note of our cautionary statements. We may make forward looking statements on today's call, including about our business plans, guidance and outlook.

Speaker 1

Forward looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 20, and we are under no obligation to update. When discussing our results, we refer to non GAAP measures, which exclude certain items from reported results. Please refer to our Q4 2023 earnings release and slides available at ir.gndx.com for definitions and reconciliations of non GAAP measurements and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward looking statements. And with that, I'll turn the call over to Catherine.

Speaker 2

Thanks, Sabrina, and thank you all for joining us. 2023 was a pivotal year for us at GeneDx. We're on a stronger path forward and closer to our goal of reaching profitability in 2025. Last year, we centered our entire team on 3 goals: 1, increasing utilization of our industry leading exome and genome 2, improving our average reimbursement rate and 3, dramatically reducing our cash burn. The combination of these three organizational goals ultimately ensured that our teams were focused on what's clinically best for patients and what's best for the financial health of the company, and that focus paid off.

Speaker 2

Our teams worked with deep commitment in the Q4 and delivered $58,000,000 of revenue, driven by more than 68% year over year growth in exome and genome test revenue, expanded our adjusted gross margins to 56% and ended the year ahead of our expected cash position, demonstrating a 51% year over year reduction in burn. We're proud of our team's performance and we're prepared to rinse and repeat that same level of commercial and operational execution. As we look to 2024 and based on what we're seeing so far, you can continue to expect this level of focus on exome and genome revenue growth, gross margin expansion and disciplined cash management. The investments that we're making, whether it's in commercial, operations, medical affairs or product and technology are directly tied to these goals. In the Q4, we realigned our sales strategy to focus on account profitability.

Speaker 2

We've right sized our sales territories and further refined our commercial tactics and tools that account profitability in mind and we're seeing good progress. Our strategy continues to include efforts that drive exome conversion with current customers, but we're taking a more precise yet high impact approach with new customer acquisition, mainly targeting pediatric neurologists. We continue to see better traction and faster growth ramps with these new ordering providers compared to lower productivity accounts, including general pediatrics. We're also keeping our operations team focused on the biggest levers for our P and L, reports out, billing operations and COGS reduction among other efforts to ensure we maintain our turnaround times. Our product and tech team is working on our strategy to further scale our operations, improve our customer experience, open up access with EMR integrations, automate our billing operations and drive greater efficiency in every aspect of the business.

Speaker 2

The total addressable market in pediatrics is large. And while we are the dominant provider of whole exome sequencing today, we've only penetrated about 3% of the total addressable market $3,000,000,000 in the U. S. Only pediatric setting. It's a market that we're developing in pediatric neurology where clinical evidence and health economics strongly support the transition to exome analysis.

Speaker 2

We will also expand further into the general pediatric setting over the coming years as guidelines and payer policy continue to evolve to become more ready for commercial expansion and execution. On the other side of that is an entire $10,000,000,000 market in the U. S. Only for adult conditions that we'll be working to develop over the mid long term and along the way there's a growing data opportunity in rare disease drug development. We've steadily added biopharma partners and have 20 active programs, mainly with biotech companies who are relying on us to find patients with a specific variant for clinical trial purposes.

Speaker 2

We're expecting that business to continue to grow at a similar pace. We think there's great promise in the role that diagnostics can play in rare disease drug development. In fact, The New York Times recently highlighted a new gene therapy for children with hearing loss. They featured an 11 year old boy who had no ability to hear until researchers at the Children's Hospital of Philadelphia gave him an experimental gene therapy from our partner, Accuos, an Eli Lilly Company. The boy was able to hear sound for the first time ever, and now the company is expanding its research to several other centers.

Speaker 2

And just a few weeks ago, FDA Commissioner Doctor. Robert Caleb said the agency will need to get creative about regulatory pathways given the tsunami of rare disease and gene therapies that the FDA is anticipating. Rare disease treatments are reliant upon rare disease diagnoses, and that's what we do best at GeneDx. We believe this market is developing and are well positioned to be the genetic testing partner of choice for these companies. Looking forward to 2024 guidance, we expect a similar growth trajectory as demonstrated quarter over quarter in 2023 as we continue to focus the teams on driving exome and GM utilization and improving our reimbursement rate.

Speaker 2

With that in mind, we expect to deliver between $220,000,000 to $230,000,000 in revenue this year, and Kevin will provide some additional commentary. With a growing proportion of our test mix shifting to Exelm, we will continue to unlock greater gross margins, effectively converting more of the market to better volume. And with the continued decrease in cash burn, we will end the year with strong operating leverage to put us on the precipice of profitability heading into 2025. And with that, I'll hand the call over to Kevin.

Speaker 3

Thanks, Katherine. Q4 2023 revenues from continuing operations grew to $58,100,000 compared to $45,900,000 in 2022 $50,400,000 in the 3rd quarter. That is an increase of 27 15% sequentially driven by exome. Our team resulted over 15,600 whole exome and genome tests in the 4th quarter, which generated revenues of over $39,000,000 this quarter from the exome portfolio. That's an increase of 68% year over year and 15% sequentially.

Speaker 3

Adjusted gross margin from continuing operations was 56% in the Q4 of 2023, up from 41% a year ago and up from 48% in the Q3. The margin expansion during the quarter is driven by favorable mix shift towards Exome and continued cost per test leverage. The 4th quarter did have certain non recurring items, which positively impacted adjusted gross margin by approximately 400 basis points. So the underlying rate is 52% for the Q4. On mix, exome and genome represented 27% of all tests resulted in Q4 of 2023, up from 16% a year ago and up from 23% in the 3rd quarter.

Speaker 3

The Exome portfolio continues to operate north of 60% gross margin, which means the total gross margin will continue to benefit as Exome picks up greater share of our overall test volume and replaces lower margin products. On cost per test, the team is driving scalability and cost efficiency across both the wet and dry lab processes. And while we are very pleased with where exome and genome costs are today, several initiatives are in our pipeline to further improve the cost base over time. Automation and AI across clinical interpretation and analysis offer large untapped long term opportunities ahead. Now let's move down to operating expense.

Speaker 3

Total adjusted operating expenses were $49,400,000 the Q4 of 2023. That is a reduction of 46% year over year. We once again delivered reduced costs as we further separate from the legacy Semaphore business. Our team has a relentless focus on improving operating leverage and efficiency throughout the business and that will continue into 2024. And on the bottom line, total company adjusted net loss for Q4 of 2023 narrowed to $17,800,000 That is an improvement of 76% year over year and 16% sequentially from the Q3.

Speaker 3

Our 4th quarter net cash burn, excluding any financing proceeds, was $32,900,000 which improved 51% year over year and improved 22% from the 3rd quarter. The net cash burn this quarter included $5,000,000 in scheduled payments under the 2022 legacy semaphore payer settlement, dollars 3,000,000 to discharge operating payables for the exited reproductive health business and $1,000,000 in severance payments related to the previously announced cost reduction initiative. Excluding these items, representative cash burn from continuing operations was $23,900,000 in the 4th quarter and we expect the net cash burn to continue to decrease as we couple high margin growth with our cost reduction initiatives. Cash, cash equivalents, marketable securities and restricted cash was $131,100,000 as of December 31, 2023. And as a reminder, in October 2023, we announced that we entered into a 5 year senior secured credit facility with Perceptive Advisors.

Speaker 3

The agreement provides for up to $75,000,000 in capacity consisting of an initial tranche of $50,000,000 which was drawn in October 2023 and an optional second tranche of $25,000,000 which is available to us through December 2024 subject to certain criteria. And now turning to guidance for 2024. We expect to deliver revenues between $220,000,000 $230,000,000 for the full year 2024. Historically, we see the Q1 as our seasonally weakest and the 4th quarter as our seasonally strongest in terms of both revenue and gross margin. We expect to continue to expand gross margin and land full year 2024 adjusted gross margins in excess of 50%.

Speaker 3

For comparison, full year 2023 was 45%. We anticipate using $75,000,000 to $85,000,000 of net cash for full year 2024. We've now delivered 7 consecutive quarters of cash burn reduction since the acquisition of GDX and expect to drive quarterly sequential declines in cash burn throughout 2024. And finally, we once again reiterate our expectation to turn profitable in 2025. With that, I'll now turn you back to Catherine for any closing remarks.

Speaker 2

Awesome. Thanks, Kevin. I'd like to acknowledge that on February 29, it is Rare Disease Day, and it serves as a reminder of why we do what we do. Our overarching goal is to create a vibrant company that draws a new standard of care using genomics, ensures financial success and profitability and creates meaningful shareholder value. Our team is fully committed to that.

Speaker 2

I'd like to thank our employees for their deep dedication and passion to serve the providers and patients who put their trust in us. And I'd like to thank our shareholders who continue to support us as we transform GeneDx for growth, for scale and for profitability, all in service of an ever growing population of patients and partners who benefit from our work. And with that, I'll turn the call over to the operator for Q and A.

Operator

Certainly. And our first question comes from the line of Brandon Couillard from Jefferies. Your question please.

Speaker 4

Hey, thanks. Good afternoon. Catherine, the Exome volume mix shift certainly played out in the Q4. Do you think that 27% of volume is a good baseline off of which to think about for 2024? How do you expect that to evolve as you move through the year?

Speaker 4

And where do you think that could be exiting 2024?

Speaker 2

Yes. So I'll kick it off and let Kevin comment as well. We do think that's a good baseline. I think looking back to where we were a year ago, we are really, really focused on continuing that exome conversion. And I think in the Q4, we really started to see even stronger sales force performance on that.

Speaker 2

And so we're building off of that momentum moving forward and really continuing to drive continued conversion. Again, it's part of the reason why we're focusing our efforts with pediatric neurologists. That segment from a customer perspective is just primed to be able to convert faster. So, we feel confident we'll continue to expand that throughout the course of the year.

Speaker 3

Hey, Kevin, you talked

Speaker 4

to sorry, go ahead, Kevin.

Speaker 3

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

Speaker 4

Okay. Kevin, you talked about realigning the sales force in the Q4 to target more profitable accounts. You just unpack how you go about that? How you have Intel in terms of profitability by account? And should we expect any other sales force tweaking?

Speaker 4

Do you expect to add headcount capacity in 2024 over your outlook for the commercial organization?

Speaker 2

Yes. So what we did was we took a look at where there is volume and we took a look at where there is favorable payer policy and where there's unfavorable payer policy. So, those were the main factors that we took a look at in terms of being able to really better define account profitability. And as we put that lens on it, it was super clear that there were just some territories that they're not going to be productive or profitable in the near term and therefore not worthy of a dedicated sales rep. So we actually scaled back some of the territories, of course, where there may be an account, that's an outlier in some of these lower profitability segments, we have a rep who is able to extend and be able to ensure that we're maximizing that.

Speaker 2

But we're happy with where we landed in terms of $3,500,000 of revenue per rep for 2023. That was an improvement over the prior year. And with the new territory cuts, we feel really confident that we're going to be able to grow at that same rate that we saw last year with the team that we have. We also are really taking a look at the inpatient setting to ensure that we can continue to drive utilization. It's a really small segment of revenue today, but it's really healthy revenue for us and that it's institutional peg.

Speaker 2

So we're not having the noise that you see from commercial payers. And that's mainly with rapid whole genome sequencing. So we've got a small and targeted team to really drive enterprise sales in the inpatient setting. So I don't expect that we're going to have any major sales force expansion this year. But where we can be opportunistic, as we start to see additional progress with the team.

Speaker 2

We may add in that enterprise team, but we'll see it's a longer sales cycle.

Speaker 4

That's helpful. Last one for Kevin. Could you unpack the 400 basis point gross margin benefit in the 4th quarter, what that was attributable to? And then how much of the cash burn, I think you said $75,000,000 to $85,000,000 for the year. What's incorporated in that for legacy restructuring, semaphore outlays, what have you?

Speaker 3

Yes. So the Q4, the benefits included the reversal of certain bonus and other incentive accruals that we had built up throughout the year and determined would not be payable. Some of those ran through COGS and we received some favorable reimbursement on our stop loss insurance. Frankly, earlier in the year, we had some very high extraordinary claims that went through expense related to COGS and we saw some relief in the Q4 that came through. So when you adjust out those benefits, I think it's fair to say the operating run rate was about 52% in the 4th quarter, which frankly we're very pleased with.

Speaker 3

And then on the full year guide for cash burn, as a reminder, December of 2024, we will have a scheduled payment, the next scheduled payment on the 2022 settlement between Semaphore and one of its payers. So that number is burdened by that next scheduled payment. And then anywhere from $2,000,000 to $5,000,000 of other payments to put the entirety of Legacy Sema 4 to bed. If you look at the Q4 cash burn, excluding the settlement payment that we made in December of 2024 and severance and some old payables of sent before. Q4 was $23,900,000 I think that's more representative of what's our run rate today.

Speaker 3

And we have every confidence that as the business grows and in particular with the high margin Exome business, we'll continue to expand gross profits. And we continue to drive down operating expense. So you should expect us to see a reduction in cash burn sort of with each sequential quarter in 2024. Good. Thank you.

Operator

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

Speaker 5

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

Speaker 2

Yes. It's a fantastic question. We absolutely feel confident in our ability to be able to step in and provide our services to that market. I think in particular, a lot of the focus that we saw with some of the rare disease testing was exactly in the market that we're aiming to drive greater utilization of exome in, which is the pediatric neurology setting. And so we're grateful for the efforts of others who have really gotten pediatric neurologists to start ordering genetic testing.

Speaker 2

Historically, they hadn't. So we now have customers who understand how to order testing, know which patients should utilize it. And we have, a growing body of evidence, including data that we presented at the American Epilepsy Society last fall that shows that, exome is going to drive, a higher diagnostic yield than panels. So these are customers who we have been converting already. We have a proven ability to convert them from panels to exome.

Speaker 2

And we'll continue to drive, I think, our market brand to those clinicians and be able to convert the business throughout the course of the year. All of that really would be upside in terms of our outlook for 2024.

Speaker 5

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

Speaker 3

Yes. The Xs represent the new machine, the X represents about 20% of our fleet. It will take us through the end of the year based on our scheduled deliveries to replace the entirety of that fleet. We've got 2 machines live with the second only going live in November. And so there's not yet a full quarter effect on the benefit to COGS for that second machine.

Speaker 3

We're seeing good experience. And I'd say more importantly, the larger flow cell that has come out, we launched subsequent to the end of the year. So in February that went live and so really won't start to make an impact on COGS until the Q2, at least from a full quarter perspective. So we've got 2 machines live and intend to replace the remaining of the fleet over the next year or so. The benefits, I'd say, more importantly, will start to be seen once we are producing at scale with all of those machines and with that larger flow cell in place, which again just went live for us in February here.

Speaker 3

So still to come.

Speaker 5

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

Speaker 2

Certainly. I mean, first, what we've done is establish a set of criteria for determining whether or not we should be keeping a panel. And it starts with what's best for patients. And then there's a number of doctors that we take a look at to really assess whether or not the gross margins are there. It's the type of panel where it's actually primed for conversion to exome and we should just be driving exome first versus clinicians who may be used to ordering via a panel.

Speaker 2

And so we established this rubric. We identified about 350 tests that we determined we could retire. We did retire them earlier this month. And that'll be a process that we continue to utilize as we drive more and more utilization of back some and genome. It represented, I would say, a small portion of utilization.

Speaker 2

So it really was maintenance for us to be able to keep those up and running. So once we've made that determination, it usually takes several months, just to be able to put the product and tech teams, in place, ensure that we're communicating with customers, ensure that we have a good strategy for ensuring that there isn't a discontinuation of care and that we can kind of have a warm transfer to whatever that new test is, if it's a new panel or if it's an exome or a genome. It's something we intend to continue to drive and feel like we're developing kind of a strength with that being a muscle organizationally.

Operator

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

Speaker 6

Great, thanks. Thanks for the questions. Congrats on the quarter. Maybe first one would be, I think, maybe Brandon, I think asked on the first question. You exited the year in the Q4, I think 27% mix as you kind of commented on exome genome.

Speaker 6

So I believe you said that is a reasonable point for all of 2024. I'm just wondering why that wouldn't continue to move higher.

Speaker 2

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

Speaker 3

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

Speaker 4

And is there like a level I mean,

Speaker 6

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

Speaker 3

Yes. I think the way we've always viewed it is in order to reach profitability, we've said that that rate needs to get closer to 40% of all tests being exome and genome. And we're anticipating that point of breakeven early 2025. And so I think something in the mid-30s by the end of this year to exit the Q4 is likely the right landing spot and we'll evolve towards that with each passing quarter of 2024.

Speaker 6

Great. Thanks for that. That's helpful. And then, I think the guide, right, is for greater than 50% or plus gross margin. So the 4Q underlying was 52%.

Speaker 6

Is there a reason if mix is going up, is there a reason why the Q4 52% shouldn't be like the floor for 24% or is there something else going on with the mix shift that could drag gross margins down?

Speaker 3

No. Look, overall, the comparison is 45% for full year 2023. I think we just want to see a little bit more data come through before we rely on Q4. Historically, Q4 seasonally has been our strongest, both in terms of revenue, reimbursement and therefore gross margin. And so we want to see a little more data come through before we call Q4 an ongoing trends.

Speaker 3

Certainly, we're optimistic that there's more room to improve average reimbursement rates and further conviction that we can continue to drive down COGS. And with each percentage point we pick up in overall test mix, it should benefit, because the Exome portfolio continues to operate sort of mid-sixty percent gross margin. But we just want to see a little bit more data come through before we call Q4 the new normal, if you will. But extremely confident we'll end the balance of the full year at 50% or higher.

Speaker 6

Got it. And then maybe the final one, just biomarker bills, like is there just how could those impact you to the extent these 15 states kind of you begin to see payment rates and there's another I think 5 states behind it. Is it are you already getting paid pretty universally? Just any color on the level of test today in those 15 states to the extent you were to see commercial coverage go up to 100%, what kind of impact could that have? Thank you.

Speaker 3

Yes. There's no doubt, Dan, that any improvement in underlying policy coverage is a net positive for us to the extent payers or state systems pick up exome and genome coverage, right. That should be a net positive to us. We expect it to be a net positive to us. At the same time, we want to make sure we're not getting ahead of ourselves.

Speaker 3

So there's a long way between enacting a biomarker bill or putting in place a positive coverage decision and getting paid. And so we want to make sure we have the operational experience and more so can see it translate into actual cash collections before we start to rely on improved reimbursement. But recent momentum with respect to policy and in particular these biomarker bills, it's great thing for patients. We believe ultimately, and should be great for our business. Our expectations are built into the guide and we'll learn more for the year once there's more clarity on how some of these will be enacted in practice.

Speaker 6

Got it. Terrific. Thank you.

Operator

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

Speaker 7

Hey guys, this is Vivien on for Mark. Thanks for taking the question. Can I just walk through in some detail what you're expecting for 2024 in terms of exome conversion? Aside from that, it sounds like you might be expecting somewhat back halfway this year. I think you've also highlighted picking up that competitor business as upside.

Speaker 7

Just maybe just walk us through any other puts and takes to discuss for the 2024 guide? Thanks.

Speaker 3

Yes, I'll start. I'd say, Bittian, the low end of the guide represents about 13% year over year growth. That's consistent with what we just delivered. And we want to acknowledge that exome and genomes are still relatively new technologies for some physicians. We're expanding markets that takes time and we've learned some lessons from 2023 and we don't want to get over our skis with respect to the expectation on the rate of change to Exome beyond what we can clearly see in our data.

Speaker 3

And I'll just remind you that offsetting Exome growth is roughly 30% or $60,000,000 of full year revenue today comes from non exome tests. And so as these non exome tests, which as you know, are relatively low gross margin non core to our strategy, they will be running off in some fashion. And so we expect to see some declines in volumes and revenue from non exome tests offsetting volume growth. And so try to ensure that we acknowledge that in the guide that we provided.

Speaker 2

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

Speaker 2

But it's, I would say, continued steady growth throughout the course of the year.

Speaker 7

Okay, perfect. Thanks so much. And then just a quick follow-up. Kevin, maybe you could dig into EMR integration a little bit, just how you're thinking about potential upside from that opportunity? It also sounds like you guys have consolidated the menu a little bit.

Speaker 7

So how should we be thinking about that?

Speaker 2

Yes. So starting with EMR, I would say it's something that we do routinely and we will continue to focus on that to open up access. So I put that in as kind of table stakes in terms of how we operate, how we make it easier to work with us, how we continue to smooth out the And in terms of test retirement, And in terms of test retirement, we're really pleased. As I mentioned earlier, that we were able to retire those 350 or so tests. And we feel like we have a healthy test menu and a very focused sales team and operations team that's going to continue to drive the conversion to Ekso and Genome.

Speaker 2

And as we keep making progress with that, we'll continue to, I think, have a healthy approach to reviewing that test menu to retiring tests over time. We want to make sure that we can continue on this steady growth rate. We feel like we're in a position of strength in terms of the overall commercial strategy and how that links up to our operations team. There's a really beautiful handoff that we're seeing between those two teams that keeps everyone really focused on near term execution. So we feel like we're in a great place in terms of getting volume in the door, getting reports out and continuing to get good volume, continue to focus on that account profitability and drive us forward towards profitability in 2025.

Speaker 7

Awesome. Thanks for taking the questions.

Operator

Thank you. This does conclude the question and answer session

Speaker 2

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

Operator

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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GeneDx Q4 2023
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