GeneDx Holdings Corp. (WGS) Earnings Call Transcript & Summary

All right. Welcome, everybody. I'm Matt Sykes, the Life Science Tools and Diagnostics analyst at Goldman Sachs, and I'm pleased to be hosting Sema4 today at our conference. We've got Katherine Stueland, the Chief Executive Officer; and Joel Kaufman, Vice President of Finance and Corporate Development. Katherine, Joel, thanks for joining us.

Thank you for having us.

Thank you for having us.

Maybe if we could just kind of start out, you can kind of set the stage for us a little bit and talk about some of the recent changes, there's been many, and sort of your expectations for the course of this year and some of the key accomplishments?

Certainly. Well, first of all, I'm 6 weeks in, and really excited about where Sema4 is going moving forward. Now that the GeneDx acquisition is closed and we're in full speed ahead in terms of integrating the teams and the technologies, really putting us on, I think, a strong run rate in terms of revenue growth for the year in addition to being able to drive meaningful gross margins. So we shared thinking about the revenue growth for the year, really looking at what we had announced earlier, $350 million between the 2 companies with an exit rate of 30% gross margins and ending the year with at least $200 million of cash on the books. So we have put in place a really strong plan to continue to drive top line growth while also taking a look at both companies to be able to make some meaningful impacts on COGS productions. From an operational standpoint, there's a lot of opportunity in terms of overall operating efficiency between the 2 companies. And then just really putting a mindful approach to how we're investing moving forward on the R&D side of things. So we can make sure that we're putting our dollars towards the highest impact efforts, keeping the spirit of innovation alive and really continuing to move into the health insights side of the business as well. So a lot of work underway to integrate the 2 technologies and teams. And I think just a mindful approach of how we want to manage the business, especially given the global environment that we're working in. In terms of some of the shifts, obviously, one of the big changes from a management perspective is I'm now CEO. I think as we moved through the course of diligence and then integration planning, just taking a step back, Sema4 has been through just an incredible growth trajectory after being spun out of Mount Sinai. And now it has really been, I think, positioned in a perfect place from a commercial standpoint moving forward. So I'm able to help drive a more commercial mindset for the business and really taking a look at how we're managing the financial investments of the company moving forward, enabling Eric and the R&D team to focus on some of the innovative approaches to R&D, health systems and pharma moving forward. We also recently announced a CFO transition, which really is rooted in a similar mindset shift of just commercial operational experience for the company moving forward. So overall, we streamlined the management team to really put a finer tune on highest and best efforts for each of the management team leads to be able to deliver on the targets that we mentioned earlier.

Great. Thank you for that overview, Katherine. Appreciate it. Maybe you talked a little bit about the gross margin improvement and the 30% exit rate implied in your guidance. How should we be thinking about some of the drivers from both the Sema4 and a GeneDx perspective? Maybe if we can dig a little bit deeper into that?

Certainly. And I invite Joel to certainly contribute to this. But I think there's really 3 opportunities for us. One, of course, there is top line revenue growth that as we think about expanding utilization of our testing and reproductive health in the pediatric setting as well as oncology health systems. There is a lot of opportunity for us to expand utilization with new customers. So there is top line growth in terms of volume, revenue and improved ASPs. We have COGS reductions that are underway for Sema4 standalone, but also utilizing some of GeneDx's best-in-class COGS approaches. So that's another really important opportunity for us as well. And then, of course, overall operating efficiencies across the entire business, we're really being able to -- we're taking a close look at how the entire business is operating and ensuring that we're really targeting revenue that is high-value revenue, I think when you're in a high growth stage for the company, really attuning the commercial operations towards being able to pull in volume that's high-value volume.

Yes. Matt, the 2 things I'd just quickly add there is on the GeneDx, Legacy GeneDx side of the business, there is a positive mix shift dynamic happening as we shift from the legacy panel business, which is at a sort of below corporate average gross margin to the faster-growing whole exome, whole genome side of the business where there is a much more attractive gross margin profile. And then across both the Legacy Sema4, Legacy GeneDx business is our efforts in revenue cycle management for tests that we're already running to make sure that we're extracting every revenue dollar that we can. So that's the sort of holistic approach. It's a lot of singles and doubles across the board. But when you add them all up, it gets us to that exit trajectory of 30% that you mentioned.

Got it. Thanks for that. And maybe in terms of cash conservation activities you're implementing to manage that $200 million burn. We're obviously in a very different macro environment. So adjustments need to be made. Maybe talk about how you're managing that in relation to the cash burn?

Certainly. It was a priority, frankly, predating the close of GeneDx. So the Sema4 team had put a lot of plans into place. We actually executed on a production in force at the same time that we announced the close of GeneDx and that was across the board. So that was, I'd say, an early step towards recognizing the need to really manage the finances of the company more closely. Moving forward, what we've really started looking at is across the board our commercial spend, how can we get more efficient, especially bringing the 2 commercial teams together. Lab optimization is something, we have 3 laboratories. So how do we really take a look at our footprint in addition to our COGS efforts? Revenue cycle management is another approach that we're taking to be able to manage the cash. And then overall, just looking at the R&D portfolio and how we're investing and what we're investing and ensuring that we're really putting our dollars towards the areas that I'd say, we have a competitive advantage in where we think that we have a right to win in a way that's different from other companies.

Great. And maybe we can dig into that R&D. I mean, where are the rights to -- I mean, where do you feel like you have the right to win? And what are the areas of R&D that you are going to be focused on?

So I've now spent, I think, the past decade in this space really and seeing what it takes from a building, scaling and sharing genomic information standpoint and having worked now at 3 companies in the genomic space. What I think is really interesting about the Sema4 GeneDx combination? One, we have a leading reproductive health franchise on the Sema4 side of things. Two, GeneDx is bringing an incredible rare disease asset to bear, both in terms of our exome, our interpretation platform that is not only applicable to our exome, but to genome as well in addition to the rare disease dataset that we have. But then when you think about the data engine, Centrellis, that Eric and the team have expertly built. That is an incredible combination of just being able to put a data engine that will be able to deliver improved and personalized health insights with our exome and genome as a backbone. That really enables something that is very different from any other company in this space. And I think that that really sets the foundation for how we can work with health systems and pharma companies to deliver on the promise of personalized medicine.

Got it. You touched on the restructuring that occurred sort of in conjunction with the close of the GeneDx transaction. Where were some of these cuts made? Have you seen any impact on the business quarter-to-date as a result of that?

I think what's really encouraging is that the business past the restructuring is completely on track to where we want it to be. So the cuts that we made were across virtually every functional area. So it was done as surgical as possible. But again, I think when you were in such a high growth stage for a company, it's almost a healthy practice to be able to just kind of take a look at the headcount and figure out how you can move some folks out in order to create greater efficiency. So I think it's a natural, virtually every company in the space does it from time to time. So it was the right time to do it. And we've seen no impacts. The business is completely on track.

Got it. Spend a little bit of time discussing your focus on sort of maximizing the commercial and operational efforts in the context of the macro environment we're in and the balance sheet and everything like that. Where are you really kind of pinpointing some of your efforts and, frankly, your time?

Certainly. So one, our commercial leadership is incredibly strong. So on the GeneDx side, we've brought Jen Brendel, who spent many years at Pfizer as well as at Bayer and was also with me at Invitae. And Jen really has developed at GeneDx and now is assembling with the combined teams at Sema4, a commercial engine that really takes to go account a data-driven approach to being able to more efficiently get sales reps out there, while we're still in the sales rep driven side of the clinical selling business. So that's one area where, frankly, I don't need to dedicate as much of my time because we have a great deal of strength in terms of our leadership there. One of the areas where we're really starting to focus with our health systems partners, we have 4 founding health systems partners who we've been investing our time with to really understand how we take a top-down approach to ensuring that more patients have the benefit of genomic information and what Sema4 can deliver to them in terms of health insights. So what I've seen in terms of the Sema4 approach in working with these systems is a really effective way to be able to ensure that more patients get the benefit. What we need to be able to do is take the learnings from these partnerships and develop a plan for scaling them. So we can bring them to more health systems in a more cost-effective way. So that's one area that we are focusing the team on. And then the third area where we're really spending a lot of time is just overall operating efficiency. So we are really taking a look at how do we continue to drive down COGS, how do we improve revenue collections, how do we drive down turnaround times and be able to take some of the benefits from what we've built at GeneDx from a laboratory perspective and apply it to the broader Sema4 enterprise. And I'll say one of our early wins actually is being able to set up within GeneDx, a population health screen that we've deployed at one of our founding health system partners. So in the middle of our integration planning, there became a need to stand that up and we did that really quickly and in a more cost-effective way. So I think that's an early example of where we can bring the operating strength of the GeneDx operations and to benefit the Sema4 broader customers and future of how we're going to be operating the business.

Yes. The only thing I'd add is we're very much -- so we're talking a lot about integration, right, between the 2 businesses. But I think we're also very much focused on integrating the various components of both legacy businesses to their counterparts. And when we think about the commercial organization and we think about the current market environment and investing with ROI. The effort that we're making on our revenue cycle management side isn't just collecting more, it's also the effort we're making with payers and understanding that not all volume is created equal. And if we're going to deploy, Katherine mentioned, taking a very data-driven approach, we are very much focused now on ensuring as we allocate resources and capital throughout the business, throughout geographies, test lines that were set up to ensure that, that volume coming in is going to come in, in a favorable profitable way for Sema4. And that is a little bit of a sea change in the way that the business had been operating prior.

Relative to your expectations, I know it's been a very short period of time, with the integration of GeneDx with Sema4. How do you feel that's going? And do you think there's areas that you could speed up, there are things that you need to slow down? Just kind of mark-to-market, how do you think that's going at this point?

Well, I think with some of the management changes, myself included, was an eye towards how do we speed up integration. What is really interesting though is, and I worked on more than a dozen integrations and acquisitions previously before coming to GeneDx and now Sema4 in the genomics space specifically. So I've seen kind of the good and the bad. What's really interesting in looking at the teams is that from a cultural perspective, I think because Sema4 was born out of Mount Sinai and GeneDx was born out of the NIH, there's actually a lot in common between the teams and the technologies that really are working in our favor. There's an extraordinary commitment to clinical excellence. And from a technology perspective, really ensuring that we're bringing to the forefront the latest thinking to ensure that we can scale the businesses. So overall, I'd say I'm really encouraged and excited about bringing the teams together. There's always bumps in the road when it comes to integration, but I think thus far, we're seeing just 2 really complementary skill sets, Eric and myself are great examples of that. But when you think about the management team that we've been able to put together, there's really, I think, a nice overlap in terms of clinical expertise in addition to commercial and R&D. So overall, we're really excited about the union of the teams and the future together in terms of being able to really bring the synergies of both to bear to improve the business.

Got it. And in terms of the combination, at the time there's been a number of changes within management. How has this had an impact on the culture? And how are you looking to kind of augment that a little bit? Is it the best of both, put it together? Is it creating a new one? Or is it -- how do you think about that just because it's a very uncertain time for everybody? And so that creates an additional environment and where you want to make sure you have a very tight well-knit culture? How are you thinking about that?

So culture is definitely an area where I'm spending quite a bit of time just getting to know the team. I did this actually when I joined GeneDx, just spent a lot of time talking to people, understanding what was really working for them and what wasn't working for them. And in fact, before I joined GeneDx, got some advice from the CEO of AWS, from his experience from Tableau and Salesforce, where he said, you really need to understand what is working culturally and make sure that you're not changing that part. But also people are really eager to understand what my experience is and what my hopes and dreams are for the organization from a cultural perspective. So I would say that some of the big shifts that we really want to make within the organization, there's clearly a shared commitment to patient care. There's a shared commitment to ensuring that we bring the benefit of health insights powered by genomics to more and more patients. But really creating an atmosphere of, I would say, accountability and openness, transparency is something that we're trying to infuse as a part of how we operate differently. So we're instituting kind of some of the business practices that I have experienced that really enable us to take regular health checks of the business, doing a look back in terms of what worked for us. It's like looking at game tape, right? What -- where do we need to course correct moving forward. And so it's an operational approach that I've learned that I think really benefits people that we're kind of infuse in the early days here. And keeping in line with being a data company, really using analytics to be able to guide a lot of our decisions moving forward.

Got it. And maybe discuss a little bit how you think about the overall portfolio on a combined basis as you progress towards profitability?

So the reproductive health offering that we have, as we talked about, is incredibly strong. We have focused quite a bit of our commercial efforts in the IVF space. We want to extend that into the OB space even more. We certainly have been selling into the OB space, and that's where we start to see some of the selling of hereditary cancer in addition to reproductive health. So I think that's where you start to see the power of the portfolio really benefiting patients and where we can start to provide multiple reports to a patient, which is, I think, one of the differentiators. Being able to extend though, if you think about a woman who's thinking about having a baby or who's pregnant, guiding all of the decisions from a diagnostics perspective to ensure that she has a healthy pregnancy is hugely important. But then once she's had the baby, if there's an issue, if we have a baby who's in the NICU, that's where the GeneDx portfolio starts to really provide additional benefit. So we're extending our relationship with that mom-to-be through having a baby and being able to provide additional benefit. And then, of course, as a child is growing up, if there are seizures or other unexplained symptoms that happen, we're able to provide information to provide an earlier diagnosis. And in those cases, being able to put -- have an intervention of an exome really can change the course of an outcome for a child at that point. So we are really trying to shift the utilization to make sure that our exome becomes an early intervention to rule in or rule out whether or not there is an underlying genetic disease.

Got it.

The only thing I would add is when we think about the portfolio, I mean, I go back to sort of this data-driven approach. We're consistently looking at our offering, understanding what's resonating in the market, what we can do profitably. There's a great example at GeneDx throughout the end of last year and in the beginning part of this year, GeneDx had an offering of hundreds of panels, many of which were just not profitable for the business. One or 2 one-offs, that just was not a sustainable way to continue the business. They did a sort of menu optimization, kept the panels that knew that added clinical value that could add margin to the business. We're taking a very similar approach. The way we're looking at things at Sema4. We feel really good about our portfolio today. But if it's something that we don't need to do in-house that can drive better margins and cash flow for the business, we're looking at all of our options.

Got it. When you think about advancing the data and the partnership aspect of the business, which we think is probably the area that you're not getting much credit for at all right now. Where do you anticipate attacking most aggressively to drive that revenue in the near term for data and partnerships?

So first, from a partnerships perspective, there's really, I think, 2 distinct areas; distinct and interrelated. So one, on the health system side of things, we talked about those founding partnerships, continuing to drive utilization. But then, as I said, really developing a plan for scale, so we can bring programs in a more modular way to other health systems. So that will open up, I think, continued opportunities in the future to be able to more cost effectively really drive more and more data into Centrellis. Continued test revenue and test volume through our clinical selling channel also will help with that. So in the same way that we want to move our reproductive health offering from IVF more broadly into OB. On the pediatric side of things, volumes were really focused on the GeneDx side with medical geneticists. And so pulling it into neonatologist and pediatrician, so to new account growth. So that's one source of fuel and data into Centrellis. And then, of course, being able to continue to pull EMR data from all of these health systems further enriches and strengthens our data asset. Being able to then take that -- the data asset and go and meet with pharma companies and talk with them about how we might be able to help them expedite drug discovery development and time to market is an opportunity that we think is tremendous in terms of ability to drive revenues coming from that data asset. GeneDx has probably the richest rare disease database with nearly 400,000 clinical exomes that we've sequenced. A third of the pharma pipeline is in genetic underlying disease. And so we think that there's a tremendous opportunity in terms of being able to partner with pharma companies to realize the data asset. And importantly, from a patient perspective, being able to, again, if you think about the child to maybe having a seizure, being able to connect them with a treatment as soon as possible can change the course of that child's health. So that's how we're thinking about it from an overall focus perspective as well as from a patient impact perspective.

Got it. You've discussed in the past kind of centering the Sema4 menu of offerings as sort of a family health initiative. What do you mean when you say that? Maybe break that down for us? And how differentiated is that in the market?

So being able to really partner with a mom-to-be through having a child and then really continuing to serve the entire family is something that's of important to health systems. But it's also important in terms of being able to put the power of the data to work for any given family. So if we think about the reproductive health offering starting with carrier screening for a mom-to-be and then moving towards sequencing babies at birth and being able to hold that information throughout the course of their lifetime. As soon as there is a symptom for that child or that individual throughout the course of their life, they're able to query and we're able to provide information. So that is something that many are driving towards in the space. We think that we are really well positioned to do that more so than anyone else because of the competitive advantage and the time advantage that we've built on our exome and our clinical interpretation platform. So between that and then the continued insights that Centrellis can provide over the course of a patient's lifetime, we think that we're in a great position to be able to really drive more and more value for a family throughout the course of their life together.

Yes. Matt, I would add, it's a shift from thinking about care delivery as being episodic to sort of spanning the continuum of care, right? So when you think about what is typically the first interaction that an adult has outside of an episodic event with the health care system, it typically is a reproductive event. And it's a captive customer that allows us as a company to establish a very strong relationship with that customer. So the opportunity to bring Sema4 sort of pre-reproductive, planning, reproductive health through testing offerings that we ultimately believe will become standard of care for all healthy newborns in the country. It's sort of owning that customer relationship. And then we very much believe in this idea that you will test once and you will query many times throughout a patient's life and we will establish that relationship from the get-go and be the go-to testing provider and health intelligence insight provider for that family.

I think the other thing to consider is we're still in the early stages of really understanding the genome. And we are in a state of constant discovery. In fact, GeneDx has been a part of discovering 300 new genes. We have contributed as a Sema4 to the discovery of disease and gene correlation. And so as we continue to learn more over the coming weeks and years, we're able to provide important new diagnoses. So I think if we look back on the past decade since the Supreme Court decision, it's been an explosion of utilization, but it's also been in part because we have learned so much more about how many people are impacted by genetics. And as we continue to see greater utilization, we're going to continue to learn more about exactly what the impact is. And so being able to have the engine that we've built with Centrellis enriched genomically, but also having a more comprehensive view with EMR data. That is going to be able to really help us arrive at for each individual upon a diagnosis, what is the health and wellness plan for them and provide that in the context of other patients who may have gone through a similar experience.

Got it. I want to talk about the health systems. So we think it's a very unique go-to-market strategy. Before we get to that, just a question that kind of I started thinking out when you started talking about the family health initiative is that you said it was very important to the health system partners that you have. And I think as you say, we're very early in this. And sometimes it's often hard to identify what the right application is for the patient of genomics. But yet you've got these partners that are doing it in real time. And that feedback loop in terms of the pragmatic application of genomics has got to be really helpful information for you. So how much are you learning via health system partners and improving upon what your offering is? And is that a competitive advantage versus others in the marketplace?

Absolutely. We are learning constantly from them. In fact we're meeting with them today. So we kicked off a health system consortium earlier this year. And until we meet with them on a regular basis to really understand how each one might be able to inform the other. As you said, we're solving different problems for each health system. So for one health system, they may be more interested in solving the problem of cancer in their particular market where they're competing with an academic center that has a lot of referrals out from initially their health system to maybe an academic center. So they're really interested in keeping the patients and not losing them to referral. So by driving population screening by then identifying patients who may be at higher risk, being able to upgrade them to a diagnostic, if they're at a higher risk, we're able to help keep that individual and their family within the health system, which solves an important business problem, frankly, for that health system. In another market, it may be that they really want to focus on healthy mom and healthy baby. And so that's where we're able to go and drive greater utilization of carrier screening and now they're interested in adding our NICU and our pediatric offering as well. So I think that the learnings that we get from them helps inform our strategy, but it also helps cross-fertilize the way that each of them are thinking about it and really puts us in a position to be able to drive, I think, the market dynamics in a way that helps that health systems, but also helps put us in a leading position.

Got it. That's really helpful. Thank you for that. And we feel like the biggest differentiating factor for Sema4, now GeneDx as well, is the sort of the -- we call it the enterprise-led sale approach towards the health systems. And there are other peers in the industry that are direct to patient or oncologist and that just gets -- it's challenging. It takes a lot of time and effort and money. Not that health systems aren't challenging. They're complex organizations with a lot of constituencies. But maybe talk about some of the successes you've had to date with your current health system partners. And where have you faced challenges, either in the integration or even the sale process?

So without a doubt, the enterprise sales approach is that is the future. And I have tried selling in health systems genomic information without nearly the success that we've seen from the Sema4 approach. I think what Sema4 has done really expertly; they are working with the hospital administrators and really the drivers of what's prioritized. But embedding it into the EMR to make it easier for clinicians to order is a key aspect of what has been working really well. And I think as we look at, for instance, NorthShore in Chicago, that's where we've been able to drive population screening, which is really taking a look through primary care doctors and trying to identify patients who may need a more diagnostic view of their cancer risk. And we've been able to drive an increase in diagnosis at NorthShore. So I think that's a really good example of where we've been able to partner with them. The ease of use in making it easier for a primary care doc needs to be a big part of what we do differently. I think one of the other areas that Sema4 doesn't get a lot of credit for is the user experience, the patient experience and the clinician experience that we're building. Really being able to scale genomics also includes making it easy for a non-genetics expert to order it, to understand it, to be able to translate it to a patient and to ensure that the patient knows what their action is next, and that's something that we've been able to do with our team of designers.

Got it. And just the last question when we have time. Just it's kind of odd after all you're going through in the integration to talk about M&A. But are there alternative means to advanced platform and portfolio of products without M&A? Or is M&A still on the table longer term? How are you thinking about capital allocation here?

So I think one of the areas that we're eager to focus on really is improving our technology. So COGS turnaround time. We can certainly look at partnerships for our oncology offering or other modalities. But it continues to be a quickly evolving landscape. So we're having a lot of discussions on this.

Got it. Great. Well, Katherine and Joel, thank you so much for joining us. Really appreciate your time today.

Thank you.

Thank you.