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

All right. Good morning, everyone. Thanks for being here today. Dave Delahunt, life science tools and diagnostics team, and here we're joined with the team here with Katherine Stueland. And if we could get started with -- if you could just give an overview of the state of the business in Q2 and how the restructuring efforts have progressed.

So good to be here. Thank you for hosting us. So just taking a step back at what we've been able to do over the past several years with GeneDx. I'm actually entering year 3 leading the company. And as you said, year 2 last year included our merger with Sema4 and really entailed a lot of restructuring of the company. And I'm happy to say that we're really focused on 3 main goals as a management team and we really embarked on this just about a year ago. So one is sustainably growing the company by way of revenues and really continuing to drive gross margins and the key indicator of all of that, of course, is our volume and revenue growth and our ability to really drive adoption of our industry-leading exome. The second goal of ours is to become the most efficient company by way of operating efficiency in the industry. And the way that we want to make sure that we're doing that really is by balancing both innovation and scale. So continuing to drive leadership and whole genome sequencing, continuing to drive leadership by way of exome utilization, but really putting into place efforts across our ability to lower COGS, drive down turnaround times, both of which we've done successfully over the past 2 years and be able to really start deploying automation and AI methodologies for variant interpretation and also some of the core operations needs of the business, whether it's genetic counseling or billing and revenue cycle management. The third goal is really coming down to the ability to manage the company with a high level of integrity by way of financial responsibility. And as we think about last year, some of our stand-alone was turning $90 million in the first quarter before the acquisition closed of GeneDx. And what we've been able to do is make meaningful restructuring changes to be able to drive down the cash burn and be able to really ensure that we can deploy our capital in -- towards the highest and best uses of driving revenues, improving gross margins, et cetera. And where that's landed us as we think about last year, we ended the year with 40% year-over-year revenue growth '21 to '22. As we look at Q1, we had meaningful growth in Q1 across our volumes as well as our revenues. And we've had a 30% reduction in cash burn. So where we sit today, we intend to drive $205 million to $220 million in revenues and really continue to drive down that cash burn and we are well on pace to be able to hit our profitability goals in 2025.

Great. Fantastic. And could you tell us a little bit more about how volumes have been trending recently?

Absolutely. So as we took a look at Q1, about 17% of our volume was in exome. And that represented on the revenue side, more than 50% of our revenues. So that conversion to exome is critically important. We have seen in Q2 that 17% tick up to about 20% so far. So we're starting to really see the conversion and the execution of our sales team really nicely translate into volumes as well as revenues. And that really is what accounts for the type of sustainable growth that I mentioned. We're focused on really being able to continue to convert existing customers to exome, bring in new customers outside of the genetics experts, so think pediatric neurologists and neurologists, pediatric cardiologists. Bring them in and get them starting to utilize our testing which may be by using something like chromosomal microarray or CMA. And that is a test that commonly is used before a shift to exome. We took a look actually at some of our customers and what we've been able to see over the past 3 months, and we've seen our sales strategy working. So we're seeing in customers who are -- have been historically ordering CMA. Their use of exome is increasing month over month, March, April, May and CMA numbers are coming down. So that tells us that, ultimately, our sales team is very effective in that switch which is a data-driven approach. It's important not only for our business in terms of our ability to sustainably grow in a high-growth era, but also it's better for patient care. So we've been able to utilize some of the data that we've presented that shows that use of exome is actually delivering a higher diagnostic yield with fewer variants of unknown significance. So it's not only good for our business, but most importantly, it's better patient care for those who are utilizing our testing.

That makes sense. And can we maybe double click on the expansion of converting more docs to exome test. And I think you'd mentioned you're offering non-exome tests to kind of meet the docs where they are today and then help transition them to using more exomes. So can you maybe double-click on that for us?

Absolutely. So we have a sufficient amount of data that, as I said, really shows that exome first is in the best interest of patients. 70% of commercial payers are paying for exome and genome testing and we have guidelines from ACMG which of course, is the governing body of medical genetisis. NSGC which is the governing body for genetic counselors and the American Epilepsy Society. So outside of the genetics experts who are all recommending that an exome and genome should be utilized as the first-line test when there is a child who may be missing milestones, there's a suspicion of autism. And so all of that data is hugely important in terms of market education. So, we have sales reps who are out there educating clinicians. We have 66 territories. So we've got a growing team of sales reps out there. We also have built out a team of medical science liaisons. So for the first time, we're really embedding the clinical experts in the field to be able to work alongside our sales reps to be able to not only talk with medical or genetics experts about the conversion to exome. But as we're talking to new customers who may not be the experts, talk to them about the importance of exome. Now that being said, the American Academy of Pediatrics encourages pediatricians to order first CMA. And so that's a bit of what we mean by stepping stone and meeting clinicians where they're at. We want them to order from us and to be able to really earn their loyalty. We know that the stickiness factor is very strong with our clinicians. So once we get them ordering, they will continue to order from us, and we're able to then convert them to exome. Some of that takes some time. So we've been able to drive down our exome turnaround times to about 4 weeks. Historically, it was much longer than that, it could be several months. But we're now down to about 4 weeks. When you include being able to do a prior [ offer ] of benefits investigation that can add some time as well. So you'll see a clinician kind of start with one and then make sure that everything that we're talking about by way of insurance coverage actually does play out for them. So we're meeting them where they're at, and we're showing that we can successfully convert them. But we really do think that, that growth in CMA or other testing as it shows up in our financials is a really important indicator of a pipeline of testing that we can convert to exome.

All right. And can we maybe talk more about the time lines for some of the product launches and are you seeing the pace of market capture in, say, rare disease in adult screening and newborn screening?

Absolutely. So just as a reminder of the overall strategy for people. If we think back to 2013, that was the year that the Supreme Court determined that you cannot patent DNA, that's really when we saw the steady build of conversion from single gene tests to multi-gene tests. And so there are now thousands of multi-gene panels that are out there that are being utilized. What we want to really be able to do is drive everyone to a single test, to an exome or a genome. So we're starting with exome in most outpatient cases now, and we are starting to invest in what the future genome product will look like. But it really is having that one test as a backbone for all indications across every life cycle that we want to be able to drive. So what does that mean in terms of product improvements, we're continuing to invest in lower turnaround times. We recently released an internal product for Centrellis, which is called Data Explorer, and that enables us in an automated fashion to be able to very quickly inquire about how many patients may have a certain variant. So that's an important internal tool that is driving our deal pipeline and really helps us more effectively engage with biopharma partners. We have investments that we're making in newborn screening. And we -- last fall, kicked off a collaboration with [ Dr. Wendy Chung ] from Columbia. She's now at Boston Children's as well as New York State Department of Health and Illumina where we're doing newborn screening for healthy babies. So there's a lot of really good rich data coming out of that collaboration that is setting a foundation for what newborn screening and population screening can look like, and we're pleased to be leading the charge there. I think that that's an area where we're going to continue to invest in market development and really working with payers, with policymakers on what does that look like by way of reimbursement? How is it paid for, et cetera. So we're excited about the prospect of that.

Great. And maybe on the competitive landscape, could you tell us more about how do you see your competitive advantages and differentiation in capturing more market share in the space?

Certainly. So a bit of context when I joined the genomics industry about a decade ago and that Landmark Supreme Court decision came out, really, the discussion was brought to life about the possibility of genomics to be able to inform diagnosis of disease, but also to prevent disease, how do you sequence and be able to interrogate regularly and then be able to put people on a healthier treatment path. And I spent the -- my prior life when I was at [ Invitae ] really focused on the panel side of things. The one area where we could not compete was with GeneDx and their exome genome. And the reason for that really came down to our interpretation platform. So our interpretation platform has an underlying incredibly rich data asset that continues to grow as our volumes grow. It continues to get smarter as we run more and more patients through it. What that means is we're able to upgrade or downgrade a variant of unknown significance and deliver a more definitive answer with a higher level of confidence to clinicians. And so that interpretation platform is really squarely where we need to continue to invest and ensure that we can maintain our competitive advantage. I think as we think about the sequencing side of things, anyone can buy a sequencer and plug it in. We're often asked about what is that secret sauce and there have been competitors who have tried to catch up to us by way of building a data asset and an interpretation platform. But we invested years ahead of the market. So if you think about how we pioneer multi-gene panels, we very early, were pioneering exome and genome. So we now have a data asset of more than 450,000 exomes and rich for rare disease. We invested in not only the baby or child but also in the parents. So it's enriched for trios which continues to strengthen it. And it would require that equal level of time and investment by way of being able to have a competitor really reach us in terms of the richness of that data asset. So it's something that we're acutely focused on. We want to continue to enrich that data asset and we want to be able to continue to build, I would say, a companion data asset that is based on clinical data that is found in your electronic medical record. So we want to be able to then provide the additional context of longitudinal data so we can pair those to the clinical insights and the genomic insights to be able to, from a patient perspective, get an even more definitive diagnosis and prognosis of disease and get them on a healthier path by connecting them with clinical trials and FDA approved therapies.

Great. Could you maybe talk about your partnership with [ Mahzi ] Therapeutics and what you're looking to accomplish there?

Certainly. So we are in the beginnings of our partnerships with many biotech companies. So when I started at GeneDx in 2021, the team really had been focused on just continuing to build the operational and clinical strength. Since then, we've built a commercial engine. We've built out a business development team and we've started to really better understand the needs of biopharma partners. And we've added several biopharma partners this year. [Mahzi] is representative of, I would say, one of the most important elements of this rare disease community that is very special and connected. You have patient advocates who are searching for a drug target, they are searching for a biopharma company to develop that drug target, and they are working collectively to really bring together other patients to expand not only the understanding of prevalence. But then as you look at longitudinal data and Genomic data, how might you be able to think about clinical trial optimization, so inclusion, exclusion criteria. And so it comes down to a growing number of patients that were able to help really identify because we are testing more patients than any other lab in this space. And then being able to look and partner with companies like [Mahzi] to say what are the inclusion/exclusion criteria, we're doing it in the case of ataxia, which causes a movement disorder. We're doing it with a form of epilepsy, really trying to identify areas where a patient may have this underlying genetic condition, but they may not have the seizures that are oftentimes the #1 symptom of this condition. And so in doing that, we're able to then identify more patients that historically would not have been considered for a clinical trial. So ultimately, that gets us to more patients identified for a clinical trial, a better view in terms of what kind of patient cohort they can bring to the FDA and get to an FDA approval as soon as possible. So that's what we're working on with Mahzi across a few different indications, and we want to continue to rinse and repeat that as we think about other biopharma companies as well.

Great. So speaking of clinical trials, could you tell us more about the SeqFirst and Guardian studies? And any updates there?

Certainly. So SeqFirst is a study that we embarked on with the University of Washington, looking in the inpatient setting as well as the outpatient setting for exome and genome. And what we've been able to do with that study is drive, I would say, in particular, in the outpatient study, quite a bit of engagement with patients there. And that really sets the standard for why exome and genome in that setting first. What are the healthy economic benefits of it. We have some data that shows that in the inpatient setting, we're able to help save $30,000 per patient by utilizing an exome or genome in that setting in an outpatient setting about 6800 patients -- $6,800 per patient. So that study is really looking to further establish the importance of exome and genome upfront. The Guardian study, which is with [Wendy Chung], looking at newborn screening for healthy infants, we're looking at 250 conditions. And we kicked off enrollment last fall in October. We had rapid enrollment. This spring, we had about 1,500 patients or families who signed up for it. About 75% of those families who we offered it to agreed to be in the study, which I think is remarkable in terms of the willingness of parents to really start to utilize the technology. What we found and Dr. [Chung] presented at ACMG about this, we identified a 2.6% of patients of pathogenic finding. And we also did a retrospective analysis, taking a look at our database of more than 450,000 exomes, looking at those 250 conditions to say, okay, historically, how many -- at what age were we able to diagnose these patients. And historically, in 20% of patients, it was age 7, 8, 9, 10, 11. We're now able to diagnose them at birth. So when you think about the ability to do that rapidly, it also correlates with the average time to diagnosis for rare disease, which tends to be about 8 years. we're able to provide information that puts the provider in a place of being able to intervene when necessary. And ultimately, we're hoping to be able to really either prevent disease but at a minimum, be able to slow down the progression of disease. So when we heard that data, particularly the 2.6% and then the retrospective analysis, that's a game changer. That's a game changer. And I think interestingly, there's a lot of really good work that has been going on over the past 15 years in this space. There's been good dialogue and discussion about the ethics of how do you do this in the right way. Dr. Robert Green, out of Harvard has done a lot of work on [BabySeq]. What information are you providing to parents -- at what point in time, all of that is being explored. And I would say we've seen a really positive shift, thanks to data like this coming out of Guardian that shows that the entire genetics community is starting to move down a place of newborn screening is something that we should be doing. It's just a matter of how are we providing that information, at what point in time, what does the consent look like by way of the parents consenting to this information and then who's paying for it. So we're starting to move to, I would say, an era where we see this as a fortunate inevitability, and we're very pleased to be leading the dialogue and investment in this space as well.

And so we have the pleasure of being joined by your CFO, Kevin Feeley here. And so maybe one for him, if you want to chime in on how you're thinking about gross margins going forward, especially as it relates to the mix shift as you start doing more exomes compared to panels?

Yes. I think it's an important question, and it's anchored on that conversion strategy that Katherine outlined to move from legacy-targeted tests and gene panels, which have a less favorable gross margin profile versus our exome product. The exome product today is at 60% gross margin. We know we've got room to take down COGS on that product. We know that there'll be evolution in reimbursement coverage to the positive that should allow for average reimbursement rates to continue to climb. And so really view that exome gross margin of 60% as the baseline in which we can expand from. Total company gross margins are less than that and really are a function of that test mix dynamic that we see in the first quarter, 17% of all tests were exome. We've now seen in the second quarter that reach about a 20% benchmark. And we expect to expand that meaningfully over the coming months. That should allow for a total company gross margins to expand. And then you couple in cost efficiencies, insurance reimbursement improvements to raise reimbursement rates and a focus on a portfolio approach. So we're looking hard at what is the strategic value of each of the test offerings that we have on our test menu, which is expansive and ultimately driving towards a 1 test platform anchored on exome and genome.

Okay. And hot topic in the space these days, with the emergence of new sequencing technologies, competitive platforms to Illumina, maybe some changes going on at Illumina, how do you guys -- how could that benefit you from lowering cost of sequencing and potential for new platforms, to further lower COGS?

Yes. I think look, ultimately, competition, we view as a positive thing for everybody. About 1/3 of all costs for us are inputs, with 1/3 coming from production steps within the 4 walls of our laboratory and about 1/3 being that back-end analysis and interpretation platform. And that's really where GeneDX has proven differentiation, not only in the breadth and knowledge of that analysis platform, what Katherine spoke about, but that's where we've been able to drive down costs in the most meaningful way over the past half decade and we'll continue to do so. Our laboratory processes are built to be agnostic towards the sequence manufacturer. And so ultimately, we've got great partnerships with both companies that you've mentioned and are actively collaborating with both of them on how do we expand access, lower costs so that we can expand access to more and more patients to get this, what we view as life-saving, life-changing technology.

Great. And could we maybe talk more about your physician education efforts and how you're helping docs to better understand the benefits of exome?

Absolutely. The growth that we've seen across all of our testing is really attributed to the commercial investment that we've been able to make on the education side of things as well as a strengthening approach to our medical affairs team as well. So we're very pleased. GeneDX has always been at the forefront of gene and disease discovery. The correlation between -- as we learn more about -- as we learn more about variants and the roll-in disease, we've published, I think, more than 350 publications over the past decade or so. So it is all a data-driven approach. We're generating not only clinical data but health economics data. Our sales team is out there partnering with medical science liaison. We're having meaningful conversations with thought leaders in the space. And importantly, I think we're working collaboratively not only with Illumina, [ PacBio ] on overall, I would say, awareness of the importance of genome-based health care, but also working more collaboratively with payers on it. So as we've gotten to really entrench ourselves in the health economics data and the view of commercial payers, in particular, there's a clear benefit to being able to really skip a lot of the utilization of panels and go right to exome. And we published data in autism looking at, I think it was 19,000 patients, and then 90% of the time when patients did have a prior genetic test before exome, 90% of the time, it was a negative test. And then with exome, we were able to deliver a positive. So that is, I think, really emblematic of the shift that we're trying to make. It is not only taking more time to diagnose these patients, it's derailing diagnosis to patients. It's racking up significant costs to the health care system. And there's a lot of work going into the emotional and psychosocial costs of not having a diagnosis for 8 years. So I think that all of that is really important. We're also doing a lot of work on a state-by-state perspective as it comes down to [ Medicaid ] opening up access. So we're pleased that there have been, I think, 28 states that are covering exome and genome in the outpatient setting. We had a team member joined by thought leaders in Massachusetts because there's a building introduced there that opens up access to rapid whole genome sequencing in the state. So we have a very, I would say, data-driven approach to it, but we have deployed an army of really passionate advocates for opening up access across the board.

Great and Kevin, you mentioned the back-end processes are part of the way that you guys are really differentiated at GeneDx. Could you tell us more about the automation that you have and ways you're looking at improving processes?

Yes. There's a number of ongoing efforts to use automation, artificial intelligence and other mechanisms and almost every aspect of the end-to-end production cycle that analysis and interpretation platform really is built on over a decade's worth of volume. The 450,000 exomes that we've run to date that Katherine mentioned, by far more than any other commercial lab in this country. And there's a snowballing effect of the accumulation of that data that makes the back-end interpretation process more and more efficient with the more data that we feed into it. But looking at steps across laboratory process, our genetic counseling workflow to both improve the user experience and reduce COGS by using automation techniques. And a lot of that is still to come over the coming months.

Great. And maybe on the cash burn, as you guys are improving there, could you help us think about your capital deployment strategy and you've raised some money early this year. So any updates there?

Yes. So we raised $150 million in January that gets us to profitability in 2025 and that is contingent on really 2 things: one, continued growth in our revenues, which we're proving we're able to execute on; two, continuing to drive down our cash burn. So I'll let Kevin provide some more color on the ways that we're successfully doing that.

There's some major waves of costs that will be coming off our books, frankly. We -- so we announced the shutdown of the legacy Sema4 reproductive health and somatic oncology business, November of 2022. Those businesses, were burning significant capital. The shutdown and wind-down activities completed in the first quarter of 2023. So those are all now substantially behind us. In the second quarter, we completed the separation and the integration of GeneDX from its previous ownership structure and IT systems and entanglements into legacy sema4 systems. That work was extensive and is now mostly complete and we've got a keen eye at looking at all operational functions, support functions throughout the company to ensure that we live up to the commitment we've made, which is to ensure that the capital we raised in January makes us to the point of profitability, which we've targeted for the first part of 2025 and confident that we've got enough in the pipeline in terms of cost efficiencies to get there.

All right. Well, it looks like we're out of time. Katherine, Kevin, thanks so much for joining us. Pleasure having you here.

Thanks so much. I appreciate it.