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

Good afternoon, everyone. I'm Matt Sykes, the Life Sciences Tools and Diagnostics analyst at Goldman Sachs. I have the pleasure of welcoming Katherine Stueland, the CEO; and Kevin Feeley, the CFO [Technical Difficulty] joining us here.

Thank you for having us.

Maybe if we just start out at a high level, just give us an overview of the business today and touch on some of those key initiatives that you guys are focused on.

Sure. So GeneDx is the expert in delivering whole exome and whole genome [Technical Difficulty] mainly to pediatric population today with an eye towards being able to diagnose all hereditary disease off of a gene. Today's focus for us as a company really is on delivering diagnoses as early as possible for as many babies and children as possible. So our whole exome is the industry's leading exome, 80% of clinical exomes are run through GeneDx. And we focus on the outpatient setting in these areas like epilepsy, autism, when children are missing milestones. And then we also focus in the NICU, being able to utilize our rapid whole genome sequencing product, which is now made more available as we think about the future with our collaboration with Epic and their [indiscernible] product.

Why don't we touch on that because of the news that was announced this morning. I didn't want to bury the lede there. So you announced a collaboration with Epic this morning. And can we just talk about how that you think will improve your commercial strategy and sort of change the process as you kind of connect directly with the health systems because [Technical Difficulty] Epic system.

We've been known for many decades, since spinning out of the NIH, for the clinical expertise and excellence that we provide. Making our tests easier to access for providers is something that Epic does incredibly well. So being able to just make it part of their routine workflow is a way that we're able to ensure that whether it is a neonatologist in the NICU looking to order our rapid whole genome product or if it is a pediatric neurologist in another part of the country trying to access our whole exome sequencing. So the partnership with Epic really provides an access point for us. We've also expanded our commercial team who are focused on enterprise-wide sales. So how do we take our services and embed them through this EHR capability that Epic has built across the country. And our Chief Medical Officer, Paul Kruszka, who is just a fantastic thought leader and geneticist in the space. He is spending a lot of time with those health systems as well. So this really helps amplify our reach, makes it easier for providers to be able to access. And then with our commercial team and our Chief Medical Officer, really amplifying our leadership in the whole genome sequencing area.

Maybe just talk a little bit about -- I mean, I've always been struck by how much of the diagnostic industry is like the blocking and tackling, online ordering versus faxes and all that stuff that seems very simple and boring, but actually is critical to the operations. And integrating yourself into EHR is part of that. And typically, you see it not immediately, but over time, an uplift in sales because of that. Could you just talk about sort of the duration of sort of the ramp-up process for the Epic integration? And when do you think we'll start to see some of that uplift over time?

We expect that we'll see uplift in 2025. The reality is we do have to build it from our system into their system and that process will start this year and then be able to really take hold in 2025. So it's most definitely a starting point. I think your point is absolutely right. It's hard to order diagnostics. And this is a really important shift for us, for providers having access to it. In a consumer world, where you can order a car online, it's really, really hard for people to access genetics, and that's part of what we have to do is just embed it in the workflow for every provider who has a patient who can benefit from it.

And Kevin, just in terms of like the financials and the spend and the build-out of this, is this sort of baked into the OpEx guide [indiscernible] a lot of that going to happen in 2025?

Yes. It's all within OpEx guide and cash burn guide that we provided for the remainder of the year, I think, beyond any uplift we would see from having just a more effective enterprise-wide sales approach to bring in more volume. I'm also -- and the team is very excited to see what benefits we could have on helping to operationally reduce denials and therefore, improve average reimbursement rate just having better access, a more streamlined approach to medical record information share with our ordering physicians. That benefit, of course, will come in 2025. But some really exciting opportunities to streamline the order to claim submission and information gathering aspects of the business.

And last question on this. But is there any synergies with your data business that the integration will allow for? Either easier collection data, a wider set of data? Is there some data sharing that they can take place? And just maybe explain if that informs your data business at all? If not, fine. I'm just curious about it.

The core is really being able to continue to build that data asset. So the greatest contribution from this, without a doubt, is going to be on our ability to continue to open up access, aggregate more and more data, and it will make, from a billing perspective, some of the workflow a bit easier on us as well.

Got it. So just taking a step back, you talked about your share in exomes. What do you think makes GeneDx tech differentiated? And what is kind of [Technical Difficulty] that market-leading position? And then how do you maintain it?

It's one of the most important aspects of the business that I think is underappreciated by investors, but really appreciated by providers. So we have run more than 600,000 clinical exomes, which is more than anyone else has to date. And those are all, of course, enriched for rare disease. They consist of both child as well as mom and dad in about 2/3 of the cases. And so it's a really robust data set that is enriched for rare disease, which then helps ensure that our interpretation platform is smarter with every patient that we're running. So we like to think of it as a pay-it-forward data strategy, the exome that's run on me is informing the algorithm so we can upgrade or downgrade a variant of unknown significance and then be able to deliver an even more conclusive result for the next patient. So it really is one of the most important elements of what sets us apart as a business. And I think overall, as we think about where the entire industry is shifting, we've actually generated data that shows that we have a higher diagnostic yield and fewer variants of unknown significance when you compare exome to panel. So you are getting, truly, a comprehensive view of the characterization of whether or not there's an underlying genetic disease. And you're able to do that without having to rerun another test. With many panels you're leaving many genes behind. Epilepsy is a great example of that. Epilepsy panels tend to have probably about 180 genes. There's 768 associated with epilepsy. So by just running an exome upfront, it really delivers more comprehensive answers, more definitive answers. And, in essence, delivers cost savings to the healthcare system because you're not running 2 tests.

And I'd also add, Matt, what makes that underlying genomic data set unique on the back of that 600,000 exomes, nearly 2/3 of all cases that GeneDx has run since inception are what we call a parent-child trio, therefore, also sequencing mom and dad in addition to the base patient, typically a child [Technical Difficulty] healthy individuals, all fueling the robustness of [Technical Difficulty] something unique in our space. We've got a team [Technical Difficulty] large team of expert medical geneticists, FACMGs [Technical Difficulty] information into the data set. And since inception, GeneDx procuring samples from populations well ahead of any reimbursement coverage. So in particular, state Medicaid programs, GeneDx for over a decade, accepting samples knowing that we were going to take denials and zeros, and therefore, the data set also looks far more representative of what you would expect in the broad-based population [Technical Difficulty] somewhat hidden investment over the last several years, [Technical Difficulty] data set.

I just want to talk a little bit about this transition from panels to whole exome, and then perhaps ultimately to whole genome, but I think right now, what you're trying to execute is the panels to whole exome. And I think what has been largely responsible for the significant outperformance of your stock is people realizing the margin mix shift that takes place when you go from panels to whole exome. Could you maybe just give the audience sort of a sense for where you are today in that mix? And what you've kind of guided to in that mix over time? And then I'm kind of interested as well as like, it's challenging just to stop doing the panels, right, because then it could be very disruptive to growth. But we know what the profitability mix shift is when you go to exome. So maybe Katherine, you can talk a little bit about the strategy of managing down the panels while you're trying to increase the exome to maintain more of a consistent growth path.

So I'll start with the overall strategy of how we get to an exome-genome only test menu. And ultimately, we believe it's going to be a genome-only test menu. And then Kevin can talk about kind of where we are in terms of the mix shift. But as a reminder, our exome drives north of 60% gross margin, 30% of our volume was from exome, it accounted for about 70% of our revenue. So it is such a strong lever for us. Most importantly, it happens to deliver better clinical care. So that's the starting point for all of our decisions. When it comes to our test menu rationalization is what is best for patients. We happen to be in a position where our exome and genome is what's best for patients, and it's also really good for our business. We initially had a testimony of about 1,000 tests. We retired well over 400 earlier this year, and we are continuing to reduce that test menu [Technical Difficulty] is, as I said, what's best for patients [Technical Difficulty] medical coverage and reimbursement standpoint, so what do those gross margins look like. We did pretty extensive research last fall just to say, what if we were to turn everything off the menu except for exome and genome. And the reality of the market today, if you think about the pediatrician setting, which is where we want to be. If you're a parent [Technical Difficulty] going in to see a pediatrician [Technical Difficulty] going in to see a medical geneticist out of the gate. So we want to be in that market, but AAP guidelines are well over a decade outdated and they state that you should be using a micro, right, which is old technology. So we have some market pressures that really enable more than one test, and that contribute to our growth strategy. So over time, we'll continue to remove tests from that test menu, but we're keeping an eye on guidelines, on payer coverage as well as on how we can continue to improve our exome and improve our genome to be as robust as possible.

And so in terms of total company gross margin in the first quarter, 61%. But as Katherine said, that was with the context that only 30% of all tests that we resulted in the first quarter were whole exome and whole genome. Ultimately, we believe all heritable disease diagnosis should be run on a whole genome backbone and are driving to get there. We've said all along, the point in which total mix becomes about 40% exome, genome to none, the company would be operating near breakeven, and we expect to be there sometime around the end of this calendar year. In terms of the gross margin profile, operating at high 60s for those flagship products, I'd say we still consider ourselves to be in the middle innings with respect to overall cost of production. We've spent a considerable amount of time and resources over the past couple of years focusing on the wet lab, turning over equipment to newer generation machines, automating the laboratory processes. And over the next 2 years, really excited about some opportunities we have to reduce overall cost within the analysis and interpretation, abstracting, report writing processes using things like automation, large language models, AI to help streamline operations there. So I believe there's still room to reduce costs. And at the same time, average reimbursement rate, $2,600 in the quarter, we continue to ensure that [Technical Difficulty] medical necessity and administrative requirements for commercial payers. And there's still very much a long way to go in securing individual state Medicaid policy for both exome and genome. 28 states covering exome outpatient, only 11 states covering rapid whole genome in inpatients. I think we're very pleased with the evolution in policy there across Medicaid populations. But with only 11 states covering rapid whole genome, there's certainly a long runway and we should benefit for a reduction in denials as more and more states pick up what we think is inevitable coverage to recognize the overall value proposition of rapid whole genome in the inpatient setting.

I'd be curious to get your view because you guys are facing what I would consider a pretty classic healthcare problem, which is, if you look at the long-term nature of the whole exome, whole genome, it is the better test and it will save a significant amount of money over time in terms of clinical care needed for these patients. But the upfront cost is high to begin with and so many people balk at that or are reluctant to try new technology. So what have you done? And I think one of the strategy you did was kind of meet the doctors where they are and then focus on areas like the NICU where there might be more urgent need for these types of tests and they're more accepting of it. But as you think about broadening your market out a little bit, as you gain more acceptance, as more states kind of come into line, how do you do that education awareness that like, there actually is a huge long-term cost savings, even though it might be upfront and slightly higher cost if you're doing to test the first time.

It's one of the most important elements of market education that we have to do. We also have to introduce people to GeneDx. Until a few years ago, GeneDx was really largely known only by medical geneticists. And so we've started by kind of reintroducing the company and introducing pediatric neurologists, pediatric developmental specialists and even some pediatricians to the brand. Generating data, I mentioned the diagnostic yield [Technical Difficulty] significant, having fewer on an exome than on a panel [Technical Difficulty] ensuring that we're publishing, that we're going to those conferences. But the third leg is health economics data. And what the literature says right now, $30,000 on average cost savings per patient in the NICU, about $7,000 per patient in the outpatient setting. And so continuing to really educate broader health systems as well as payers on that is hugely important. One of them is perceptions about our testing and about exome and genome is that it takes a long time, it's really hard to understand and it's really expensive. And thanks to a lot of the commercial efforts that we've put into place and thanks to a lot of the operational improvements, our exome now has turnaround times that are aligned with panel. And we're continuing to make sure that there is really good payer coverage to take the burden of cost off the table. We actually announced a program last week related to our epilepsy testing. So in cases where there's not good medical policy, we have biopharma partners who will now be able to cover the cost of that. So all of that first goes through insurance because we have to work within our contractual obligations, but we also have to make sure that we're continuing to prove that this is a really important and medically necessary test. But overall, I think, we're just getting started in terms of the health economic benefits. And I expect that over the next 3 years, we're going to continue to make sure that, that is one of the most important elements of the story that we're telling.

Got it. The company, over the past 2 years, has gone through a number of restructuring, which I think you're on the other side of at this point. So as you think about expanding back, expanding into those markets and maybe enterprise-wide NICU opportunities, things like that, how are you thinking about expanding the sales force for, at the same time, making sure that you're keeping that path to profitability track in place?

The entire management team is really, really acutely focused on the key metrics that we have our investors focused on. So revenue, gross margins, our OpEx, our cash burn. And so I'm very confident. We actually just did a survey of our employees to see how well they understood our company goals. And it was about 90% of our employees said that they clearly know what the company goals are. So we are doing a really good job communicating internally about them. And every single investment that we make comes with a really good analysis of the impact that it's going to have. And so I feel like we, as a management team, have developed an appreciation for near-term execution, but making sure we're not losing sight of the long term. And I think the Epic collaboration is a great example of continued execution and focus on that outpatient setting, but then being able to say, the business is operating in a way where we feel like we can invest in some of the longer-term strategies and making sure that the same market leadership that we've enjoyed in exome, we continue to translate into that genome space, into the NICU and to broader health systems. As we think about the commercial team and the build-out, we contracted the sales team last fall after taking a look at account profitability. So I would say, we did a really nice job of designing the entire footprint, the tools that our sales reps are using to really take a look at what the gross margins look like, is there good payer coverage. The sales force has been trained on the financial side of the business. And so with every incremental territory that we may add in 2025, we're doing it in a thoughtful way that continues to line up with those profitability goals.

Got it. Kevin, just on ASPs, could you kind of give a view as to what your goals are for this year? What are some of the key drivers of the ASPs? Obviously, it's commercial coverage. You talked a little bit about the states coming onboard, all-exome, all-genome. But what are some of the levers over the course of this year you think that will drive ASPs and sort of the near-term targets that you have for that?

Yes. The way I think about it is a tale of 2 stories. So within the Medicaid population, once the state activates coverage, we tend to have fairly predictable adjudication experience, very low denial rates. And it's just a matter of more and more states picking up coverage. So as I mentioned, with 28 outpatient and 11 inpatients, there's still a lot of white space there. I don't necessarily think there will ever be a watershed moment where all the rest of those states, all activate at one time. They really are state-by-state decisions, subject to decision-makers, the political work stream bureaucracy within those states. We're helping to do our part to ensure that the right information is in the hands of policymakers. But I think it's reasonable to expect 1, 2, maybe 3 states a year, pretty steady drumbeat over the next several years. I've been with the company now for 7 years. When I started at GeneDx, there were 0 states covering the test. So we made great progress and I'd expect, like I said, 1, 2, maybe 3 a year to pick up coverage. And we should expect to benefit from a reduction in denials there. On the commercial side, it's far less about winning any new contracts. GeneDx already contracted with over 80% of commercial lives. The vast majority of payers do have some level of coverage for exome or genome in different settings and, of course, subject to policies around medical necessity. What's most important for us in order to drive down what is still a denial rate far in excess of what we'd like to see is ensuring that our own workflows are designed to capture medical necessity requirement, and just as importantly, administrative requirements put forth by payers. And that requires individual workflows rather than a one size fits all linear workflow. And so it is a payer-by-payer game. We've had great success over the last 9 months in redesigning procedures, putting in some new technologies, changing leadership and amplifying resources. We've seen some benefits. That's helped us reduce the denial rate fairly meaningfully over the past 9 months and we'd expect, with each passing quarter, that chip away to reduce denials over time in that regard and excited in '25 as well to see what benefit we might see from the Epic integration capabilities that, that helps with information flow to also be just another tool for the team to help ensure that we're capturing the right information upfront to supply with claim submission.

And maybe you could talk a little bit about the other side, the gross margin equation, the COGS. I mean a lot of COGS is kind of out of your control in terms of sequencing costs. There's only so much you can do. You can upgrade your technology. But there are things like automation, chemistry, et cetera, that you think there are levers to improve COGS as well?

Yes. I mean as I mentioned earlier, we've, I think, at this point, have come far down the road of optimizing what I'll call the wet side of the laboratory. And over the next 2 years or so, most focus will be in using automation, AI and similar tools to reduce manual steps. It is still a very manual process. After the sequencer and before the result is submitted, we've got a large team of medical geneticists, genetic counselors, all analyzing and interpreting, abstracting and report writing, all steps that we actually think are ripe for automation. And we're very early in exploring how we can use new tools available to the market to help our business. I certainly believe that there's room to further reduce unit cost and at the same time ensure that we're prepared for an inevitable rapid scaling of our business.

And just last one on margins. But the panel test retirements, Katherine, you talked about the 400 you've done. Is there a potential for additional benefits, additional sales force optimization as you continue to retire those? And are there some LDTs in there that you just don't want to continue to pursue because of the potential new regulations that will force additional retirements?

So the tests that we're retiring, I would say, are really have not -- they may have had a slight drag on gross margins. But at this point, we focused the vast majority of our operational and clinical efforts towards exome and genome. So when we think about the FDA strategy moving forward, it will be focused on exome and genome.

Got it. Can we talk a little bit about the competitive landscape. You guys are the main player within rare disease. There was obviously another competitor that went into bankruptcy and then most recently, that got bought. But how do you see that opportunity set as the market consolidates for your position in rare disease? And how are you capitalizing on that opportunity today?

So first, I will say, competition is good. It's good for patients and it's good for us. I think it's good for the industry as a whole. It's been great to see some wins in the diagnostic space. But without a doubt, competition makes us better. And so as we think about the landscape, the rare disease panels that now reside within Labcorp because of Invitae and some of those we're going after anyway. So we've been focused, as I mentioned, on the pediatric neurology space, and I think some of that is just continuing to be part of our bread and butter in terms of our commercial strategy. And I think as others come into exome and genome, I think it puts the responsibility on us to continue to earn the trust and respect of our customer base. If you think about 3 years ago, when I joined the company, GeneDx had performed 270,000 clinical exomes. They were at 600,000. So part of my intention in joining the company 3 years ago was to say, I know that the entire market is going to exome and to genome, I know that the entire market will benefit from one test and the best thing that this company can do is get into the health systems and as many providers as quickly as possible. And given the growth that we've had, we're executing on that vision. We're going to continue to make sure that we can win over our customers based on the clinical excellence and expertise that we have, the cost savings and we have to do that by continuing to scale the business.

Can we talk a little bit about the data business? I mean it's something that I personally have always been a little cautious about just because I think the data business is a great long-term opportunity, but the data acquisition costs of running a diagnostics business are really, really high. So it just costs a lot of money to generate that data. And if you can't make money in your diagnostics business, you won't have a data business. And I think you guys have understood that really well and have been very patient with how that data business plays out. Could you kind of give us a sense for the context? One, the size of the data business today and what your goals are for that data business? And then you have a partnership with Komodo as well, which is helping on that. Maybe explain a little bit about that and how that's going to help drive that data business.

Sure. I'll kick it off and then invite Kevin to comment further. But I think your skepticism about the data business today and across all diagnostics is absolutely fair. I haven't seen a company yet really realize the big vision and dream that we all have for the way that data can be used to help more patients and can be monetized. I think the benefit of the past 3 years, I can say that, today, it was hard to get here. But the benefit is you become really clear about what you're really good at. And we are really good at running a lab with exomes and genomes. And we're going to continue to build that business. We announced a partnership with a biopharma company, and we have about 17, 18, I think, just around that number, of other biopharma partners where we're connecting them with providers who have a patient who can benefit from a clinical trial or an FDA-approved therapy. The Komodo example is a great example of a partner where they're able to serve as a sales channel and a broker for us, connecting patients and providers from our database with their customers who are biopharma companies. So we're going to continue to be opportunistic there. It represents a small sliver of our revenue today, and we expect that it's going to be commensurate with that over the next several years. In the way that oncology has really figured out how to make a data business work to some degree, we do think that there is an opportunity in rare disease. I think the FDA is setting up important pathways for what they characterize as "the tsunami" of gene therapies and rare disease therapeutics that will be coming through. And there's nobody who diagnoses rare diseases as well as or as often as GeneDx. So I think we're squarely in that ecosystem and we're going to be able to be a really important player as a data business in our ecosystem emerges. It's going to take a few years to get there.

And the only thing I think I'd add. Along the lines of the Prognos deal we've announced last year and Komodo earlier this year, a bit of an acknowledgment that we at GeneDx potentially should partner with others whose business models are surrounded around the right way to match those looking for information. It's our job to ensure that we're building the most robust genomic data set so that anybody who could leverage genomics to advance patient care in their business wants to source that information from GeneDx, but it doesn't necessarily need to be us who is the broker in that equation. And I think the Komodo deal is a good example of that, proud to partner with them. It's a very small deal now, but because of that intentionally capital light from our part to ensure that over time, we can learn what is the right way potentially to monetize the data set and do so while maintaining our commitment to run a healthy thriving business, not investing exorbitant capital in a longer-term pursuit until we can see the real commercialization path to using that information.

Yes. I actually think rare disease lends itself to the data business, [indiscernible] and massively wide net for a small population with a tremendous amount of data. So like in terms of other indications, I think rare disease actually makes the most sense for data, and it certainly helps the patients. So I do think that there is a definitive case for it. It's just that building out that data set takes time, you want to make sure that you make money while you're doing it so you can sustain that business.

There's some really beautiful examples over the past several months that have been covered in the New York Times and in the Washington Post about children with hearing loss and an ability to start hearing again because of a gene therapy that is in clinical trials. And we are centered in those patient stories in terms of making those connections. And I think we'll continue to turn the crank on being able to both help with those connections and figure out how we can play a meaningful role in realizing the value of those two.

Yes. The last question, but I do think that the role of patient advocacy and parent groups in rare disease is incredibly powerful, and you guys have done an amazing job connecting with them because it's an important constituent. In the last minute that we have, could you talk a little bit about what you think is the most unappreciated thing by investors about GeneDx, you want to make sure you get across to people?

The impact that GeneDx is having on a broad population. We talk about rare disease, but it really is something that impacts 1 in 10 Americans. And as we test more, we find out that more and more people actually are carrying these variants. And so I think as we continue to talk about the total patient opportunity that's in front of us, it is far wider and it will have a much greater impact than I think people appreciate today, but we're excited to prove it through our numbers and prove it through the impact that we're having.

Great. Katherine, Kevin, thank you very much for joining us. Appreciate it.

Thank you so much.

Thank you.