GeneDx Holdings Corp. ($WGS)

All right. Good morning, everyone. I'm [indiscernible], science tools and diagnostics analyst here at Goldman Sachs. I'm joined here today by GeneDx CFO, Kevin Feeley. Thank you so much for being here.

Yes. Thanks for having me.

GeneDx has been the market leader in rare disease diagnostics for some time, kind of beginning with expert genetics, I guess now moving into new markets where these patients can be diagnosed earlier. What prompted this shift into the nongenetic markets like pediatric neurology?

Yes. Look, I think it really starts with the problem we're trying to solve. Nearly 1 in 10 Americans has an undiagnosed rare disease, and it's a much larger patient population than I think the name rare disease gives rise to. And if you look at where those patients have been diagnosed in the past, it's primarily been expert genetics at the end of what we call this diagnostic odyssey patients. progressing through nearly a decade of disease progression without a diagnosis. There's about 2,000 clinical genetics in the United States. And while they're serving patients very well, there's not enough of them to a the large unmet medical need that's out there for rare disease. So beginning 2023, we moved for the first time into space, primarily pediatric neurology in order to expand the physician population, servicing exome and genome. What we're embarking on over the next several years is moving into a far wider subset of pediatric specialists and ultimately into more primary care setting, that being the general pediatrician on the back of new American Academy of Pediatric Guidelines that came out last summer. It was the first time in 11 years that genetic testing guidelines have been updated by and opens up the door to move beyond that small subset of clinicians into a much larger physician set. We're in the early innings of that. But ultimately, what we want to do diagnosed disease for earlier in life, ultimately put it into what we call that diagnostic odyssey.

Great. And then, I guess, you mentioned some of the markets, maybe walk through some of these new markets that you're going after? And if you could kind of help size these opportunities relative to one another?

Yes. So look, as I said, about 2,000 clinical genetics in the U.S. By comparison, how large is the general pediatrician population, the 60,000 general pediatrician in the United States. Those American Academy pediatric guidelines are specific for children with global intellectual developmental delay. And we think there's something closer to 25,000 pediatricians who are serving and looking for global DDID. What that means ultimately is hundreds of thousands of patients available specific to that indication and that call point alone. And then, of course, what we'd like to see over the next several years and into the next decade is a continued expansion of those guidelines and payer policies to acknowledge that beyond DDID, there's a broad spectrum of conditions, disease types, disorders that exome and genome can play a role in diagnosing on top of that legacy call points of genetics and pediatric neurologists. We're still in early market development of serving the neonatal intensive care unit with a rapid whole genome where speed is of the essence. These are vulnerable patients. If you look at the NICU alone in the United States, about 800 Level 3 and Level 4 NICUs. We think that is the target population. We, a couple of years ago, put out a study in partnership with Seattle Children's in the University of Washington called Seek First. It outlines a meaningful change in care through use of a rapid genome for what is about 60% of admittances in Seattle children. We're seeing that level of utilization in that hospital system. And now, of course, what we want to do is pull the rest of the NICUs across the country into that level of ordering that should produce by itself in the NICU, something north of 200,000 tests a year that should be run. And so again, we've got massive new markets that are in the early days of being developed to really move outside of what has been this legacy core of expert clinical geneticist and frankly, moving exome and eventually a whole genome for all into an integral part of the medical stack across nearly every physician type.

Yes. I mean these are obviously fairly large opportunities as you outlined. I guess, how do you think about balancing the investments and strategic focus on each of these new markets simultaneously?

Yes. I mean if you think about what we've embarked on in introducing new call points, there's also been a double-click there into what are the indications or disease types that we're talking to those physicians about frankly, today, it's not the wide spectrum of every disorder in disease that exome and genome can diagnose. But those that there is underlying guidelines and payer policy to at least have a fighting shot to be reimbursed. And we'd expect that to continue over time as the technology becomes more well known by payers, by guidelines bodies like the American Academy of Pediatrics. It's up to us to ensure that they have the clinical evidence that they have the health economic evidence to continually put out new guidelines, new policies to expand the number of indications that we'll attempt to sell through. But our market approach today is to improve the acumen of nonexperts, whether that's pediatric specialists that eventually adult specialists. Of course, the primary care setting to ensure that they're aware of the power of the technology and then focus on where are the pockets of volume that we can bring in that might be today covered by reimbursement policy, and we'd expect that to continue to evolve and advance over time. So it takes a lot of education with respect to physicians to ensure that they're aware of where their patients may have underlying payer policy, and that's the type of volume we want to go after today, we'll see that expand over time.

Great. And then I think within the NICU market, I guess, if you could talk through what challenges are maybe more unique to this specific market? And how have you adjusted your strategy to address some of these specific challenges?

Yes. The NICU is an exciting and interesting place. It differentiates itself from the outpatient market in that today the business for us is predominantly cash pay, so you have got a hospital system who relies on the DRG or a pathway to submit for reimbursement themselves. And then our relationship with the hospital system is a B2B contract or we're being paid for every test. What that offers to us is far more predictability with respect to the payment stream. But of course, that comes down to ensuring that hospital systems are aware of the value proposition. And so they're going to use those precious DRG dollars to pay for our test, it's up to us to ensure that we're not just providing excellent patient care through the use of the rapid genome, but they're seeing the economic benefit to run that acute most efficiently and cost effectively. And so if you look at the studies that we put out with Seattle Children, it clearly shows the clinical benefit of intervention with a rapid genome for the majority of patients in the NICU. What we're hard at work doing now is bringing to hospital administrators, NICU management, the economic arguments around the value proposition. It's a compelling case to be made, but it's it's one that needs to be made across the wide variety of constituents in the NICU. So we've got to influence the Chief Medical Officer of the hospital system on the clinical benefit, but the CEO and the CFO of the hospital system that this is a good use of dollars. That means a longer sales cycle, it likely means a longer time to develop that market, but we've got a team of people focused on that every day.

And I guess moving to sort of the general pediatrician. Most of these providers are not ordering genetic testing today. So what's your approach on sort of opening up this newer market?

Yes. To us, if you look at the evolution, it's been about a year since AAP guidelines have been put out. We've been hard at work ensuring that those guidelines are well known and understood by pediatricians. Frankly, the first time many pediatricians are hearing about an update from AAP on genetic testing. They're hearing that for the first time from our sales reps out in the field. I guess I said it was 11 years between that update and pediatricians are very busy clinicians. And so a lot of education a lot of acumen building. That's what we've been busy at work the past several quarters laying the groundwork for a pretty exciting launch of a new customer experience designed for nonexperts, like a pediatrician. So some extensive work with focus groups and market research to really understand what are the workflow impediments by a pediatrician, that we can overcome to enable them to order a test. It starts with the ordering process itself. Diagnosing rare disease on an exome genome is phenotypically based. And therefore, the more clinical records, the more symptoms, the more physical characteristics, the more information that we can obtain in the ordering process, the better. Today, that's a fairly arduous task that -- that experts like Genesis are accustomed to. The pediatrician office is a fast-paced, busy place. They don't have much time. with a patient. And so what we've heard loud and clear over the past year, engaging with the community is they understand the guidelines, they understand the medical need. They will be orders of these tests as long as we can set the conditions to make it easier with respect to that workflow. So we've developed a number of mechanisms to accomplish what we like to call 1 minute ordering, through a seamless ordering where we could take that burden off of the pediatrician themselves. This is an area particularly where AI is our friend. So it takes scraping of medical records and other electronic means to pull that information into the order form without placing that burden on the physician or their staff. And beyond a more seamless ordering process, clinicians in that cohort have told us, if you look at our report today, it's fairly cumbersome and complex. It's geared towards the experts geneticist that we've been serving for 20 years, and we've heard loud and clear from busy pediatrician, they would like to see a more simplified order -- more simplified report come through with the diagnosis, and so we have some features launching later this summer in that regard. And then finally, pediatricians, they want to feel equipped to provide a diagnosis of a diagnosis is there. And so beyond positive results, what they'd like to see is help in managing the family with next steps. So something akin to a care plan or action items that could be taken by the family so that the pediatrician can feel like a hero in that regard rather than just providing the diagnosis. And so all of that frames out what is a new customer experience that we'll be releasing throughout the course of the next several months really geared towards moving the usability of these tests into the non-expert space.

And the report that you mentioned that would be specific to the pediatrician, you wouldn't then update the Genesis one as well. That would be the same report that you've done in the past, you would just give a new report to pediatricians to make it easier to read...

Yes, it's been interesting as we've looked at what is the customer experience across ordering the resulting pathways for nonexperts -- at the same time, expert geneticists have told us they love our report. It gives them a treasure to information with respect to variance of unknown significance, ancillary findings. It's fairly detailed, and they like that detail. And so staying true and honoring that physician base that has frankly built the business. we're going to allow them to continue to receive that in more detailed report. So I think more of a choose your own adventure depending on how detailed of a report you would like. Not every clinician is built the same and they ought to have options that they require.

And then I guess thinking about your core testing business and the shift from XM to genome, I guess you saw a faster-than-anticipated transition to genome in the first quarter. what strategies do you have in place to drive utilization while balancing between the 2? And I guess, make sure you're driving kind of the right test volume?

Yes. I think if you look at the past several quarters, we have seen this accelerated shift into genome over exome, but important to understand that's really just within the genetics cohort. So those expert genetics are now at the point where, frankly, they're receiving the genome that for the past 20 years, they're waiting for, one that comes in days, one that is not cost prohibitive, one that's simple to understand. Achieving that is what GDX has been working towards for the past 20 years, all with the promise of eventually serving all heritable disease diagnosis on a whole genome backbone. And those experts who've been using exome and genome for decades now clinical genetics in large part are ready for that pivot, and we want to enable that pivot. We're not seeing that same accelerated shift from exome to genome in other subspecialists. So within pediatric neurologists, still exome predominant. Exome serving them really well, easy to understand, diagnosing the diseases and disorders that they're most interested in. And so what we're now hard at work doing is ensuring that we're optimizing test messaging to serve the clinician type -- it's a product that fits the best. In many cases, that will be genome. In many cases, that will be an exome today, eventually moving the market towards whole genome. And in some cases, serving them with a new product that we launched in mid-February, which is an exome to genome reflex. In that case, the physician effectively gets the best of both worlds. That's been on the market for a few months now. I think we're seeing nice uptake. There's a split across genetics. Some just want the genome that they want, and we're there to serve them with that. But we are seeing some physicians like the option of the reflex offering. So there'll be a place in the market for both. It's not necessarily a matter of one being better than the other. But we want to find the right product fit to maximize the level of insight that the physician is looking for, while at the same time, looking at underlying payer policies, performing things like prior authorization. And if genome is not covered, but an exome is, that plays into the calculus of whether or not that is "good volume for us to be had" because there's a unit economic argument for us to run a healthy business. And so what we've been embarking on is while in parallel, how do we expand access for a whole genome? How do we improve collection rates for whole genome? We don't want to impede the eventual shift of the market towards whole genome for all. But we want to make sure we're doing so responsibly where we can both service patients and physicians and also run a good business. And there's a place in the market for exome reflex and genome at various levels across different physician types.

Yes. Do you want to dig into the rec test in a minute. But I think touching specifically on the genome unit economics, what levers do you have to improve the profile of that test, both in the near term and then also in the long term?

Yes. It starts with access and payer policy. If you look at underlying commercial payer policies, exome was written into over 90% of commercial payer policies with respect to medical necessity. Now we don't get paid today on 90% of our test, but it's at least acknowledged in nearly all commercial contracts. Genome only about half, and that's a matter of bringing to those payers the clinical evidence, the economic arguments to bring policy coverage up to parity where exome is. We've run that playbook before. It's a matter of payer engagements, continually bringing signals of strong demand by clinicians as well as evidence to ensure that they're properly setting medical policy in that regard. And then, of course, there's more blocking attack, like revenue collections. And how do we improve that? It's another area where there's some interesting AI tools and process flows out there to ensure that upfront, we're matching each order to underlying payer policy to ensure the propensity to pay is increased by capturing required documentation, medical history and other requirements that might improve the chance of getting paid. And then I think, third, beyond improving the reimbursement stature for genome. The cost curve still has a lot of room to come down. If you look at the difference between exome and genome today, the largest gap remains on input costs with respect to reagent kits and consumables in the wet lab. And I think, frankly, that's a matter of just continually showing more demand. And as we increase volumes for whole genome and are able to show that demand to manufacturers. It likely will mean putting some pressure to see those input costs come down in line closer to where exome is today. So a lot of work to improve access, to improve collection rates, to optimize test mix between the 3 products and then at the same time, continual efforts to bring down costs, both in the wet and the dry lab. I think where GDX is a unique advantage given our size and scale and a decade of optimizing the interpretation platform for both exome and genome, we have near cost parity on the dry side of the lab. So after the sequencer with respect to analysis and interpretation, we've now gotten the time there by the clinical staff down to minutes and not hours for both exome and genome. And so the largest gap is on the wet side with respect to input costs. And I think there's a lot of confidence that over time, we will see some relief there.

Awesome. And you mentioned the reflex test earlier. I guess maybe walk us through the mechanism for ordering that test and then how you expect it to shift the split of volumes between exome and genome in the short term?

Yes. So it's an intentional choice by the physician upfront to order reflex product. It's not a unique feature in the in the industry, but it is a choice by the physician to first receive an exome reports. If that has the relevant findings they're looking for, then the process effectively stops and we submit for reimbursement on the exome. In this case, they'll receive that report. And then if there's additional relevant findings on the additional genomic content, they received a second report. And so if you're a physician, you have to accept receiving 2 reports. Ours happens to be a fairly quick follow. And the fact of the matter is you can receive your 2 reports from GeneDx, likely well ahead of receiving a single whole genome report from any competitor in the marketplace today. And so we're still able to offer turnaround times that are favorable in that regard. What this allows the physicians do. So what do they get in return for that, go back to the fact that I said exome is in more commercial contracts than genome today. And so there's the ability potentially for the physician to see less friction in the billing processes. By that, I mean, there's a higher propensity that the exome will be covered, and therefore, the patient won't face a denial. And unfortunately, those denial rates often lead to a patient calling their physician. And it's not a phone call that clinicians like to receive. And so what we want to do is maximize the insurance coverage. The patient is actually paying for and we can do that by submitting for the exome while at the same time, giving the commission the full insights they're looking for. And in this case, we're able to enable that because of the rapid turnaround times we have to deliver both reports at quick speed.

Yes. Thinking more broadly, GeneDx is the first mover and has a first-mover advantage with specialists and you've demonstrated clear market leadership there. I guess how durable do you feel this moat is space specifically?

Which credit type?

The specialist?

Look, we've been serving the genetics community for 20 years, 8 out of 10 clinical geneticist in the United States or do their exome and genome for us. With respect to durability, we saw in the past several quarters, competition approach that existing geneticist space and try to take a genome first message to them. Frankly, most of those geneticist were ordering in [indiscernible]. I think what we saw was, of course, some of our competition was able to successfully convince those clinicians to move from exome to genome. But what you saw in the first quarter, we grew the entire portfolio about 34%. We didn't see the clinician base leave. We didn't see those genome orders leave GDX and move to competition. What we saw was the conversion from exome to genome, but that installed base stay with GeneDx. And I think it was a really positive sign to us that there was a wave of competition, and we were frankly successful at defending against that that competition now meant to a mix shift within the portfolio that happened sooner and quicker than we initially thought. But at the end of the day, we wound up keeping those orders and I think that showed through in the strength of the aggregate number of tests that we resulted through in the first quarter. Ultimately, what will win in the marketplace across all clinician types, whether it's experts or nonexperts is service. And service in our space is defined as clinical quality, who can provide the highest diagnostic yield, the least amount of variance of unknown significance, and frankly, that's GeneDx given the data set that we have to work with. We've got the largest, most well-advotated curated genomic data set in the country, if not the world. It's specifically been built for rare disease over the past 3 decades. That data set gets stronger every day with every sample that we run through it. And so first, you'd look towards clinical quality. Next would be speed and turnaround times. Our ability to operate at large scale, we continually bring down turnaround times well ahead of anybody on the market. And then ultimately, it's ease of use. And so things like the customer experience that we're rolling out later this summer. As I said, it's designed for the nonexperts, but we certainly believe that the expert community will find that customer experience with features that are pretty exciting and interesting. And so ultimately made the best product win. And our durability will be defined by our ability to continually improve service in that regard.

You mentioned [Technical Difficulty]. How do you think about AI impacting the business? And maybe talk to some of the benefits related to use in clinical diagnostics, especially given this data asset that you have?

Yes. It's only a net benefit across the whole of the enterprise that being AI, but in particular, GeneDx is part of the analysis and interpretation platform has developed proprietary tools, ML and other AI features into our processes long before it was as high on the investor radar as it is today. It's core to why the team today can deliver an exome/genome results in the time frame that we do. As I said earlier, on the dry side, in terms of analysis and interpretation. We have it down to a minutes, not hours, to if you go back -- I started with the company 10 years ago, our turnaround times were months, about 3 months to return our results. We now have a 2-day whole genome available in the NICU, our average turnaround time in the outpatient market is 3 weeks and, frankly, leaning towards 2 weeks at this point. And so we're only able to do that because of automation in the wet lab and because of AI and other interpretive tools that we've built, most of which are proprietary and have been specifically geared towards exome and genome and in the rare disease setting. And so that AI tools, ML is only as strong as the underlying data set it sits on. And so we've got this unique combination of the right data sets and the right tools. And I think now what we want to do over time is continually lean into reducing that ultimate time to diagnose [Technical Difficulty] that goes back to improving the service to make the moat with respect to our market share of that much more durable. At the same time, we're leading in, as you can imagine, across all aspects of the business. whether it's SG&A functions. But I think ultimately, there's a number of areas where AI is our friend. And first and foremost, it's the production processes, but really exciting with respect to seeing over time how we can deploy new technology in the revenue cycle. So looking at underlying collection rates today, they're not where we want them to be. So we've talked about improving payer policies, but adhering to those payer policies, means parsing through a complex web of thousands of conditions with respect to medical necessity criteria, documentation requirements that in the past was manually intensive work and ultimately led to revenue cycle leakage vis-a-vis denials. And I think where we want to turn our focus to is how do we deploy AI to improve revenue cycle. We know payers on the other side are likely doing the same, and we need to compact them in that regard.

And how differentiated, I guess, is the Infinity data set? How long would it take someone to catch up? And then kind of beyond the data advantage, how do you see your tech and commercial capabilities stacking up in the market?

I mean the data set has been, as I said, intentionally built for rare disease over the past 20 years. We're now well past 1 million whole exome and whole genome, well over 8 million phenotypic data points. Specifically, nearly all of those samples enriched for rare disease. Physicians over time searching for unknown conditions at the end of that diagnostic odyssey. Nearly 60% of all cases since inception, we've captured parent-child Trios. What that's allowed us to do is not just sequence the symptomatic child in those cases, but the otherwise perceived healthy asymptomatic adult in those cases. That's enabled us to have more de novo gene-variant findings. And than most or nearly anyone out in the marketplace. And so to recreate that asset would not just be a matter of running million genomes, which would be a costly and time-consuming thing to do all by itself, but ensuring that those cases were stemmed from the clinic with physicians searching for answers. How long would it take to recreate? Well, it's a GeneDx about 20 years to create that data set. I think the answer there depends on how quickly we can run. And we're going to continue to run fast. The head start is only as good as our ability to keep pace. We continually take market share. Pretty proud of the aggregate volume in command genome that we produced in the first quarter. And so that data set is getting stronger and bigger every day. And so the answer to your question is it would take many years and a whole lot of capital in order to recreate it overnight.

Yes, very differentiated. -- have been on the guide for the year. Maybe walk us through some of the moving pieces and then how things have trended since the first quarter call?

Yes, if you look at the guide reset we put out on our last call, demand is healthy. Demand is not the challenge. I think ensuring that we pull that demand through to revenue and how that revenue stacks up against the comparison where the previous comp was more exome heavy with respect to mix, looking at exome versus genome has been the challenge. And so the team is focused on ensuring that we're driving for healthy volumes with the right mix at the right clinician points that we're optimizing the revenue cycle, that we're improving reimbursement stature. And those things are going to take time. They're not going to take weeks. They're going to take months before that materializes into a higher revenue base for whole genome, but that's what was contemplated in the guide that we took down. And so since our last call, operating under the framework consistent with what we put out in that guide, which is to say demand is heavy and we're working through a comparison here where there just is the reality that gross margins for whole genome are lower than exome. And it's going to take some period of time before we can improve that. But thus far, really pleased with how total demand is coming through, I think, ultimately shows that not only do we withstand that last wave of competition, but a lot of what we're bringing to the market in terms of messaging and the overall experience is resonating well. And so thus far, I'd say the quarter is consistent with the framework that we put out on our last call.

We have just about a minute left. So maybe to wrap up, what do you feel is the most underappreciated or misunderstood piece of the GeneDx story today?

It's a good question. Look, I think given the expectation miss we had in the first quarter, but what has been lost in a lot of the noise and volatility that we've seen in the stock was we saw in the first quarter was, yes, a shift in volume from exome to genome and that played a part in how we stacked up against expectations. But inherently, a shift of the portfolio towards genome is not a bad thing. Now there is a short-term comp in terms of reimbursement rates and gross margin against exome and we need more time to get margins between those 2 products near parity with each other. But it's been our long-term intention to drive the market over time in a controlled, rational way towards genome. It's why we picked our ticker symbol WGS. We do see a world where eventually whole genome sequencing is embedded in the medical stack, and then we're the market leader in providing that. So with some of the short-term market dynamics, what might be is not well appreciated is we didn't lose share towards a product that isn't part of our future. Ultimately, we're building market share for the long term. And I think we were able to deliver on that demand in a healthy way in the first quarter despite there being a gap in expectation there. And then the other, frankly, is our largest asset beyond the data set, and that's 1,300 employees thereabout at this company through some of that volatility up and down over the past several years has really kept a fairly steady and stable mindset with respect to bringing the highest quality test at the best speed getting paid fairly for that work at the forefront of everything they do. And so a lot of conference like this, a lot of noise with respect to short-term volatility in our stock price. I'd say the morale and culture within the company is far more stable, focused on the long term and driving down what is our key metric, which ultimately is the age of diagnosis and bringing that closer to at or around birth rather than letting disease progress through the course of a decade.

That's great. We can end it there. Thank you so much.

Great. Thank you all.