Tempus AI, Inc. (TEM) Earnings Call Transcript & Summary

Perfect. I think we can get started. Kallum Titchmarsh here from the life sciences team at Morgan Stanley. Welcome to Day 2 of the Global Halfway conference. Really pleased today to be joined by Eric Lefkofsky, Tempus' Founder and CEO. Thanks for being here, Eric.

Thanks for having me.

Lots of news to discuss, but maybe we can just hit on first the second quarter results, I think very strong across the board, broad-based performance. Anything that surprised you within that, maybe just go through the goods? Anything that surprised you to the bad maybe just level set us, and then we could dive into some specifics from there.

Yes. I think the both the quarterly performance and I think the year performance has really been anchored around 2 main themes. One is the core strength of our diagnostic business, in particular, around comprehensive genomic profiling and how kind of durable those growth rates, unit growth rates are, both in terms of solid tumor profiling and liquid biopsy. So you have this like very strong therapy selection business in terms of like demand -- that also has rising ASPs. And so that's kind of 1 of the big bellwethers of our business. It's the biggest part of our business. So even though MRD has high growth rates, higher growth rates, it's the biggest part of our business. So the diagnostic -- our diagnostic unit has been buoyed by really strong demand that we don't see slowing down. And on the other side, the data business continues to perform really well. I think our data licensing business grew about 36% or something in the last quarter. So really strong -- continued strong growth, and we've had something like 3 quarters in a row of more than $100 million of TCV. Last quarter, it was around $200 million of TCV ad, meaning our bookings for that quarter, people signing new data licenses or $200 million order. And so really strong demand that I think is starting to really be catalyzed by migration to AI solutions by biopharma every time you turn around, they're announcing a deal to bring in NVIDIA chips or cut a deal with Anthropic or Open AI for inference and compute. And they just -- we're the fuel that makes a lot of that spend intelligent. And so we just have seen kind of a frenzy of demand.

Amazing Neas talked about expectations for at least 25% growth for the business over each of the next few years. Maybe just go through what has given you that confidence where you have the most visibility across the different business lines to that sustained growth rate?

Yes. So we have long said that we would rather have a business growing at 25% for a decade than 35% for a few years. So we just kind of architect ourselves around long-term growth. On the diagnostics side, that business is really going to be benefited by not just this robust demand in terms of therapy selection, but really significant rise in ASP. We have 2 big levers that are going to work in our favor. I think one is our main solid tumor assay got FDA approved, not just tumor normal, but also tumor only, which allows us to migrate that entire platform to pricing. That should add somewhere in the neighborhood of $80 million to $100 million and then our second largest product, our liquid biopsy, which is also quite large in terms of units, that is in front of the FDA now. We expect that will be approved at some point that also have ADLC pricing. And the kind of benefit to us is that, that assay is kind of roughly similar in size to Garden's larger assay that just got approved, and they signal that they're getting ADLT pricing or they expect ADLT pricing north of $8,000, so we historically thought that assay would be priced at, let's say, $5,000 or $6,000, but now it looks like going to be price closer to $7,000 or $8,000. So that should add something like $250 million or $300 million of lift on an annual basis once that's approved. So you just have these really big kind of revenue drivers that will accrue to the benefit of the diagnostic business in therapy selection. And then we have the same thing happening in MRD. We have even stronger unit growth rate, rising ASPs. And so like -- that's just -- that business for the next, whatever, 3 to 5 years, we'll likely just have really robust revenue growth. At the same time, as I just mentioned, the data business, you have record demand and you have this migration to people leveraging these large language models for their benefit is not going to slow down or stop. In fact, it's probably going to accelerate because these people are just now starting to leverage those technologies. And so I think the data business also has really long-term visibility. And so if anything, if you said to me today, are you going to under over-deliver that 25% growth rate you got to bet it all every day of the week and twice on Sunday. We overdeliver.

Amazing. And you announced the deal to acquire Personalis. You've obviously been involved with the company for some time before that commercially. Maybe let's just start with the rationale behind that acquisition and the path you see forward for MRD across the market.

Yes. So I mean, we have long thought that Personalis assay was best-in-class. It's whole genome-based. It has incredible sensitivity and specificity. Limits of detection are really extraordinary. So we've long thought that it was a best-in-class assay, and we had cut a deal with Personalis years ago to be their exclusive distributor in the U.S. in the world as I'm not turret-based -- U.S. in the U.S. And so we thought that, that was a great way to enter the market. And the deal was structured where they were paying us basically a sales and marketing fee to distribute the assay, whether or not they got paid or not. And so for the last several years, this deal was largely in our favor, right? Because they were -- we were getting paid about $400 per test. They weren't getting paid because they didn't have reimbursement approved, and so it was just in our favor. And I had been pretty vocal that like -- why would you want to change that? -- you have to wait until the things flip. When they got lung and breast and recently I-O approved by Moldex -- it became apparent to us that we were getting close to that point that their ASPs would rise pretty dramatically and that there would come with time in the next few months, few quarters, whatever, where their ASPs would actually be higher than they're paying us. So we began having conversations. This is all kind of detailed in the S-4 that was filed -- we again have conversations -- those conversations were accelerated when another party showed up and made an offer by the company. So whereas we may have bought them toward the end of the year or maybe early next year, we accelerated it by a few months because there was all of a sudden some activity. But it makes a ton of sense in that it's a best-in-class assay, the unit growth is really strong. We're already distributing it. So it's already a part of our portfolio, and they will have ASPs that will rise, they'll get to $1,000 to get north of $1,000 similar to Natera and it will become a really strong financial product. And so it makes a ton of sense inside our platform.

Interesting timing as well with the Merck Moderna, V940 melanoma vaccine data. It seems like you had some involvement there kind of excluding what person is was doing. So can you maybe just detail how involved Tempus is and then how that personalized addition would kind of come into the picture?

Yes. basically, personnels was selected to be the sequencing partner for that clinical trial some time ago. And they've been performing the sequencing for that trial. At some point, Moderna and Merck felt they needed a national partner for the rollout. And so they ran an RFP that I think most people scale. And they ran an RFP, and we won that RFP, which we put out on social the morning it was -- the news came out. We won that RFP. So once the product is FDA approved, Tempus unrelated to Personalis will be handling a significant amount the kind of revenue and volume associated with that approval. In terms of who does the sequencing, those details are still being worked out in terms of what percentages Personalis may do some sequencing. We may do some sequencing. If we're 1 company won't really matter. But in terms of like if you were to look at this like pizza slices, we were getting the majority of the pizza slices anyway by virtue of winning that RFP. It's a really important program because it's really the first time that I'm aware of where the sequencing is actually a component of the manufacturing process and product. So it's unlike kind of any other form of companion diagnostic, where somebody could get a drug approved using Foundation Medicine, but Caris or Tempus could do the same sequencing or Garden could be part of the arena rollout, but I can sequence for ESR1 as well, and you can prescribe the drug. Here, if we don't sequence you like you can't get the drug. And so you can't use somebody else. The manufacturing process is approved by the sequencing we do as -- and a whole bunch of other logistical things we do as part of the process. So they need Merck Maden needed a partner that can handle that kind of national scale redundancy can't go down, all that good stuff. So I think it now works out great that we're going to be 1 company -- but that process kind of ran its course at the end of last year. So for a long time, we've been a big benefit and.

Perhaps this is more my job, but have you worked to size that opportunity up for what this could be? You obviously have melanoma today and obviously, other indications are perhaps coming through the line. So how should we be thinking about how big this could perhaps be?

Well, it's okay. So -- and I said this -- I mean -- so I mean, obviously, I don't know because I don't know how the other trials will read out -- and I don't know how big this will ultimately be. My best guess is that it's quite big, both because the performance of this drug, its ability to essentially allow patients that don't respond to immunotherapy to respond is pretty extraordinary. I suspect it will work quite well in multiple subtypes and that it will be a very big drug. So there's revenue associated with the work we do as part of those clinical trials, of which there will be many, and that's great. And then there's the ancillary benefit that we -- 1 of the reasons our unit growth rate is so strong at Tempus is we just have given our oncology partners like more and more reasons to work with us. We said this years ago, we said, you people are all kind of chasing performance of assays if that's why you make decisions, but it's never why you make decisions. oncologists make decisions because of a whole bunch of other reasons, including ease of use, logistics, administration, contextualization, but like do I get the information I need in a timely manner in a way that's better than other people. It's the same reason we shop at Amazon, and we don't shop at eBay. If you go back in time 10 or 15 years, eBay and Amazon were kind of neck and neck or 20 years, whatever. And today, that's just not the case. We all go to Amazon, and we don't go to eBay, and it's all those kind of logistical benefits. And so this is just another -- this program will be another reason to use the Tempus because why would you want to sequence to somebody else? And then if you want to get this drug, which is a part of your mainstay therapeutic options, you then have to kind of resequence for those. So I suspect that we'll have both real-term revenue benefits as these trials roll out. just more and more people just use our cloud.

And then just reading through the S-4, 1 of the things that colors just the differences in how personas and Tempus was underwriting the kind of projections for the 2 businesses for the 1 business. So maybe just talk through where that difference was. I think Personalis came out of $758 million of revenue, Tempus $333 million. So why do you think there is a big difference there?

Yes. It's almost entirely ASP. So our expectations of unit growth I think are both quite robust. We have a robust pro forma. They have a robust pro forma. We expect the unit growth to be really strong. you can make different assumptions about how ASP rises. What percent of the ordering what percent of the orders are for like IO response, how fast do they get, for example, CRC approved, these would radically change our projections. We have kind of try to take the approach of being conservative with those particular estimates. And so we just don't feel any reason to kind of like be overly aggressive. But -- the short answer is their forecast could be better than ours, I don't know.

Yes. Makes sense. And there are some unique features of the deal. Personalis is currently trading above the deal price. How do you think about that?

I mean I think it makes no sense. -- and I don't know what is trading at, not in look at it yesterday, but there was a while it was trading like $17 or $18, which made no sense. I mean, first of what you can read from the you can read in the S-4 that it was a competitive process. There were all kinds of people contacted. They ran a full robust process. And the spread between the bids was only like $0.75. I think the somebody who was at $17, we were $16 25. So it wasn't even like -- there's kind of no logic to think there's some kind of magical price out there that's much bigger. I don't think exists. On top of that, it's the idea that somehow you would be trading above the price when you have Tempus as the largest shareholder obviously voting in favor. Merck is the second largest shareholder also voting in favor. I think ARC is the third largest shareholder and they're kind of a huge tempus span. It just doesn't make a ton of sense to me that in and of itself could be 35% or 40% of both. And these things never get 100% of voting. So I don't see any topic bids coming. There's no kind of logic there. We already have significant shareholders voting in favor of it. So there's just -- doesn't -- there's no kind of rationale to be buying their stock at a significant price above where it's going to close. The only counter to that would be some kind of like nefarious short-term trade like you somehow think because there's an exchange ratio that's calculated a few weeks before closing that you could like short us or buy them or whatever. But that -- those trades in my opinion, are kind of riddled with risk that I would be taking.

Makes sense. Maybe we can transition on to the genomics business and focus specifically on oncology for a little bit. I think at the Investor Day, you described 3 key trends that will drive therapy selection in the years ahead. physician penetration, earlier stage testing and more comprehensive testing as well. So when we look kind of 3, 4 plus years out, how do you think that market evolves? Obviously, it's a more established market in the oncology space, but we still obviously have plenty of room to run, I think.