Welcome back to the 44th annual TD Cowen Healthcare Conference. I'm Kyle Boucher, an associate on the Life Science and Diagnostic Tools team, and I'm pleased to welcome SOPHiA GENETICS. I have Ross Muken, CFO and COO of the company here with Kellen Sanger, head of corporate strategy or head of strategy in IR. So welcome, guys.
Thank you for having us.
Definitely. And why don't we start? You reported earnings yesterday. I just wanted to start with maybe a reflection on your 2023 performance, key accomplishments, and what are some of the 2024 priorities for you guys?
Great. So as we think about 2023, we had a very strong year, right? So we had really good revenue growth across the board, and it was pretty balanced geographically. Most of our growth continues to come from the expansion, and that is despite having very good, I would say, landing of new logos. And that's just the nature of our business in terms of the pacing of new customers as they adopt the platform. But it continues to provide us with a very high degree of revenue visibility. I'm really pleased with sort of our gross margin expansion. We had a record year. And if you look at our fourth quarter results, excluding sort of the credit we had in the prior year period from Microsoft, gross margins were up over 600 basis points, right, into the low 70s.
That remains for the full year above our long-term targets. We're quite pleased with the work we've done on gross margin. We continue to show across the board really nice operating leverage. We took down headcount over the past 18 months. That probably will cease in the beginning of next year as we roll off some of the remaining folks we unfortunately had to part with in the back half of this year. Between that and the really strong OpEx management on discretionary and then the continued really nice dropdown from gross margins, our cash burn was down pretty materially for the full year. We were able to achieve our targets, continue to grow within our guidance range, but do so with much less cash burn. I would say strategically, I'm quite pleased with the progress we're making in liquid biopsy.
Our relationship and partnership with Memorial Sloan Kettering is just getting started. It's extremely exciting. There's a lot of opportunity for us to both penetrate new accounts as well as expand within our existing accounts. We also have quite a bit of pharma-related business that should come online related to liquid biopsies. So that, for us, remains a real priority as we think about this year. Solid tumor, particularly the momentum we had in 2023 and HRD will continue in 2024. There's a lot of interest in that signature given what's happened in the PARP category for many pharma companies. There's a bit of, I would say, expansion of indications that's happening there from ovarian into other parts, and so that will continue the growth. But broadly, whether it's CGP or traditional solid tumor, both here in the U.S. and abroad, we're seeing really nice demand.
And then I would say lastly, the U.S. market for us has been quite strong. I think this was a big question folks had when we came public. Obviously, we grew up in Switzerland, and a majority of our business when we came public was in ex-U.S. markets. And I'm really proud that we grew over 70% in the U.S. this year. I think there's always sort of this debate of centralized versus decentralized, and we truly believe that there is synergy between the two and that they can kind of coexist. And that ultimately, in our world, we can support any types of customers, right? And we've now proven that, and we've added some really nice new logos here in the U.S. and new customers. And so I'm really proud of the momentum there and think that will continue into 2024. Anything I missed maybe on multimodality?
Yeah, sure. I think from a biopharma perspective, we continue to have a good footprint. Ross mentioned MSK-ACCESS. We're also getting some interest there. We worked with AstraZeneca. We announced a partnership with them where they sponsored the deployment of HRD across Spain. We're excited to expand that partnership in 2024, and they'll sponsor and subsidize the deployment of our MSK-ACCESS powered by SOPHiA DDM as well as MSK-IMPACT. From a multimodal perspective, we had a lot of good progress in 2023. We took the DEEP-Lung-IV clinical study as a catalyst to collect a lot of great multimodal, high-quality data on lung cancer patients and completed some pretty landmark studies with biopharma partners in 2023.
Looking forward to the next year, we're excited to expand our capabilities beyond lung cancer to breast, kidney, and prostate, and also capitalize on some data partnerships with both MSK and some other partners such as Exactis to further build out those capabilities.
Got it. Great. So going on to your guidance for the year, yesterday you initiated 2024 guidance. It's just a tad below the street estimate, calling for $78-$81 million in total revenue, which represents 25%-30% year-over-year growth. So this range is below your medium-term guidance of 30%-35% constant currency, but it's at the lower end on a constant currency basis. Can you sort of discuss the puts and takes here? Is this just more of a conservative view? Have there been any changes in the underlying fundamentals? How should we think about that?
Yeah. So I would say in general, right, if you look at the number of new logos we added in the fourth quarter relative to the year, we had a fantastic fourth quarter in terms of new business. So the new business outlook for us remains very robust.
Our pipelines are quite strong, and this is balanced globally. I would say the offset or where we have a slightly higher degree of uncertainty is with respect to some of the new customers coming on and the timelines at which they would adopt. So normally, if we sign a customer, they'll be online and into what we would call routine to start ramping consumption within six months, right? So if you sign them at the end of last year, they'll get half a year of contribution. Now, the challenge we had as we entered this year, and again, we'll have to see how it plays out, is, one, a lot of our more recent bookings are liquid biopsy-oriented, and inherently, liquid is just more complex as an approach than tissue. And so given we don't have historical experience with that, we decided to be conservative in the ramp time.
So our customers have given us their assumption of when they'll be live. But the reality is, because we don't have many customers in the past that have done this to compare, we wanted to make sure we didn't come back later in the year and have an update that said, "Well, we had expected these new customers to begin in June, and now they're beginning in September and October," right? So we wanted to be conservative in that assumption. Now, on the sequencer side, we are seeing some combinations of sequencer and chemistry that is just new to us. And frankly, I think one of the points from yesterday maybe I wasn't clear on was it is not related to our software's ability to adapt to that diversity.
It's more a question of not having as many of these vendors with the experience that Illumina has or Thermo has in market of delivery, installation, onboarding. If someone has operated Illumina sequencers their entire career and now they move to something else, it's sort of like learning a new phone or laptop, although at a much higher degree of complexity. And so without sort of the reps of seeing this again across our platform, we decided again to assume a slightly more elongated path to new growth. So it's not like the growth is going away, right? We'll probably capture a bit more of it in 2025 than in 2024, or we may find that the implementation times are a bit more normalized.
But again, I think we wanted to take the stance, given the environment and given how we always talk about predictability in the business, that we would set the bar initially at a level that we had a very high degree of confidence in being able to achieve based on what we already see from our recurring revenue from the previous year as well as what's in our backlog that's already being implemented.
Got it. So Ross, I want to take a second here. Later this year, we'll mark three years since SOPHiA's IPO. Can you share your thoughts on where the company has progressed over the time frame? Are you ahead of where you thought you'd be? Are you behind? How should we think about that?
It's a great question. I would say for me personally, the biggest challenge (and I know it's been the demand of the market, and it probably in isolation or in an Excel file looks not so hard) but to continue to hit our revenue forecast but do so with half the cash burn or much less headcount and to be able to continue to grow without adding people or money into the business, it's not so easy, right? So we've had to grow up quite quickly, right? I grew up in my career on the finance side looking at businesses like Thermo and Danaher and others that have amazing operating discipline. Bringing that to a young company that's growing 30%+, it's not so simple, right? And so we've had to, I would say, grow up quickly. We've become a lot more efficient.
We've become a lot more reliant on trying to automate and simplify processes. So far, we've been able to achieve a lot of our growth trajectory with far less capital, right? So I'm quite proud of that. And again, it wasn't sort of the plan at the time of the IPO. Now, I would say the other two areas, right, at IPO time that we probably got the most questions on were, one, can you exist or win in the U.S. market? And at that point, we were quite small here. And two, can you actually build and grow in pharma? And I think the good news is we've said yes to both of those now. We've built up quite a critical mass of important partners and customers here in the U.S.
We have some of the most marquee logos in the cancer landscape, and we're also serving some of the centralized laboratories, right, which I also think was a question. So I'm really proud of what we've done here, and that team that we have in the field today has great momentum. I would say secondarily, on the pharma side, we're still in the early stages of the evolution of that business. I still think it could be much bigger for us. But again, we've landed some really marquee accounts. We have some fantastic relationships. If I think about the discussions and touchpoints and who we're interacting with at these pharmas and how they view our technology and what we're able to do, it's evolved massively. Now, would I like the revenue to be bigger than it is today as the CFO? Of course.
But pharma, in terms of that world, if you want to have sustainable, repeatable business with them, takes time and proof points. And so I think we're going about building it the right way. And in that vein, multimodal for us is such a sort of a futuristic concept, but still, we're starting to make it a reality. When we first started talking about DEEP- Lung and we started talking about ingesting all of these different data types into complex algorithms and then being able to compute data in sort of a multivariate way, this was very futuristic. AI is now quite a big thing, apparently. We've been doing it for 10 years. But I would say there, I'm really proud of what we've done in terms of the technical advancements.
I think we're at the bleeding edge of what's happening in the space, and I think it'll position us well for the long term. So essentially, we've been able to check a number of the boxes. We've advanced the technology. We've won some fantastic customers all by spending less money, right, which is not a particularly easy combination, but we've managed to do it. And I think some of you know our CEO missed the Q&A portion of our call yesterday. He had a slight procedure over the weekend, and he embodies who we are. We're a very resilient bunch, right? And so we've taken the challenges in front of us, and we continue to execute, and he'll be the same.
Got it. So I want to touch on some of the specific opportunities in a second, but can you maybe take a second to discuss your TAM from a total addressable standpoint, maybe that serviceable addressable market too? Can you lay out just a big picture of what the revenue opportunity is, and then maybe dive into what SOPHiA can really address?
Sure. So obviously, in our 20-F, we cover the TAM in great detail. So I won't bore you with all the specifics. But the reality is we essentially, with our platform, can address all cancer and rare disease patients in the world, right, which is a very large number when you think about many of the different geographies we play in, which today is 68 countries.
I think we're moving into a few more new ones this year, but it's a huge global base of individuals that we can impact and help. And so it's quite a large TAM in the tens of billions overall. Now, in terms of the addressable market, the reality is the percentage of patients still tested today in NGS is relatively low, right, in many areas, but it's growing quite fast, right? So that is a part that's fueling our growth. But we'd like to obviously see that precision medicine impact happen on a much greater portion of that potential market. And again, certain countries are far ahead of others in that vein. The other part of it is the richness of data per patient is exploding. So Illumina, the market leader in sequencing, has talked a bit about this around their NovaSeq X. We see the same dynamic, right?
The percentage of growth we're seeing in data within our platform is quite significant, and I think we're just getting started. And that doesn't even incorporate all of the other multimodal aspects of data, whether it's radiology or pathology or the phenotypic data that exists in the EMR. And so for us, we believe we're still sort of at the early stages. So essentially, what we're trying to do is obviously, maybe today there's 5,000 potential institutes in the world that can produce precision medicine data. We serve north of 10 applications. So again, a broad spectrum of that population base in terms of no matter what disease.
But we're also seeing a great increase in our ASP per patient because when we first started in the space, people were doing one gene or five gene or 10 gene tests, then they moved to 25 gene panels or 100 gene panels, and now we're looking at exomes, even whole genomes. And even things like liquid biopsy, you have to sequence at such a depth that the amount of data being presented is quite significant per individual. And so our ASP continues to move higher, which also obviously increases our TAM. And then now you add on to that the ability for pharma to use that data in a way that's useful both from a discovery or a development or a commercialization standpoint. And as we get that flywheel moving, that SAM will continue to grow pretty materially for us.
Got it. So can you just take a second? Why do customers choose to use this offering? What are the key sort of selling points when you walk into a new customer and you're trying to push the SOPHiA platform? How should we how do we think about that? Do you want to take this one?
Yeah, sure. So I think there are a couple of core tenets of our platform that are initial points of attraction. So first, we're universal in nature. So we work with every different type of library prep, sequencer type. So any of these permutations, we're able to adapt and work with any of those. And that specifically is originated from our algorithms. So we have a series of proprietary algorithms that allow us to identify signal from the noise or biomarkers across these different setups, which I think is a really unique value prop.
So with that kind of at the core, there's also more tactical reasons why people adopt our solutions. So maybe it's our high level of accuracy. So these algorithms, once again, contribute to a really high level of analytical performance. Beyond that, we also are really good at improving the turnaround times. We integrate really well throughout the customer's workflow. We can work with any different LIMS or medical record system, and we can help turn around the analysis data very quickly. Beyond that, we're secure. We're also scalable. So it's exciting to see not only this ability to land new logos. We announced this year that we landed 87 new Core Genomics customers, and then in the fourth quarter, 35 new, which is a record number from us, up quite a lot even from the third quarter.
And then seeing the ability to expand within those existing counts due to our menu. So we have a really wide menu of applications that we offer across oncology and rare diseases. So basically, being able to meet any need that the customer might have from a genomics perspective.
So on that, your land and expand strategy, you mentioned yesterday during the earnings call, the average customer is now using 2.5 applications. And I think that was up from 2.3 at year-end 2023. Where do you ultimately expect this can go over the next few years?
Yeah, so it's hard to tell. Obviously, there's an evolution curve for most diagnostics, right? They start centralized. As they get more adopted, they become more and more decentralized. And actually, as they get commoditized again, they become centralized again, right? So it's kind of a 20-year curve.
And so different tests are at different, I would say, points on that curve. For us, some of our most sophisticated customers, the largest customers, can use 9, 10, 11 applications, right? So we're still quite far from coming close to fully penetrating our base. And we're also adding new applications, right? What we're doing in liquid biopsy that may ultimately yield MRD, right? So there's still quite a lot of expansion potential already. The positive and negative of our space is, right, nothing moves quickly, right? So the good news in that is our churn is really low, right, because people don't typically leave and they don't typically change very often. The negative side of that is, even as they're adding new tests, right, or adding new capabilities, maybe they'll spend this year adding one, right?
We wish they were adding more, but the reality is, and you may or may not have read about it, but there's a massive labor shortage, right, in laboratories globally. And so many laboratories basically just have enough labor to run what they're doing. And so when you want to do more, you either have to become more efficient, which is where we come in, or you need more labor, right, to validate. And that's sometimes where the challenge becomes. Otherwise, we would see certain institutions, I would say, do more.
The one big difference that's changing now, though, is with some of the new sequencers in market, just the sheer volume and cost, right, that these sequencers enable really changes the paradigm of what folks are willing to do in-house versus send out or moving into new applications in terms of what percentage of their population they're going to test. And so we are seeing quite a lot of institutions that are looking at that expansion potential more aggressively than we have in the past.
Got it. So sort of on that note, I want to raise a few industry trends/factors, get your reaction on what these can mean for SOPHiA. So maybe I'll just go through these and you can pick which ones you want to talk about. But first is competitor, if not a competitor, big diagnostic companies, bankruptcy, what that means for you guys. The next is the broadening field of NGS competitors, which you touched on a little bit. The third one is the proliferation of MRD testing. And then the final one is LDT legislation. So I don't know which one you want to start with?
Yeah, there's a couple of points there. So starting on your first point, obviously, in terms of some of the noise or disruption in the space, I think it's still quite early to know how that's going to play out. I do think, again, whether it's that situation or others, we are seeing, particularly in the U.S., more laboratories and academics think about the continuity of supply of testing and whether or not it makes sense to have some of that in-house, right? So I do think that has driven some of that discussion. I don't think all of it certainly will not move in-house.
I think it will certainly be pretty balanced between the other centralized players and such. But it is a question, right, particularly given what has happened on the cost side. Maybe moving to a simpler one. I mean, in terms of MRD, super exciting, still quite early. Most of what's being done or all of what's being done in the world is pretty much centralized. We're really excited about the capability. We think ultimately there is a sort of ability for that to become decentralized, but we haven't sort of yet unveiled our plans there. But we do have a lot of other institutions and other actually existing assay providers that have come to us and asked us about how to do this at scale globally. So I would say stay tuned there.
On LDTs, this one, honestly, when we first saw the legislation, I was a bit unsure of what it would mean for us just because at times, right, changes in regulation can mean different things, right, to a customer base that's already overly burdened. They've also voiced many labs' displeasure, both centralized and some of the academics with sort of the developments. Ultimately, what we're seeing today is actually it's quite positive, right? I think the need to have a validated platform. And by the way, we've already gone through some of this in Europe with IVDR. We also—and we don't talk about it all the time—but as part of our professional service offering, our MaxCare does already many of the things, right, that relate to what the FDA is going to request. So we think we're quite well-suited to help many laboratories through this transition.
My guess is similar to IVDR. There'll probably be some delays and bumps along the road, but we actually think it will make it harder for many institutions to basically have a QMS for their own proprietary software. Because still, the reality is most of what we compete with is institutions doing it themselves, right? It's not DRAGN or one of the other products that exist in market from QIAGEN and others. It's really mainly in-house. And then lastly, the new sequencing piece, this for me is the most interesting as someone who's been around the space for a long time. We obviously welcome diversity. This feeds quite well into the USPs of our business model. And I also think for the space and for researchers and clinicians, a bit of competition for everyone, including for Illumina, is quite healthy.
They're obviously a fantastic company with great sequencers, and they're still the majority and lion's share of what we see in the market. But I do think finding new angles or new niches, a lot of the new emerging players have pretty cool technology, and we've tested many of the new boxes. And we think for certain use cases, they're quite compelling. And so again, I think in that, we're ready to serve our customers where they want to be. And this was sort of the hallmark of SOPHiA from the beginning, which was design your lab and use whatever instruments or chemistry or automation or protocol steps you want, right? And we'll basically correct for it on the back end with our algorithms.
It's that sort of almost stubbornness that we were willing to kind of accept that diversity from the beginning that enabled us to create the most powerful algorithms in the space. So we're meeting the challenge of these changes head-on. Whatever the landscape looks like in five or 10 years, I think we're quite well-positioned for it.
Got it. So maybe moving on a little bit back to the biopharma opportunity, can you talk here about what the ultimate opportunity is here, your key partnerships to date, and ultimately how this revenue sort of flows through over the next few years? Maybe you want to cover the first part, and then I'll touch on revenue.
Yeah, sure. So I'll structure the response in terms of two different offerings we have. So first is the sponsored deployment of our platform in the clinical space. And then second, I'll touch a little bit more on the multimodal data and analytics. So once again, 2023 was really great for us. I talked a little bit about the partnership that we had with AstraZeneca in Spain sponsoring the deployment of HRD. That was really quite successful. I think we reached 4,000 samples to date, which represents about 90% of the total HRD testing in Spain. So super successful project with them. And they're really excited to then expand this to additional areas in 2024.
So we also talked a lot about our partnership with Memorial Sloan Kettering and how we're taking their central tests for liquid biopsy within the MSK-ACCESS and solid tumors for MSK-IMPACT and then sponsoring that deployment globally. So AstraZeneca will be joining us in that mission, which is really quite exciting because it's not just one country.
This is two tests or two applications across the globe. So this is very exciting from us from a clinical deployment perspective. Along the other offering, which is our multimodal data and analytics, 2023 was a really big year from a development perspective and also a clinical traction perspective. So we launched SOPHiA CarePath, which is basically our multimodal product or module for multimodal data and analytics. And we're starting to ingest data for lung cancer. We've used that lung cancer for a really great project where we're using multimodal signatures within a subpopulation of patients to help a biopharma company basically unlock potential for a drug that was previously considered dead. So a really exciting project there with ambitious plans to expand in 2024.
So both within the algorithms that we've developed for the lung cancer patients and the data that we have today, but also announcing partnerships to collect more and more multimodal data across different indications such as breast, prostate, and kidney cancer, and then to develop new algorithms and opportunities to help biopharma in that way.
Got it. So just one on geographies broadly. So the U.S. is one of the, if not the biggest opportunity for SOPHiA. Key area of focus from a commercial investment expansion perspective. What % of revenue does the U.S. represent today? And ultimately, where do you see this over the next three years?
Three years. So in terms of percentage of revenue, it's about 15%, right? And that was low single digits when we started. So we've made some pretty good progress. The business was up 70% this year. We've also had great growth in our pipeline and other elements that we obviously don't publicize but are important in terms of the future direction of the business. I would say on a multi-year basis, right, I don't know about three years, but frankly, just given the global share, right, the U.S. eventually should be nearly half of our business, right, just given the dollar spend. I'm not projecting that on a three-year basis because that would be supernormal growth.
But certainly, we expect the U.S. to grow above the corporate average for the foreseeable future. I think some of the pace of growth or that mix will depend on, I would say, some of the newer applications that we have and their success. So example, liquid biopsy to me could be quite, I think, impactful here given what the reimbursement landscape looks like in the U.S.
There's also quite a bit for us to do in solid Tumor. So we're quite excited about all of those things as well. We would argue over time, the central labs, which are fantastic businesses, should also consider using our platform as their backbone, right? I think we will have the cheapest ability to compute NGS-based clinical data in the world, right? And I would say no one is better at designing many of these analytical capabilities than us for any of the different use cases. And so how that changes, it's not an easy switch out for some of the labs. But to me, that's the other big question that will determine sort of where we get to. But fundamentally, we can grow at our designed rate for the long term, irrespective, right, of that success. But certainly, that could change some of the step function part of it.
Got it. Got about a minute and a half left here. So I just want to jump over to the P&L margins. So you guided adjusted gross margins to 72.5%-72.7% in 2024. What's the headroom over time for margins? What are sort of these underlying supporters of that margin profile?
Yeah. So we continue to get leverage on the cost of compute and store, right, which remains the largest portion of our COGS. Obviously, there's labor absorption there as well for some of the maintenance that happens. I would say outside of that, right, it also will be mixed, right? And the reason why we haven't necessarily re-updated sort of our long-term expectation, given we've now exceeded it, is because there is some question, at least in my mind, as to what some of that mix is.
Because we have some areas where incrementals could be 90%, and then we have some other areas where it could be a bit less than our corporate average. But for the customer, it might be quite interesting. And so I think we would like to see how some of these newer places evolve. But ultimately, in the near to medium term, we still feel like we can advance that gross margin line and continue to outperform even our own internal expectations of what we're going to be able to drive within our business and showing that we are truly a software company.
Got it. So last one, what do you think's most misunderstood about the story?
I think we're quite complex, right, and we're a bit different, right? It reminds me a bit of Foundation when they first came out. They were so different than everything else. And sometimes when you're different and you don't have an easy comparable, it sometimes is challenging. But honestly, if you think about us like any other SaaS network business, right, which isn't sort of necessarily that prevalent in life sciences or even in healthcare, it's a bit hard. But overall, I think what we do in terms of our impact on patients and how we grow and how those network effects can drive very long-lasting sustainable revenue growth and good profitability, to me, over time, it will all shine through.
Got it. Well, with that, Ross, Kellen, thank you so much. Great to have you.
Thank you so much.