Great. Hey, everyone. Welcome to the 2024 Jefferies Global Healthcare Conference. My name's Matt Stanton. I'm on the life science tools and diagnostics team here at Jefferies. Happy to have the team from GeneDx back at the conference with us this year. Joining us from the company, we have CEO Katherine Stueland and CFO Kevin Feeley. Thanks for joining us here today. I guess just to kick off, you know, it's been a little over two years since the Sema4 GeneDx deal originally closed. A lot has happened since then. Thought it could be helpful to just kinda level set folks on, you know, where we came from, where we are today, and then maybe talk a little bit about some of the key highlights from the transformation GeneDx has undergone over the last few quarters.
Wonderful. Well, thank you for having us. As we think about the past two years and the evolution of Sema4 into GeneDx, I think it's helpful to go back to kind of the original premise, which was being able to sequence using a genome as a backbone through every stage of life, be able to use that genomic information, combine it with clinical data from an EMR in order to provide better health insights. Of course, we are a different company, but with a similar vision today. And when I joined two years ago, after the acquisition of GeneDx by Sema4, the market was looking very different, and the mandate from the board was: How do you make the company profitable as soon as possible?
And so we went through a series of business reviews at that point in time to take a look at the underlying health of the different businesses. So there was a nascent oncology business, there was the flagship reproductive health business, and then the pediatric and rare disease business that came through the acquisition of GeneDx. And as we looked at the various businesses, the oncology business, again, nascent, was requiring several hundred million dollars in order to really develop that and get it to scale in order to compete in a very crowded market. The reproductive health business shifted tremendously, in part because of the spin-off from Mount Sinai.
ASPs for the carrier screening business were declining rapidly, and that business required, because they were in the IVF space, an investment of about $30 million a quarter in order to continue to maintain that business. And so it became very clear that those businesses were no longer sustainable, and so we wound those down. The bright spot really was the strength of the GeneDx business, and in particular, our flagship exome business, as well as our whole genome business. Our exome business, in particular, has gross margins of north of 60%. And GeneDx, really, before I joined three years ago, did not have a true commercial strategy in place. So, what we saw was a growing business, based on healthy revenue, healthy volumes, really strong gross margins.
And so we wanted to make sure that we could continue to grow that opportunity, really keeping an eye on what we originally had envisioned, which was: How do you run all hereditary disease diagnosis off of a genome backbone? So that's what we're focused on today. I would say in 2023, we saw the finalization of the restructuring of that, of the business, and in the fourth quarter, what we saw was, I think, the first time that people really saw a clean P&L representative of where we're going as a company moving forward. And as we announced our Q1 results, it was, again, strong focus on revenue, really based off of exome growth, as well as a rapidly growing whole genome business, with gross margins, again-
Around 60% or so. Then beyond that, continuing to show that we've got cash burn under control, and so we have the leverage that we want to continue to drive, in order to open up the markets moving forward.
Great. That's helpful. I guess to touch on the LDT impact, I think you've had a little bit of time now to digest it. I think on, you know, the time of the 1Q call, you had 4 hours to read 400 pages. You know, now that you've had a bit of time to think about that, just update thoughts on, you know, potential impact to your business, the broader industry. Is it potentially a net positive for someone like you guys? You know, what are you thinking there?
Yeah, the LDT legislation, we think, ultimately is positive for us. We think it's actually quite good for the industry as well. You know, as a reminder, GeneDx was actually spun out of the NIH back in 2000, and so we have been a regulated business for 24 years, under CLIA, CAP, and New York State. I think what's really helpful as we think about the LDT opportunity moving forward, is really being able to work with FDA to set a standard, by which all labs should be held to in terms of an exome and a genome, and what that really takes in order to deliver the highest level of clinical care, the highest degree of confidence. We've run more clinical exomes than anyone in the space.
When I first joined, we were at about 270,000 clinical exomes in 2021. Today, we're north of 600,000 clinical exomes. So we are rapidly growing that knowledge base and that data asset, which is an absolute strength in being able to reduce the variant of unknown significance, thus providing a higher level of confidence for clinicians, which is why 80% of clinical exomes today are run through GeneDx.
Okay, maybe Kevin, one for you. You know, gross margins in 1Q, you know, over 60% were stellar. Can you just talk about where we go from here? You know, any additional levers you have to kind of improve gross margins from, you know, the improvement we've seen in the last few quarters?
Yeah, so in the first quarter, total company gross margins, 61%. But I think important to pull out there that, in the first quarter, only 30% of all tests we actually ran were exome and genome. We expect, of course, over time, to see the majority, and then, at some point, substantially all, tests, be either exome or genome. And still-- so still a long way to go, in terms of overall test mix, but pleased with the acceleration of mix pick up there. The exome and genome portfolio as a whole, operating north of 60% gross margin, in the first quarter and the fourth before that. I would say benefiting from all three of, improvements in average reimbursement rate for exome, vis-à-vis, overall reduction in denials.
Continual progress to reduce cost of production across both the wet and dry lab in exome and genome. Really pleased with the operational rigor the team is driving to achieve scalability and cost efficiency throughout the lab processes. And then, of course, total company gross margin will benefit as the overall percentage of test exome to non-exome improves. And we expect throughout the year to continue efforts to improve test mix, to lower cost, and ensure that reimbursement rates continue to rise via reduction in denials and increased medical policy.
Okay, maybe one on ASPs. I think in 1Q, you noted that the $2,600 for exome, genome in 1Q was kind of a floor. You know, so I guess where can ASPs go from here? And any kind of finer point you can put on, you know, either the timing or kind of the magnitude of upside from that $2,600 we saw in the first quarter?
Yeah, so that $2,600 is a sort of all in after all activity and experience, including all denials, and, and with a roughly 50% denial rate in the insurance channel. Now, not all of our business is insurance-related. We do have a book of business institutionally, cash pay from hospital systems. But, roughly 50% of all tests running through the combination of commercial insurers and Medicaid programs still being denied. We think ultimately, a mature product in our space, will never get to likely a 0% denial rate, but cutting that denial rate in half should be plausible over the next few years, which will be a combination of additional state Medicaid programs picking up coverage for exome and genome.
Today, roughly 28 states have medical coverage in the outpatient setting for exome, and only 11 states have coverage for what we think is a really helpful product in the NICU or inpatient setting, that being the Rapid Whole Genome. So still a long way to go to secure additional state Medicaid coverage. That said, extremely pleased with where we are from a coverage standpoint. I've now spent seven years at GeneDx, and in my tenure, both those outpatient and inpatient Medicaid stats were zero when I started with the company. So extremely pleased with the progress we've made over the last few years, but there's a long way to go. And as state Medicaid programs pick up coverage, we'll invariably see a reduction in the denial rate.
And across the commercial payer landscape, we are in-network and contracted with over 80% of all commercial lives, and are working hard and invested significantly to improve upfront processes to make sure that every order we submit adheres to medical policy and administrative operational policy of payers. So happy with where the rate is, and we still think there's room to reduce denials over time.
On that reduction of denials, is there any, I mean, I'm sure it's not a simple formula, but is there any way for us to think about kind of every 5% improvement is, you know, $25, $50 to ASPs? Is there kind of a simple equation? I'm sure there's more moving pieces behind the scenes, but is there kind of a way to frame, you know, as you continue to drive that rate down, what that could mean?
Yeah. I mean, so we work hard in our earnings release to actually supply a table where you can see for major product categories, both volume and revenue, and so it can derive that average reimbursement rate. And, look, it's a meaningful part of our revenue equation. To the extent we can reduce denials by a theoretical 5%, it's $2 million a quarter worth of revenue. But of course, this puts and takes-
Yeah
within all the various product lines and what we see as the theoretical max that we can get to.
Okay. Maybe moving over to the mix shift dynamics you guys touched on a little bit earlier. You know, whole exome, genome has seen, you know, pretty drastic mix shift, right? I think it's effectively doubled from 16% to 30% in the most recent quarter. Maybe talk about first, you know, some of the, the big drivers behind that. You know, as we think about more longer term, you know, is there a theoretical limit of where that could go with the portfolio in, in the next couple of years here? Is it 40%, 50%? How should we think about the, the slope of that curve from here?
Ultimately, we want to get to 100% exome and genome. That's going to take several years. We've done some analysis just to take a look at what guidelines say, what payer coverage it is covering, and also where clinicians are comfortable, what kind of data we need to provide them. We've worked really hard to establish a commercial strategy where our teams know where there's opportunities to drive exome. Epilepsy is a good example of that, autism is another example of that. And so we want to continue to focus on the neuropediatric segment, where we're finding really good success in getting clinicians who have been ordering panels to start ordering exome. Then for clinicians who have not been ordering genetic testing, they're starting with exome, and then they stay with exome.
The commercial strategy is designed to really drive as much exome and genome utilization as possible. But in the meantime, we continue to offer some key tests that may provide additional benefits for us commercially, or where there may be a gap in a test. We have a really important rubric that we've established about test menu retirement. We retired 400 tests from our menu that was originally at about 1,000. So we've removed 400 tests from that menu. We'll continue to retire tests over time in a systematic way. We look at first what is best, what's the best test for patients? That is the number one thing that we take a look at. Then we take a look at the financial profile of each of those tests.
So I think we've established a really, thoughtful way of ensuring that we can drive to 100% exome and genome over time, putting clinical care at the forefront of decision-making, but without a doubt, the financials of the test behind it have to make sense as well.
Okay, that's helpful. Maybe one, Kevin, back to you on cash burn. You know, you guys have laid out a target for profitability in 2025. You know, I've reiterated that a few times here. We've seen nice improvement for, I think, eight straight quarters on the cash burn front. You know, as we think about bridging from today to 2025, can you just talk about some of the biggest levers to get us to that profitability target in 2025 year to track over the next few quarters?
Yeah, the key in my mind is continuing to drive leverage to the P&L through overall mix share gains into exome and genome. As we talked about, the margin profile is attractive. We think it's a durable margin profile. And so as more and more share of total tests reported moves into exome and genome, that drives overall gross profit. At the same time, we've radically transformed operating expense across the combined company, having spent the last 18 months restructuring and effectively shutting down the entirety of the former Sema4 business. And so at this point, feel that our overall operating expense is at a point where it's servicing the high growth that we're seeing, but is at a point where we can start to really gain leverage throughout the P&L.
So, should expect to see sequential declines in cash burn for each of the remaining quarters of 2024, with profitability coming near term, crystal clear in sight.
Okay, and can you just remind us how many, if any, and what is left on the legacy payments in terms of cash outlays we have for the rest of the year from the Sema4? Are there any left, or are we in the clear on those?
So all operating activities, restructuring, severance costs are effectively nil at this point. What remains on the balance sheet is certain liabilities of the former business. There was a payer settlement, 2021, related solely to that former Sema4 business. There's $22 million left on that liability. We have some operating leases for some facilities that have been shut down and are vacant. The market, as most of you know, is fairly cold with respect to commercial real estate nationwide. It's about $5 million of operating expense for facilities we're looking to offload, that are still obligations of the company.
We, you know, our 10-Qs and 10-Ks will outline other liabilities from the former business, but all activities shut down, costs are fully behind us at this point.
Okay. Maybe shifting gears over to the biopharma data business. This was an area that was kind of core to the legacy Sema4. I think GeneDx has taken a bit of a different approach there. Maybe just talk a bit about the size of that business today, where you're having the most success, and then in terms of the pipeline, where do we sit today in terms of some of those, you know, biopharma data-type partnerships?
So we're really excited. We announced this morning an access program for epilepsy testing that was designed in partnership with biopharma companies that are in drug development for epilepsy. So this is a really important program to get off the ground, and I think is representative of the types of biopharma partnerships that we want to be able to drive moving forward. Just a little bit of color on the program. Epilepsy is a particular area of strength for us with our exome product. We have higher diagnostic yields than panels, so this is an area that we've been driving from a commercial standpoint every step of the way, and we're continuing to see leadership there, particularly as the industry is shifting.
So, today's announcement, I think, is really representative of the types of biopharma partnerships and programs that are committed to opening up access. We have very good commercial coverage for epilepsy, as well as for other indications related to exome. Continuing to improve medical policy is an area of absolute focus for us, and so in areas where and for children, where medical policy is not covering it, this provides access. Importantly, it also continues to ensure that we are growing that overall data asset, and we're able to connect patients to biopharma companies through their providers for clinical trial opportunities, for FDA-approved therapies, and really ensure that we can connect not just a diagnosis, but a treatment as well.
For children with epilepsy, once diagnosed, you can see a reduction of seizures by 90%. So it's a really meaningful program in terms of being able to deliver better clinical care and better clinical outcomes for children with epilepsy. As it pertains to contribution this year, the biopharma business, we're continuing to say it's gonna be a modest portion of our overall revenue guidance, and we expect that it's gonna be that way over the next two years or so until we really start to build, I think a new model and strength behind that new model.
Today's news, without a doubt, I think, is a first step in proving that we have a good model out there that can both open up access and contribute to the underlying business.
Okay, that's helpful. On the commercial side, you know, enterprise sales, relatively small team today. I think they're focused largely on the NICU opportunity. Understanding it's a different process and maybe a longer sales funnel, can maybe just talk a little bit about how the funnel's shaping up there, and should we or could we expect to see some benefit in 2025, as you know, that team kinda gains some traction? And I guess, you know, what's the biggest gating factor or hold-up to adoption, as that team goes out there?
So our Rapid Whole Genome product is actually our fastest-growing. It's off of a small base historically, but it's our fastest-growing product line. And that Rapid Whole Genome is providing benefit to babies who are in the NICU. And, as you said, we have a small team that is doing enterprise sales at this point in health systems. But we are growing that team because we're starting to see success in terms of our ability to not only get into a health system, get them to begin ordering our Rapid Whole Genome, but our ability to operationalize that business as well. So, our focus as we continue to think. I think your timeframe is right.
We would see greater contributions in 2025 from that Rapid Whole Genome business, but it's a really important area of focus for us in the second half of the year, in order to ensure that we can continue to drive the same sort of leadership that we've enjoyed, in the outpatient setting and the inpatient setting. I think one of the things that sets us apart in that inpatient setting, they are relying on the geneticist to decide who to work with, and we've really established ourselves with the medical geneticists in the world as being the leading provider of exome, and we'll continue to be able to convert that into whole genome sequencing as well.
Okay, thanks. Kevin, maybe one for you. Just back on your revenue, you bumped the guide after 1 Q, well, typically, maybe a seasonally softer 1 Q, really strong showing. You know, just anything we should think about for the year in terms of seasonality or phasing as we move up, you know, through the rest of the year, relative to your updated guide and the you know, $61 million you did in 1 Q? Is there. You know, is it continued sequential growth? Is there maybe, you know, a pocket that's a bit softer seasonally? Just how do we think about the cadence of the updated guide through the rest of the year here?
Yeah, I mean, so you're right that typically, the first quarter is our seasonally weakest, with the second and fourth quarter being seasonally strongest. So with that as a backdrop, we were really pleased with the results in the first quarter. I think showing strong, underlying fundamental growth in volumes, and in particular, in the areas that we're most focused on. So was really pleased to start the year, with a strong quarter. It gave us the ability to raise that revenue guide. At the same time, we would expect to continue to see continual sequential growth. But I wanted to make sure that, as we look throughout the year, we would expect to see declines in the non-exome, non-genome testing lines. That wouldn't be anything, or shouldn't be anything surprising.
And so we want to leave room in the guide to absorb any declines in the non-exome business. I think ultimately it's our position to make sure that we're looking at the business always with the most prudent viewpoint possible and focus on execution throughout the year. So really pleased to be able to come out of the gates with a beat and raise there in the first quarter, and we'll update on July thirtieth when we release the second quarter.
Great. Maybe in the last minute we have here, you know, a lot of heavy lifting's been done over the last year, so, you know, safe to assume that probably assumed a good bit of management's time. You know, as we look ahead, you know, maybe Kevin or Katherine, you know, where are you most excited, and, you know, what are maybe some of the projects you'll be spending your most time focusing on, you know, over the next few quarters?
I think we have great confidence in our team's ability to deliver, and everyone is entirely focused on revenue, gross margins, and managing our cash. We're now lifting up our heads. The NICU opportunity and ensuring that we can continue to drive whole genome sequencing as the future is something that we're really excited about. Newborn screening, the work that we're doing with the GUARDIAN study, is something that is incredibly important. We've sequenced now more than 7,500 infants in that study. That is showing great promise for where we hope to drive the future of healthcare.
Super. Thank you. Thank you.
Thank you so much.