Opko Health, Inc. Q4 FY2021 Earnings Call

Good day, ladies and gentlemen. And welcome to the OPKO Health Inc. Fourth Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Ms. Yvonne Briggs, with LHA. Please go ahead.

Thank you, operator. Good afternoon. This is Yvonne Briggs with LHA. Thank you all for joining today’s call to discuss OPKO Health’s financial results for the fourth quarter of 2021. I’d like to remind you that any statements made during this call by management other than statements of historical fact will be considered forward-looking and as such, will be subject to risks and uncertainties that could materially affect the Company’s expected results. Those forward-looking statements include, without limitation, the various risks described in the company’s SEC filings, including the Annual Report on Form 10-K for the year ended December 31, 2021 and in subsequently filed SEC reports. Importantly, this conference call contains time-sensitive information that is accurate only as of the date of the live broadcast, February 24, 2022. Except as required by law, OPKO undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances after the date of this call. Before we begin, let me review the format for today’s call. Dr. Phillip Frost, Chairman and Chief Executive Officer, will open the call; and Steve Rubin, OPKO’s Executive Vice President, will provide a business update and pipeline review. And then, Dr. Jon Cohen will discuss BioReference Laboratories. After that, Adam Logal, OPKO’s CFO, will review the company’s first quarter financial results, and then we’ll open up the call for questions. Now, I’d like to turn the call over to Dr. Frost.

Good afternoon and thank you for joining today's call to discuss our fourth quarter financial results and business update. 2021 was a record year for OPKO Health, with revenue of more than $1.7 billion. Starting with our pharmaceutical division, we were pleased to announce NGENLA approval in several major markets, including the European Union and Japan, as well as in Canada and Australia. NGENLA is the brand name for somatrogon for the treatment of pediatric growth hormone deficiency. Pfizer launched NGENLA in Canada on February 16 and we look forward to launch this in other territories as they receive pricing determinations. In the US, we were disappointed with the FDA’s issuance of a complete response letter. However, Pfizer and OPKO are evaluating the FDA’s comments and will work with the FDA to better understand their requirements for a path forward, where Pfizer and OPKO are committed to bringing this product and its benefits to growth hormone deficient children globally. Since the start of the pandemic, the BioReference laboratories team has responded to the nation's needs with efficiency and innovative testing services. As a result, BioReference exceeded sales expectations for the quarter and closed out a record year with $1.6 billion in revenue. For the past two years BioReference has effectively managed its resources and pivoted its operations to be prepared with testing capacity. Moreover, the addition of our digital health service, Scarlet Health, has made it more convenient for patients requiring both COVID and routine tests. And we expect Scarlet to be a growth driver in the future. Jon will provide further details on BioReference and its performance in a moment. As part of our strategy to unlock the value of OPKO’s assets and maximize value for shareholders, we entered into a definitive agreement to sell GeneDx to Sema4 for $150 million in cash and 80 million shares of Semaphore upon the closing of the transaction. We're also entitled to receive up to $150 million of potential milestones. Katherine Stueland, CEO of GeneDx will become Co-CEO of the combined companies. With a significant equity stake in Sema4 by closing, OPKO shareholders will continue to participate in the growing genomics market without significant investment of capital. Vifor Fresenius, our commercial partner for RAYALDEE in Europe and other markets outside the US, we launched the product in Germany earlier this month. This is the first launch of RAYALDEE outside the United States and we're enthusiastic about rollout plans with a launch in Switzerland anticipated next. In December, we announced top line results for our Phase 2 clinical trial with RAYALDEE in COVID-19 patients. The preliminary data demonstrated that improving Vitamin D status with oral RAYALDEE results in earlier resolution of respiratory symptoms. Last time, I mentioned an OPKO Gem, or small Latin American business. It finished the year with record sales and profits and is now planning to expand into Ecuador and from its unit in Spain into France. As I've stated in the past, we believe the market doesn't adequately value up those assets presently. The GeneDx transaction is one step towards better recognition of actual value. I'll now turn the call over to Steve Rubin, who will provide further commentary on our pharmaceutical business.

Thanks. Well, good afternoon, everyone and thank you for joining us today. As Phil mentioned, we are recording record revenue for the year and BioReference was able to effectively respond to surges in COVID testing, while its core business began to return to pre-pandemic volumes. Regarding our pharmaceutical business, we recently jointly announced with Pfizer that NGENLA was approved in the EU and Japan. NGENLA is a once-weekly long-acting recombinant human growth hormone for the treatment of pediatric patients who have growth failure due to an inadequate secretion of endogenous growth hormone. In the fourth quarter, Australia and Canada granted approvals for NGENLA as well. As Phil mentioned, Pfizer launched NGENLA in Canada on February 16. Under the worldwide agreement with Pfizer, OPKO is eligible to receive milestone payments upon regulatory approval and pricing determinations in major markets outside of the US, which is expected within the next 12 months in both Europe and Japan. In addition, upon launching in the primary regions of the US, Europe, and Japan, we're entitled to tiered gross profit sharing on sales of both somatrogon and Pfizer's daily GHD drug Genotropin within the respective regions. Pending commencement of profit sharing within a region, OPKO will receive tiered double-digit royalties on net sales of Somatrogan. In the US, we were disappointed, yet the FDA issued a complete response letter to Pfizer for the US PLA submission. We are collaborating with Pfizer to evaluate the FDA comments and intend to work with the agency to determine the best path forward. We look forward to providing an update once we are able to do so after we gain greater clarity from the FDA regarding their requirements. In the meantime, Pfizer is seeking pricing approvals and preparing launch plans in Europe, Japan, and other territories where the product has been approved around the world. OPKO and Pfizer remain committed to bringing the potential treatment benefits of Somatrogan to pediatric hGH patients around the world. Turning now to RAYALDEE, our treatment for secondary hyperparathyroidism in adults with stage 3 or 4 chronic kidney disease and low Vitamin D levels. The numbers for the quarter breakdown as follows. Total prescriptions for RAYALDEE in Q4 2021 as reported were essentially unchanged from the previous quarter and were approximately 11,450 representing a decrease from approximately 15,100 in Q4 of 2020. New patient starts decreased by 6% in Q4 versus Q3. Since the product was launched nearly 30,000 patients have had RAYALDEE prescribed by approximately 4,100 physicians. More than 150 physicians, nearly 10% of the total number of prescribers were new RAYALDEE prescribers in Q4. Earlier this month, we launched RAYALDEE in Germany with a sales kickoff led by presentations from several nephrology key opinion leaders and Vifor executives. Vifor has received marketing authorizations for RAYALDEE in 11 European countries and expects to launch in additional markets later this year, with a launch in Switzerland being expected in March. Europe represents a large market opportunity for RAYALDEE with an estimated 26 million people suffering from stage 3 or 4 CKD. We received a $3 million payment triggered by the first marketing approval of RAYALDEE in Europe and are eligible to receive up to an additional $17 million regulatory milestones and $210 million in milestone payments tied to launch prices and sales as well as tiered double-digit royalties. RAYALDEE’s sales continue to be impacted by pandemic-related challenges in onboarding new patients during Q4 2021. The downward trend in sales which started at the onset of the pandemic bottomed out at Q1 21 and sales remained stable for the duration of the year. During the pandemic, we progressively reduced the size of our commercial team by approximately 40% to 57 individuals in order to maintain profitability with a reduced level of sales. We expect that sales will gradually rise again as the pandemic subsides and we rebuild our commercial infrastructure. We hope to soon regain the same strong growth in sales that had been achieved before the pandemic began. In December, we announced top line data from our Phase 2 trial for RAYALDEE in adult patients with mild to moderate COVID-19. This multicenter trial entitled a Randomized Double-Blind Placebo controlled study to evaluate the safety and efficacy of RAYALDEE or calcifediol extended release capsules to treat symptomatic patients infected with SARS COVID-2 enrolled 171 symptomatic COVID-19 outpatients from 10 sites across the US. Patients were randomized one to one, to four weeks of treatment with RAYALDEE, 30 micrograms per capsule or matching placebo and a two-week follow-up. Dosing was designed to raise serum total 25-hydroxyvitamin D more quickly but in the controlled progressive manner to a targeted range of 50 to 100 nanograms per milliliter well before day 7.34. COVID-19 symptoms were self-reported daily by patients. One primary endpoint was attainment of a targeted serum 25 D level by day 14. Serum 25 D levels increase with RAYALDEE treatment to 82 nanograms per milliliter by day seven and remained elevated for the duration of the study, with 86% of subjects attaining the targeted level greater than 50 nanograms per milliliter, compared to 15% of placebo subjects. A secondary endpoint was time to resolution of five composite COVID-19 symptoms: trouble breathing, chest congestion, dry hacking cough, body aches or pains, chills or shivering. Time to resolution for these five aggregated symptoms was unchanged by RAYALDEE; given that the two composite non-respiratory symptoms responded poorly. However, the other three respiratory symptoms trouble breathing, chest congestion, and dry hacking cough when analyzed together post hoc resolved three days faster on average when serum 25 D was elevated above baseline at days seven and fourteen. Chest congestion resolved 3.4 days faster. Time to resolution of chest congestion was four days faster with 25 D increases of at least 25 nanograms per milliliter. These data support the conclusion that RAYALDEE was effective in increasing serum 25 D and COVID-19 outcomes, possibly accelerating resolution of respiratory symptoms and mitigating pneumonia risk. In January, we posted a manuscript on net Rx which summarizes the top line data from the Stage 2 study in more detail. The manuscript is currently under review for formal publication in a peer-reviewed journal. We are currently completing a full analysis of the data and plan to review it with the FDA in Q2 2022 along with a proposed design for a follow-on Stage 3 study. Here's a brief update on a joint venture with the LeaderMed Health Group based in Asia. In September of last year, we granted exclusive rights to manufacture, develop, and commercialize the once-weekly oxyntomodulin and a CTP factor seven technology in Greater China and other Asian territories. We retain the global rights for all other territories. Since the agreement, LeaderMed has made significant progress in advancing manufacturing, preclinical and clinical activities to develop these products in the Asian territories. In addition to hGH-CTP and Factor VIIa-CTP, we believe that the CTP technology may also be broadly applicable to other therapeutic proteins in the rare disease market and provide a reduction in the number of injections required for treatment. We're currently engaged in research and development efforts to use the CTP technology and other drug delivery technologies to develop long-acting therapies and expand our Rare Disease pipeline. Our lead targets are IGF-1 and a growth hormone antagonist. Our knowledge and expertise in this area should expedite development. Finally, as we have previously disclosed, as Phil mentioned, on January 14, we entered into a definitive agreement for Sema4 to acquire our wholly-owned subsidiary GeneDx. The transaction provides the opportunity to unlock value in GeneDx, as it offers higher-value genomics testing, and fits with Sema4's business and growth strategy to advance precision medicine as a standard of care. Based on Sema4's closing price as of January 14, the aggregate purchase price was approximately $623 million, comprised of $150 million upfront cash, $80 million shares of Sema4 common stock, and $150 million of contingent consideration based upon achievement of commercial milestones over the next two years. As part of the transaction, Sema4 also entered into definitive agreements for a $200 million private placement of Sema4 stock from a syndicated group of institutional investors including Pfizer. GeneDx is a leader in genomic testing and analysis. Together, Sema4 and GeneDx will be one of the largest and most advanced providers of genomic clinical testing in the US, with a projected $350 million in pro forma 2022 revenue. Katherine Stueland, the President and CEO of GeneDx will be appointed as Sema4 Co-CEO and is expected to join the Sema4 Board of Directors upon completion of the acquisition. The acquisition and the private placement are expected to close in the second quarter of this year, subject to customary closing conditions including approval by the stockholders of Sema4. Now, let me turn the call over to Jon Cohen to discuss BioReference Labs.

Thanks, Steve. And good afternoon, everyone. As Phil mentioned, BioReference had a better-than-expected quarter given the surge in COVID testing volumes due to the Omicron variant, complemented by the continued normalization of the core clinical lab business, the growth in specialty testing, and the acceleration of Scarlet Health. BioReference continues to make significant strides relative to patient access with the payers. We executed a national preferred agreement with Aetna for their 24 million covered lives. We are one of only three laboratories in the country with this designation, which means that most patients will have no co-pays or out-of-pocket charges for their lab services from BioReference. This is similar to our preferred status with United Healthcare. We also executed a preferred agreement with Oscar Health for their 600,000 covered lives. Our base clinical business volume remained stable year-over-year, despite the impact of Omicron on the general public in December. Our women's health vertical volume increased 8% year-over-year, as a result of our announcement that we discussed last quarter relative to our acquisition of the Roche Ariosa business. NIPS tests performed doubled in comparison to 2020 for the same period. In December, we announced the FDA approval of our 4Kscore test. This test is approved for use in men 45 years of age or older who have not had a prior prostate biopsy or are biopsy negative and have an age-specific abnormal total PSA or an abnormal digital rectal exam. The 4Kscore test has been used by more than 7,700 healthcare providers including approximately 4,200 urologists. Over 300,000 tests have been performed since its launch as an LDT in 2014. With the new FDA approval, we have developed an aggressive plan aimed at converting additional commercial health plans to positive coverage policies for 4K. In addition, we have launched the process to utilize our Scarlet Health home drug service to significantly improve patient access to 4K. The urology business grew significantly, growing in volume by 29% over the prior year and 13% in revenue. In Q4, most of the oncology testing returned to pre-pandemic Q4 2019 levels or surpassed the volumes in Q4 2019. This was led by our genomic offering, which more than doubled the pre-pandemic volume. In 2021, oncology brought in over 200 new accounts, including large partnerships with academic medical centers and cancer centers. Scarlet Health has been well received by oncologists for many of their patients, specifically those that are immunosuppressed and are resistant to going to physicians' offices. In Q4, Scarlet Health orders for oncology grew 45% compared to Q3. Our strategic partnership initiative continues to grow, with strong performance in growing our hospital reference business. In the last quarter, Q4, we added eight new reference clients. In addition, Scarlet Health has been rolled out to multiple partners including large medical groups and health systems, employed physicians with significant success. Now let me turn my attention to COVID. During the fourth quarter, we performed 2.7 million COVID-19 PCR tests, compared to 2.2 million tests performed in Q3. Since the pandemic began, we have performed more than 22 million COVID-19 molecular tests. Testing increased significantly in December, as a result of Omicron, especially at our Rite Aid retail sites. We also experienced significant increases in our point-of-care rapid COVID testing offerings with our cruise lines, sports, employer, and retail partners, and performed almost 600,000 rapid tests in Q4. We continue to be one of the largest providers for school-based testing, including the largest school district, New York City, as well as many others. In Q4, we brought on 76 new schools for COVID testing programs. We continue to be one of the largest providers for the cruise lines, testing on over 30 ships at 11 ports around the country. In Q4, we were able to assist the city and State of New York with COVID testing in a community, opening 28 new locations in under one week's time to meet the rapid demands of the Omicron surge, coupled with the holiday and travel testing needs. We also continue to perform a significant amount of testing at large events. Recently, we provided testing for the Super Bowl, the Pro Bowl, the NHL All-Star Game, the NBA All-Star Game, and the Collegiate Bowl. Many employers have started using Scarlet for COVID testing for their employees' needs for returning to work in a safe environment. As I've discussed, we continue to see significant demand for Scarlet Health across all of our commercial verticals, including oncology, women’s health, urology, and the strategic venture partners. I'm also proud to announce that multiple national payers have agreed to pay us a premium for Scarlet Health above our negotiated rates. In December, we announced the collaboration with MVP Health Care to offer their members medically necessary COVID-19 testing, blood work, and other diagnostic tests in the comfort of their homes. MVP is the first insurer in New York State and Vermont to offer this service. 85 million lives now have specific additional in-network coverage for Scarlet Health services, which is now available to 92% of the US population. Scarlet Health’s volume has grown sequentially over 400% through Q4 of 2021. Over 600 individual providers now use Scarlet, and we are seeing an increasing number of patients taking advantage of our patient-initiated testing service. And now, I'll turn the call over to our CFO, Adam.

Thank you, Jon. Before I review the fourth quarter results in more detail, I’d like to highlight a few of the significant financial milestones that we achieved this year. Overall revenue, as Phil mentioned, for the year was nearly $1.8 billion, with over $1.6 billion coming from our diagnostic segment as a result of the execution of the COVID testing strategy John laid out. In order to achieve these results, as John mentioned, we developed non-traditional revenue channels through our relationships with sports leagues, retail pharmacies, the travel and leisure industries, as well as partnerships with state and local governments, including testing at the nation's largest school districts. More than 75% of our COVID testing volumes came from these non-traditional clients during 2021, which are the results of our team's highly customized testing solutions. On the pharmaceutical side of our business, total revenue was over $167 million. We realized revenue from product sales of more than $141 million, reflecting growth of 18% led by our international operations including Chile, Mexico, and Spain, which totaled nearly $100 million of revenue as a result of the execution of their growth plans in each market. Our revenue growth allowed us to make significant investments in our long-term growth initiatives, including the digital transformation of our reference core lab business, lead bar investment in Scarlet, as well as investing in our Germline Genetics Business, GeneDx, which during 2021 reported an operating loss of approximately $31 million. In addition, we invested $75 million into our R&D projects, which, with the recent approval of NGENLA, as well as the European commercial launch of RAYALDEE, are also expected to provide near-term cash flow improvements on the pharmaceutical side of our business. We ended the year in a strong financial position, with about $135 million in cash, along with cash available under our recently renewed credit facility with JP Morgan, resulting in nearly $200 million in liquidity. In addition, our recently announced transaction with Sema4 will result in approximately $120 million of net cash after considering transaction costs and cash escrowed. Additionally, we will receive 80 million shares of Sema4 at closing. We can also receive up to $150 million of additional consideration if the GeneDx business achieves its forecasted revenue targets for 2022 and 2023. The combined cash on hand, as well as the proceeds from the GeneDx transaction, put us in a strong financial position. Turning to the results of the fourth quarter on a consolidated basis, we reported an operating loss of $63.1 million, compared to $49.4 million operating income in 2020. The net loss for the fourth quarter of 2021 was $73.8 million or $0.11 per diluted share compared to net income of $32.3 million or $0.50 per share for the 2020 period. The operating losses for the fourth quarter of 2021 were impacted by non-recurring legal expenses as well as expenses related to our GeneDx transaction. Our diagnostic segment reported revenue from services significantly higher than our guidance as a result of the increased demand for COVID-19 testing due to the Omicron variant. When comparing the fourth quarter of 2021 to 2020, overall revenue from services decreased to $362.8 million from $457.9 million for the 2020 period. As John highlighted, we performed nearly 600,000 point-of-care diagnostic tests during the quarter. Additionally, as a significant portion of our test volume came through our retail partnership with Rite Aid, and as a result of the point-of-care testing volumes having a higher cost to serve, we saw year-over-year sequential declines in overall gross margin. We continue to invest in our commercial organization, including Scarlet Health, the digital health platform that Jon mentioned. We have also invested in a National Phlebotomy Network, and we increased investment in our GeneDx commercial team. We remain focused on near-term profitable growth on our commercial and digital health operating investments. Moving to our Pharmaceutical segment, we reported revenues of $38.5 million for the fourth quarter of 2021 compared to $36.7 million for the 2020 period. Revenue from product sales in the fourth quarter increased 14% to $35.3 million, including $7.7 million of revenue from RAYALDEE, compared to $30.8 million in the 2020 period, inclusive of $10.1 million of RAYALDEE revenue. When looking at revenue from the transfer of intellectual property, we reported $3.3 million of revenue for the 2021 period compared to $5.9 million a year ago, reflecting decreased Somatrogan R&D related revenue. The operating loss from the Pharmaceutical segment was $14.8 million for the fourth quarter of 2021, whereas the comparable period of 2020 reported an operating loss of $9 million. Overall research and development expense for the fourth quarter of 2021 was $16.2 million compared to $14 million in 2020, reflecting a slight increase in spending on our Somatrogan development program. As we look into 2022, we've built the following assumptions into our forecast. We anticipate performing between 2.2 and 2.6 million COVID-19 PCR, point of care, and antibody tests during the year. We have capacity well in excess of these levels should demand for testing increase. Our revenue could expand beyond our guidance. Through February 23, we have already performed approximately 1.6 million COVID tests. So our range of guidance reflects testing demand from our physician and general public testing channels with our more stable channels—sports, education, and leisure activities remaining. As we have not assumed any new surge in COVID testing for the remainder of 2022, should such a surge occur, we could see significantly higher revenue than guided. Our Clinical Laboratory business will grow year-over-year in the mid-teens. We anticipate the GeneDx transaction will close during the second quarter of 2022. However, given the shareholder and regulatory approvals required, we have included full year forecasts until those transactions close and have not forecasted a gain or loss on the disposal, given the 80 million shares to be received will be marked at the time of the actual closing. For RAYALDEE, we anticipate double-digit volume and revenue growth, which assumes improving access to CKD clinics as a result of the declining COVID infection rates. We have not assumed Pfizer will obtain pricing in any of the regions that have received regulatory approval that would trigger a milestone payment. As a result, we have not forecasted a profit share with Pfizer to begin in 2022. However, we expect but have not forecasted royalties on product sales, which we expect to commence during 2022 beyond Canada. Vifor has recently launched RAYALDEE in Germany and has plans to launch in other countries in the coming months. We have forecasted milestones and royalties expected before establishing pricing throughout their territories. With that, we expect overall revenue for 2022 to be between $1.1 billion and $1.2 billion, including revenue from services of $940 million to $1 billion, revenue from products of $145 million to $155 million, and other revenue of $18 million to $22 million. We expect costs and expenses to be between $1.1 billion to $1.3 billion, which reflect various assumptions of testing volumes, as well as our investment levels in commercial initiatives at BioReference, which we may choose to accelerate or delay, depending on the uptake levels. Operating results include approximately $100 million of non-cash depreciation and amortization expense, as well as an expectation of research and development expense of $85 million to $97 million. With that, I'll open the call up for questions.

Thank you, sir. We have our first question from Jeffrey Cohen with Ladenburg.

Good afternoon. And thank you for taking our questions. So a few, Adam based on your 2022 guidance and projections as far as outline, can you talk about labor a little bit and what you've seen on the labor front, particularly through Q4, and maybe through the beginning of this year and any expectation or anticipation there for the balance of the year?

Yeah. I think like most people on a macro basis, we've seen labor costs increase overall, and during some of the staffing shortages that we saw at the end of the year in the beginning of this year, we did have to make some increases to attract talent. So we are seeing probably the same labor pressure across the industry. That everybody is seeing; we haven't seen that accelerate, but we did come under some pressure to make some adjustments during the end of the year period.

Okay. Got it. Dr. Frost or Steve, could you talk about the current territory now as it relates to the US as far as the size comparison in the European Union, some of Scandinavia as well as Australia and Canada and Japan, please?

So just starting to decide to say what your average, so I mean that the US is the biggest, Europe is second. Japan is third, and our European approvals will be global. And the way our deal works, if you remember, once we get pricing or Pfizer gets pricing intuitive majors, it will shift to a profit share, which would accomplish sales agenda as well throughout the territory, and the same goes for Japan, which actually encompasses rest of world on our geographic selections.

I could just add that the combination of Europe and Japan is about equivalent to what the US market is. And then you have the additional countries such as Australia, Canada, and other jurisdictions.

Okay. Got it. That's very helpful. And then Adam back to the – the projection for 2022 testing volumes, if I heard you correctly, was that 2.2 to 2.6 million for the full year?

Yeah. So Jeff, we've seen testing volumes come down pretty quickly week after week into this year. So we do have testing continuing through the year, but we've seen a significant drop off in volumes post mid-January.

Okay. So based on your 1.6 number, you're anticipating – from what you understand now or overall look at it now that the balance of the year would be less than that first six weeks conservatively?

Yeah. So we're using that forecast based on the remaining school years and sports league testing that we have as well as some of our other leisure activities. But generally seeing significant declines in testing volumes.

Got it. Lastly, your commentary on the cost of goods seemed a bit high for the quarter. Can you discuss how leverage might bring that number down?

Yeah, so we spent a significant amount of time in early part of the fourth quarter taking down our staffing level. It's hard to believe, but the first case of Omicron occurred December 1st in the US and as a result, we had not anticipated the surge that came in. When we saw the surge come, we had to staff up significantly and had to play a little bit of catch-up over the surge time and had to pay significant wage increases to get people in the seats during that surge time. We've been aggressively taking that capacity back down with testing volumes coming down. John mentioned our point-of-care business. It comes at a much higher cost to serve, and as a result, you've seen some of the margin basis points declining, as well as our retail channel driving where most of the Omicron testing came from, which comes at a lower price point than our traditional testing. So the combination of those two drove the decline in overall gross margins.

Okay, perfect. Thanks for taking the questions.

Thanks, Jeff.

Next question is from Maury Raycroft with Jefferies.

Hi, this is Kevin on behalf of Maury. Thanks for taking my questions. The first one I had was just about GeneDx. Could you say what the share of revenue and expenses was for GeneDx in 2021, and how the sale impacts your near-term growth and long-term goals for the base business?

Sure. Thanks. So GeneDx generated about $115 million of revenue during 2021. We reported an operating loss from that business of about $31 million. So it does have – it's a small part of the overall piece of the puzzle today. We expect that business to grow significantly and with Katherine's joining, expanded out our commercial outreach and capabilities. So we do expect that business to grow meaningfully and we've set a target of $160 million in revenue for 2022. So meaningful growth on that piece of the business, but overall, not a significant component of our reference. I think the important thing is it does allow us to improve the overall profitability of our diagnostic segment by removing those operating losses which we have forecasted to expand over the near-term.

Okay. Great. Thanks. And then just this was sort of mentioned earlier, but in terms of COVID testing for the rest of the year. You mentioned before that in references, you have a relatively higher ratio of contracts versus retail. So, do you see a scenario where COVID becomes endemic and you still have these contracts going forward, or is that not a likely scenario?

Hi, it's Jon. Thanks, Kevin. There are a lot of independent factors right now. First, whether children will take the vaccine will have an impact, as will the approval status of the vaccine for kids under five, which has been delayed. I believe that this situation will extend into June. In my opinion, the fall school system will likely continue testing in certain areas, as there won't be a unanimous opinion about vaccinating children for school. Many schools will need to decide how to handle unvaccinated kids. Regarding the cruise lines, I don't think they will reduce their testing protocols. I expect they will continue to test through the end of the year, but that's just a guess. Cruises have had many issues in the past, and I think they will be resistant to changing their current protocols. Sports leagues will continue for a while, especially the NFL, but I can't predict their next moves. Other leagues will likely operate for a good part of the year. I mentioned earlier that we've opened many NBA sites for COVID screening. In summary, I think much of this will continue through our contractual surveillance testing until the end of the year, but I can't confirm that for certain.

Great. Thank you.

And our next question is from Yi Chen with H.C. Wainwright.

Hey, everyone. I have three questions. First, could you share your commercial plans for the 4Kscore test regarding PMA approval, including reimbursement panels and other strategies? I know you've touched on this briefly, but could you also discuss any potential business opportunities for Scarlet moving forward, especially considering that some aspects are related to COVID testing? Lastly, you mentioned revenue guidance for testing this year, but could you provide any insights on testing volume or expectations regarding the trends in testing, particularly for asymptomatic cases? Thank you.

Sure. I'll start with the first two points. We have a strong and aggressive plan for 4K. We have a dedicated sales team focused on urology offices, which we are expanding nationwide. Additionally, we have a substantial effort in place to engage with commercial payers following the FDA approval of 4K that we announced about four weeks ago. We've also seen a positive response to 4K compared to Scarlet, as it simplifies the process for urologists to order the test and conduct it through home draw, which is beneficial since many urology offices lack phlebotomy services. This increases accessibility for 4K across the country. Regarding Scarlet, there are still numerous opportunities in various segments, including non-traditional clients with home products that require blood draws. I believe we are entering a phase of significant growth for Scarlet in terms of volume for 2022. I will now pass the guidance question to Adam.

Yeah, so the remaining testing volume that we forecasted is principally coming off the surveillance contracts that John mentioned between the school, sports, and leisure contracts that we have in place. We're not expecting in our guidance anyhow, any meaningful volumes coming from our retail partnerships and the general public testing.

Thank you so much.

I am showing no further questions at this time. I would now like to turn the conference back to Dr. Phillip Frost.

Well, thank you everybody for participating and we look forward to communicating with you after the next quarter.

Ladies and gentlemen, this concludes today's conference. Thank you again for your participation and have a wonderful day. You may all disconnect.