SOPHiA GENETICS SA Q2 FY2024 Earnings Call

Good morning. My name is Kevin and I'll be your conference operator for today. At this time, I'd like to welcome everyone to the SOPHiA GENETICS Second Quarter 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Tuesday, August 6, 2024. I would now like to turn the call over to Kellen Sanger, SOPHiA GENETICS' Head of Strategy and Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to the SOPHiA GENETICS second quarter 2024 earnings conference call. Joining me today to discuss our results are Dr. Jurgi Camblong, our Co-Founder and Chief Executive Officer; and Ross Muken, our Chief Financial Officer and Chief Operating Officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meanings of Federal Securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties and factors that could cause results to differ appears in the press release of SOPHiA GENETICS issued today and in the documents and reports filed by SOPHiA GENETICS from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS to non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I'll now turn the call over to Jurgi.

Thanks, Kellen, and good morning, everyone. In the second quarter, we achieved another period of strong forward-looking indicators and continued improvements in our bottom line, even though we faced macro challenges that temporarily affected revenue growth. I will begin by discussing the difficulties we encountered and the growth initiatives we accelerated to counteract these disadvantages. Following that, I will highlight how these initiatives have positioned us to regain growth momentum by later this year. Finally, I will provide a brief update on our path to adjusted operating profitability, which remains on course as we effectively manage costs and enhance our bottom line. After my remarks, Ross will provide a detailed look at our Q2 financials, our revised outlook for 2024, and additional information regarding our path to profitability. In the second quarter, our revenue fell short of expectations, primarily due to issues related to BioPharma and the EMEA region. These challenges, which we discussed during our Q1 earnings call, turned out to be more severe than we initially expected, but we believe they are temporary. I will now take a moment to address each of these challenges and some of the actions we've implemented to counter these headwinds and drive growth. Starting with BioPharma, we are navigating a macro environment where budget constraints have hindered the signing of large contracts and prolonged cost cycles. To mitigate these issues, we've accelerated several planned growth initiatives. First, we restructured the BioPharma business by separating our data and diagnostics offerings. Our data offerings utilize the vast amount of molecular data from our genomic business and the multimodal data generated by our platform to provide AI-driven insights to licensed companies in drug discovery and development. Our diagnostics offerings leverage our extensive network and real-time feeds to assist BioPharma companies with clinical trial matching and market access. By splitting these offerings and appointing new leaders for each segment, we are now better aligned with our customers' needs and are confident in our ability to market more effectively. The second action involved refocusing our BioPharma sales efforts towards smaller, more reputable businesses instead of pursuing larger contracts. This strategy caters to our buyers and helps us avoid the lengthy approval and procurement processes associated with larger deals. We have previously seen success with this approach on projects like [indiscernible] and more recently with the breast cancer study sponsored by AstraZeneca. I'm pleased to report that these measures are generating heightened interest, as our current pipeline for BioPharma remains strong and is becoming increasingly diversified. Our leaders for data and diagnostics are fully committed to capturing pipeline deals and restoring our BioPharma business to the high growth levels we experienced in 2023. The second challenge we encountered in Q2 was an anticipated slowdown in EMEA, particularly in France, Italy, and Spain. During the first half of 2024, we observed two unexpected developments in this market. First, there was a slight moderation in the overall growth of patients being tested. Conversations with customers and robust bookings suggest this trend is temporary and will stabilize in the medium term. In addition to this moderation, we also faced unexpected customer churn and price pressures in France, Spain, and Italy. These challenges are specifically related to established applications like hereditary cancer and rare neuropathy disorders, not our newer applications. To address these issues, we took two immediate actions. First, we adopted a more strategic approach to managing high-volume accounts. Our sales representatives are now working more closely with large customers to understand their long-term growth objectives and to outline the full scope of precision medicine needs across institutions. By leveraging our extensive applications, platform scale, and volume-based pricing, we aim to be more successful with larger enterprises. In the second half of the year, we will invest in specific strategic accounts in EMEA to outpace competition and capture market share. Market share is vital to our strategy, as we believe that the entity with the largest network will prevail. The second action involved reallocating resources to our high-growth markets such as the U.S., the U.K., Germany, the Middle East, and Asia-Pacific overall. These choices have already yielded positive outcomes, as we've signed major new customers in each of these regions this year. This quarter alone, we welcomed significant new customers, including Detroit Medical Center in the U.S., which is adopting SOPHiA DDM for hem/onc, the NHS North Bristol Trust in the U.K. for HRD and MSK-ACCESS, and Abu Dhabi's National Reference Lab in the UAE, one of the first adopters of MSK-IMPACT powered by SOPHiA DDM. Additionally, as we come out of a substantial R&D cycle, we are excited to unveil a suite of new applications in the second half of 2024, alongside a major overall upgrade of our platform. Initial customer feedback and early pipeline data indicate that these investments are driving significant demand and further differentiating our offering across the board. I'm eager to share more about these launches shortly. Before doing so, I want to underscore that despite the dip in revenue growth during Q2, forward-looking indicators for our clinical business remain solid. In Q2, we achieved our third consecutive quarter of strong bookings with 20 new SOPHiA DDM customers acquired. This new business growth was led by our solid tumor application as well as our new liquid biopsy application, MSK-ACCESS. I'm proud of how well MSK-ACCESS is performing, as it has rapidly generated substantial demand, with a pipeline in the double digits. Regionally, 11 out of the 20 new customers signed during the quarter were from EMEA. This trend confirms that our strategy of refocusing efforts on high-growth markets like the U.K., Germany, and the Middle East is effective. Furthermore, it reinforces our belief that the macro trends and slowdown in EMEA are only temporary and will correct in the medium term. Although we've recently had success in acquiring new business, I want to remind everyone of the timeline in which new signings translate to revenue in our business. Typically, it takes around nine months for a new customer signing for SOPHiA DDM to start generating revenue. This is due to the necessity for institutions to complete proficiency testing and receive accreditation before they can routinely serve patients. As I mentioned in previous earnings calls, the nine-month timeframe can stretch longer if the adopted application is more complex, like MSK-ACCESS. After implementation, it may take an additional three to six months for the account to ramp up to full volume and revenue. Thus, new business acquired in Q2, Q1, and even some signings from Q4 2023 will likely not enter routine usage until late Q4 or early 2025. As we move into the second half of the year, we are highly focused on expediting the transition of new customers to routine operations. Our recently launched MaxCure team is dedicated to accelerating the journey from signing to revenue. In Q2, they moved 17 new customers to routine, an increase from the 13 customers added to routine in the same period last year. A key component of gaining new customers and expanding within them over time is to continually offer a comprehensive and appealing menu of offerings. With that in mind, I'd like to highlight a few recent product launches and briefly update you on what's in store for the remainder of 2024. I'm excited to share that in Q2, we launched a new application in the hem/onc sector that measures minimal residual disease for acute myeloid leukemia. This is a significant application for both BioPharma and clinical clients. During the quarter, we also announced a partnership with Microsoft and NVIDIA aimed at developing a scalable world genome sequencing application on SOPHiA DDM by the end of the year. Previously, NVIDIA recognized us as one of the leading companies leveraging AI to drive transformative changes in our industry. We're eager to continue collaborating with these partners to promote the global adoption of data-driven medicine. Looking forward to the rest of 2024, we're also set to launch MSK-IMPACT powered by SOPHiA DDM, which serves as the decentralized solid tumor profiling counterpart to the liquid biopsy application MSK-ACCESS. I'm proud to announce that we have already secured two customers for MSK-IMPACT ahead of its launch, including SOPHiA Genomics in Taiwan and Abu Dhabi's National Reference Lab. As we anticipate the second half of the year and into 2025, MSK-IMPACT will play a crucial role in our growth as we partner with MSK-ACCESS to develop both liquid biopsy and solid tumor testing capabilities at institutions worldwide. Beyond expanding our application portfolio, I’m also pleased to announce that we will be undertaking a comprehensive modernization of SOPHiA DDM later this year. We are transitioning the platform from Java to web technology and micro-services. This upgrade not only enhances the customer experience but also enables us to compute data more efficiently and accelerate the launch of new applications. As we exit the phase of significant R&D investment, we are confident that these initiatives will continue to set our platform apart in both new and established markets, allowing us to serve our clients in clinical and BioPharma sectors more effectively. Since the inception of SOPHiA 13 years ago, I take great pride in our impact. From the beginning, we envisioned a future where a cloud-based analytics platform could eliminate data silos and enable healthcare institutions to compute and analyze multimodal data. We also believed that crafting proprietary algorithms to generate insights from this data would drive the future of patient care. Furthermore, we have remained steadfast in our conviction that a decentralized model is the most sustainable way to achieve our mission. Today, patients in over 70 countries benefit from our decentralized analytics platform, SOPHiA DDM. Our customers can extract highly accurate insights from multimodal data within their institutions, achieving faster turnaround times and reduced costs while maintaining control over the data they generate. In this regard, I am proud that SOPHiA Genetics is leading the global movement towards data-driven medicine, and I am particularly proud of the nearly 1.8 million genomic patient profiles we have analyzed since our founding. I am also proud of our commitment to achieving our mission sustainably. Our goal to attain adjusted operating profitability within the next two years not only enhances value for our shareholders but also ensures that we can continue assisting patients for generations to come. Our capacity to continually improve our bottom line, including during a quarter as challenging as this one, demonstrates our dedication to this goal. With that, I will now hand the call over to Ross, who will provide a closer look at our Q2 financials and our outlook for 2024.

Thank you, Jurgi, and good morning, everyone. Results in the second quarter did not meet our expectations from a revenue standpoint due to the aforementioned challenging budget conditions at BioPharma as well as temporal macro challenges in our EMEA customer base. I'm confident we have taken the necessary actions to respond to these unexpected market changes and have also adapted our cost structure accordingly. Overall, I'm pleased with the new business environment which supports our view that the moderation in growth is transient and in turn we remain committed to our path to sustainable growth. And with that, I'll move to an update on the quarter. As Jurgi highlighted, Q2 revenue was below expectation and we have taken actions to return the business to expected growth levels over the next several quarters. Total revenue for the second quarter of 2024 was $15.8 million compared to $15.1 million for the second quarter of 2023, representing year-over-year growth of 5%. Constant currency revenue growth, excluding COVID, was 7%. Platform analysis volume was approximately 87,000 for the second quarter of 2024 compared to approximately 77,000 for the second quarter of 2023. Year-over-year growth in analysis volume was 12% or 14% when excluding COVID-related volumes. From an application standpoint, oncology outperformed rare and inherited disorders during the quarter driven by strength in hem/onc testing. The EMEA experienced the softest growth in Q2, in addition to weak performance in Latin America. This was partially offset by notable strength in North America and Asia Pacific, which both grew at over 40%. I'm especially proud of the strong growth delivered in the U.S. The U.S. market has grown from its nascent stages just a few years ago to now approaching our largest market in terms of revenue contribution. Beyond the challenges in EMEA, Jurgi also highlighted that we experienced material delays in our BioPharma business, as we continue to face a challenging macro environment in which budget constraints have made the signing of large contracts difficult and caused sales cycles to elongate. Specifically, we had one major high-value contract slip to later in the year, and potentially into 2025. Despite the weak revenue performance, clinical bookings, which don't show up in revenue until 9 to 12 months post-signing were strong in the first half of 2024. New customer wins were also strong, as we signed 20 new logos during the quarter. We are laser-focused on getting these 20 customers, as well as the influx of new customers signed during Q1 and Q4 2023 into routine usage as quickly as possible. Beyond bookings and new customer wins, we also continue to see positive momentum in our pipelines of both clinical and BioPharma business. The pipelines for our clinical and BioPharma businesses are both at all-time highs cumulatively exceeding $200 million in total value. Strong new business momentum along with growing pipelines indicate that our end markets remain healthy despite the consumption challenges in the quarter. Moving on to an update on other key business metrics. Core genomic customers were 457 as of June 30, 2024, up from 434 in the prior year period and down sequentially by six customers relative to Q1 2024, as we experienced higher than expected customer churn during the quarter, attributable to smaller accounts that were unable to scale and saw their volumes consolidate to larger related hospitals and laboratories. Annualized revenue churn rate was around 4% for Q2 2024, which is in line with our historical averages. Net dollar retention for Q2, which is net of revenue churn for the year, was 114% in line with Q2 2023 levels. Constant currency net dollar retention, excluding COVID-related revenue was 113% as compared to 121% in Q2 2023. This decrease is primarily attributable to some of the aforementioned challenges in our established markets, as patient demand and pricing pressure moderated some of our continued growth momentum. Gross profit for the second quarter of 2024 was $10.8 million compared to gross profit of $10 million in the second quarter of 2023, representing year-over-year growth of 7%. Gross margin was 68.2% for the second quarter of 2024 compared with 66.7% for the second quarter of 2023. Adjusted gross profit was $11.6 million, an improvement of 10% compared to adjusted gross profit of $10.5 in the second quarter of 2023. Adjusted gross margin was 73.2% for the second quarter of 2024 compared to 70% for the second quarter of 2023. We remain proud of our ability to manage costs, scale, compute and continue to expand gross margins by over 300 basis points despite soft revenue performance. Total operating expenses for the second quarter of 2024 were $25.8 million compared to $30.1 million for the second quarter of 2023. Across the functions, we continued to benefit from lower headcount on a year-over-year basis. R&D expenses decreased during the quarter as we increasingly focus on high ROI projects. Additionally, I remain pleased with our progress on the G&A side, where we also continue to benefit from targeted process improvements, system investments and the optimization of our public company costs. Sales and marketing expenses were up a touch, primarily due to select investments oriented in accelerating penetration of several key markets as well as marketing initiatives to support our robust new product momentum. Operating loss for the second quarter of 2024 was $15 million compared to $20 million in the second quarter of 2023, an improvement of 25%. Adjusted operating loss for the second quarter of 2024 was $9.9 million compared to $14.6 million for the second quarter of 2023, an improvement of 32%. We continue to be pleased with our trajectory toward profitability. The additional headcount actions we took in the second half of 2023 and incremental discretionary expense controls implemented were necessary to sustain the positive momentum across the balance of 2024. In Q2, I was also proud to see us maintain strong bottom line performance despite the revenue challenges, a proof point of strong operating leverage in our business and the discipline of our team. Lastly, total cash burn for the second quarter was $12.3 million, exclusive of the $15 million in debt and associated borrowing costs that we took down as part of the financing deal with Perceptive, which we announced last quarter. The $12.3 million in cash burn represents an improvement of 7% compared to the $13.3 million in cash burn in the prior year quarter. We remain happy with our cash utilization trend and are on track with respect to our medium-term liquidity trajectory. Cash and cash equivalents were approximately $105.4 million as of June 30, 2024. Turning to our 2024 outlook, given the more challenging macroeconomic environment we are seeing in BioPharma and in our established markets in EMEA, we now expect full-year revenue to be between $65 million and $67 million, representing growth of 4% to 7% compared to FY 2023. Roughly 60% of the reduction is related to lower expectations for BioPharma-related business as we continue to face budgetary constraints and longer-than-anticipated sales cycles. FX has also weakened modestly from our original expectation, creating an incremental headwind of a few hundred basis points. The remainder can be attributed to a softer-than-expected start to the year in our clinical business due to macro-related headwinds in EMEA. While we believe the challenges to be temporary, we do expect them to persist in Q3 and through the end of the year. I will note that despite headwinds in EMEA, clinical revenue grew low double digits in H1 2024 compared to H1 last year. While below expectations, the underlying core growth of the business does remain solid. With respect to seasonality, we now expect Q4 to be stronger than Q3 as new business comes online and revenue from BioPharma-related awards signed during H1 are recognized, albeit later than originally expected and with some moving into 2025. We are also updating our adjusted gross margin guidance to be between 72% and 72.5% compared to 72.2% in FY 2023. Despite the strong performance in the period, we anticipate a slight mixed impact in the second half relative to new product launches as well as investments we have decided to make in EMEA to secure certain renewals that are strategic in nature. Following our strong cost performance in Q2, we are reaffirming adjusted operating loss guidance between $45 million and $50 million and further reiterate that we remain confident in our path to adjusted operating profitability within the next two years. Our current cash and existing capital resources are expected to be sufficient to reach this milestone. This has been made possible by taking necessary cost actions and continuing to be obsessed with capital efficiency. In 2024, we will continue to revisit our discretionary expenditures and execute identified savings via targeted process improvements, scale-focused system automation efforts, as well as continued reduction in certain public company costs. With that, I would like to turn the call back over to Jurgi for the closing remarks before we take your questions.

Thank you, Ross. I'm proud of what our team achieved this quarter, particularly our continued ability to expand gross margins, reduce operating loss and improve our bottom line. I also remain excited about our future. Booking momentum is strong and end markets continue to grow. Cancer rates are increasing worldwide. Better therapies are being developed each day. And data is becoming more and more useful in diagnosis, therapy selection, drug development, and drug deployment. Given our business sits at the heart of these innovations, accelerating and enabling the adoption of each, we remain confident in our long-term growth. In closing, thank you to our SOPHiA colleagues, partners, customers, and investors for joining us in our journey to transform patient care with data-driven medicine. Please note we are presenting at the Morgan Stanley Healthcare Conference next month in New York City. I look forward to continuing to update you on SOPHiA's future success in democratizing data-driven medicine. Operator, you may now open the line for questions.

Thank you. Your first question comes from the line of Dan Brennan of TD Cowen. Please go ahead.

Maybe first one just on pharma, since that seems to be the weak spot here or one of the key weak spots in the quarter. I know in the past, Ross and Jurgi, you've kind of sized it at maybe just under 10% of revenues last year, but that is pure R&D. I think with translational, it could be bigger. So can you just help think us through how big that business is today, what you were expecting and kind of given this is a big part of the cut, can you just kind of walk us through what expectations were for pharma and what they are now? And then kind of related to that, so basically, on the back half of the year, it's the pharma cut, and then it's basically the clinical cut. Those are the two factors. Where there anything else? Because the back half year, you know, is definitely coming down. Just trying to figure out kind of what's in that.

Yes. Good morning, and thank you, Dan. Let me start with the BioPharma. So on the BioPharma side, indeed, this explains 60% of the delta versus the revenue we were expecting this quarter and to try to address that mid, long term, we have taken some actions, right? So as a reminder, on the pharma side, we work both with the DX teams. So when it comes to decentralized testing or when it comes to development of potential companion diagnostics, and we work with the data teams. In the data teams, our focus has been primarily on the market access needs or on the, definition of patient recruitment, for instance, to improve or speed up clinical trials. So what we have observed on the pharma side is that between '23 and '24, there have been some pressure on the budget and signing deals of certain amounts of dollars became a bit challenging and hence, the refocus on first splitting the diagnostics and the data business on our side to our teams that are really focused on that because these are different people we sell to in the pharma. And second, ongoing for deals which are at a lower value, but, more of those, so that we can de-risk, I would say, as well the execution of the bookings as well as the execution of the delivery of those deals and so this has really been the learning and the shift for us. Now I would like Dan that the bookings remain or the pipeline remains strong for the BioPharma business on our side and that we believe that while this quarter and this year, given the bookings we had at the end of last year and the beginning of this year, the number is not the one we want in terms of revenue. This is something we should be able to correct for 2025 on.

Thanks, Jurgi. So, Dan, last year, we talked about disclosing pharma if and when it got above 10% of revenues. So you can assume it was slightly below that level on a '23 basis. That business was up triple digits last year. And so what's essentially implied in '24 is that business will not be down. So we'd originally obviously assumed continued growth. We had a number of contracts, verbal awards that we had received late in '23 that frankly still are sitting in procurement or have yet to be actualized. We're confident in sort of them ultimately getting recognized, but certainly, they have not come through in the timeframe that we had expected. I would also say that outside of sort of the direct pharma business kind of to your implication, there are products like HRD where pharma sponsorship in the market is crucial. So while our customer may remain a clinical customer, it is pharma that is obviously subsidizing to some degree that clinical testing in order to allow for improved market access for their product. We've also seen in some key markets, particularly in Europe, where that I would say reimbursement support has been pulled back or less certain and so that has as well caused some utilization or usage differences from our original forecast. So while obviously, we're disappointed in sort of the decline in the direct to pharma business, we're confident ultimately in that improving.

Understood. Regarding MSK, you mentioned in your prepared remarks that you've made some progress with new business wins. You also talked about the rollout of the NVIDIA whole genome product. Can you provide more details on the current status of the MSK business? Are there any impacts from the pipeline? How important is this business for your growth—would you classify it as essential or just beneficial? Additionally, how should we view the whole genome product in terms of its contribution as we move beyond 2024? Thank you.

Yes, thank you, Dan. Indeed, so our core business has been in hereditary cancer, hem/onc, minority rare, and to some extent, solid tumor testing and with the MSK-ACCESS application, we're expanding our offering in the space of liquid biopsy, which we expect to be significant as the clinical utility of liquid biopsy has now been clearly demonstrated. And in that sense, to give you some numbers, we signed 10 customers in MSK-ACCESS, 16 in total on the liquid biopsy because we support other applications. And today, our clinical pipeline for MSK-ACCESS is above $10 million and on the BioPharma, it's even more significant. And maybe, Ross, you want to give some color and remind what we did with the AstraZeneca-sponsored testing of MSK-ACCESS and how this is now being expanded.

Yeah. So, Dan, obviously, we're really excited about the early adoption of the liquid biopsy product and obviously that will be as well accelerated via our partnership with AstraZeneca, as Jurgi mentioned. I think overall this is obviously going to be a much bigger impact to 2025 revenue growth. These kind of initial lands we are seeing are much larger than our typical ACV or contract value. So we're excited about that momentum. Obviously, we've talked about in the past, this product takes a bit longer to bring into routine testing. And so that is why you're not seeing a ton of impact in 2024. So that's kind of progressing as expected. But certainly, we think the potential of this product can be quite significant. In terms of whole genome, there, I would say as well, I've been frankly a bit surprised as to the level of the sort of commercial interest. Certainly, we're seeing it in the U.S. and you've seen some of the large central labs talk about demand there, but we're seeing it ex-U.S. as well.

Yes. Look, on the whole genome, definitively with bigger sequencers in the clinical market, we do see that there are more and more applications, in particular for rare neuropathy disorders, but eventually as well for new applications in the future like minimal residual disease. And this, I would say, makes our opportunity bigger, right, because more data means more data compute, more identification of complex signatures, and more need for AI-driven, sophisticated algorithms. So in that one, indeed, we're pretty proud of the work we've been doing with NVIDIA and with Microsoft, which definitely enables us to scale, to be even more competitive than what we are today versus competition. And by doing so, not only to increase our market share but in the meantime, as well protect strong gross margins. Beyond the whole genome sequencing, as I mentioned briefly, MRD. So today, we don't have MRD capabilities out there in the market for solid tumor testing, but we're very excited about a new application we launched in the market for hem/onc at capabilities, so acute myeloid leukemia, which we believe will be an application that will be quite distinguished from the others, both for the clinical needs and the Biopharma in a decentralized way. And last, if we speak about new applications where we believe the market is going to still grow strongly, we're very proud as well of launching the MSK-IMPACT, CGP application, which is a counterpart of the liquid biopsy of MSK-ACCESS, where we already signed, as we mentioned today, two new customers, and we are going to hold in September an event in New York with a high number of U.S. potential customers and are going to show first results on MSK-IMPACT and how this can be combined as well to follow patients on two to three with MSK-ACCESS. So, in a nutshell, Dan, despite we're not where we want on the revenue side, I would say that we haven't been too bad on managing costs. And while we have been managing costs appropriately, we're still being able to expand our R&D offerings so that we can grow and increase our revenue. Again, we accelerated strong double digits by beginning of 2025 later.

Okay guys, thank you for taking my question. In an election year where there are heightened geopolitical tensions and now FX volatility, I'm curious if the new guide, you are making any assumptions on how you set guidance just to be a bit more cautious given the environment?

Yes, good morning, Subbu. Thanks for the question. Indeed, the environment, it's a bit of a challenge in one, not necessarily easy to predict everything. I will let Ross guide you on how we are creating FX for our new guide.

In general, we've always valued the visibility of our business. We are not satisfied with our results for the quarter. As we reassessed, we conducted a thorough review of our customer base, examining usage patterns and making assumptions about whether the softness we experienced in Q2 would continue for the rest of the year, along with the new business coming online. These factors primarily drive our outcomes. Regarding BioPharma, we made some significant cuts and do not anticipate much reacceleration in the second half. Overall, we have adopted a conservative approach in our forecasting and now need to focus on reacceleration to demonstrate that this business should grow at strong double digits moving forward. However, due to our recent observations, we chose to be cautiously conservative to avoid repeating the situation we faced in Q2.

Got it. This has been another quarter since the LDT final rule, and customers have had more time to understand its implications. Do you anticipate any volume flow for your customers in the long term? Could this become a concern? Similarly, as IVDR progresses, does it present a barrier? Thank you for that.

Yes. Thank you for the question, Subbu. So to your point, indeed, the legislation in the U.S. around LDT, as I would say, delayed some of the decisions for self of the year and we've experienced that with a number of prospects that we intend to sign in H2 but despite that, what we hear from other players in the field, which are the significant contributors to molecular genomics, is that probably the LDT legislation will make actually the decentralized version, so the production of data in-house bigger than what it is today. And just as a reminder, most of our customers in the U.S. are large academic centers or large private labs. So we believe that those ones are going to benefit from the LDT legislation and going to see volume increase. And as a reminder, actually, this is something we're pretty proud of. U.S. is where we've been growing the fastest this quarter in terms of volume of usage year-on-year with overall 40% growth year-on-year on utilization in both U.S. and Canada. When it comes to Europe, IVDR is still not quite there. We are making some efforts to be fully compatible for many of the applications we cover with IVDR. In some countries, it's going to be more important than in others. There are some countries where it's going to be more like the LDT-like. In other countries, it's going to be more around the IVDR, but we have a very good understanding of what the market needs are and a very strong plan according to the specificities of each country.

Just can you comment on the sustainability of the accelerating growth you saw in North America? Is that a function of a market acceleration due to lower cost sequencing that we're seeing out there or the market share gains or a combination of both?

Yes. Good morning, Conor, and thanks for the question. So definitely, the accretion comes as well, not only from, I would say, the fact that, for us, it was a newer market and we can cover many of the applications. But beyond that, indeed, there are trends. The fact that strong private labs, large private labs and academic centers are expanding their sequencing capabilities with sequencers, which are more powerful, increases as well the market itself, right? And again, for us, more sequencing, more volume, better, given we are being paid on usage. But beyond that, I would say as well, that we do see more and more demand for enterprise-like platforms to do data analytics. Often, large academic centers as well as large private labs are now looking for one key provider who can cover all their needs from hem/onc hereditary cancer, rare disorders, solid tumor liquid biopsy and this enabled us to enter into, I would say, large enterprise discussions with a number of potential targets. Given that there are not many or any companies at the scale of SOPHiA who are completing over 30,000 or close to 30,000 genomic profile amounts and these credentials are extremely important, so that one can work with large academic centers or large labs, which are seeing volumes increase. Ross, in terms of other type of dynamics in the U.S., I don't know if you want to give more color?

Thanks, Jurgi. So I would say, obviously, there's been some disruption in the U.S. market with related to hereditary cancer and rare disease. I think some of that has played into an in-sourcing thesis where we've seen a number of institutions bring in some of that volume, which obviously benefited us. I also think in general, it's caused them and some of the larger institutions to rethink, sort of the mix of send-out and in-house. And so, overall, I would expect volume growth in North America to remain quite robust. Additionally, I would say that probably the U.S. is quicker to adopt some of the newer platforms and systems and some of the chemistry upgrades, and certainly, there again, you're seeing probably more robust volume growth, both in terms of just sheer number of analyses but also complexity or size of analyses. And so we expect that as well to play out in other parts of the world over the next 12 to 24 months. So, certainly, a favorable backdrop for us in North America. And if I look at sort of the pipeline as well as kind of our bookings trajectory there, it will support continued outside growth in the region.

Thank you for that information. Regarding the weakness in BioPharma and your decision to concentrate more on smaller BioPharma customers, is this due to increased competition from other AI platforms or is it more about a general market that is developing slower than you expected?

So just to make sure we didn't misguide the one listening to us today. On the BioPharma side, we're focusing on the top pharma needs, the top 20 pharma needs and some biotech but indeed, we're focusing within these accounts on deals which are lower in terms of the budget and the dollars and this is due to our experience of having significant discussions and delays in signing large deals. When it comes to the current need or demand, we see clear demand in anything regarding market access, so which can be sponsored testing, eventually follow on DX, which is as well access to data for market access needs. We see a bit more delayed decisions on anything which is pre-launch of a drug. So which would be leveraging on the data to, for example, design the clinical trials in a certain way or CDx development plan. Beyond that, I don't know, Ross, if you want to add anything else.

Yes, I think just broadly, Conor, and I'm sure you've heard this from peers or other companies. I mean, certainly the budget environment at pharma this year has been more challenging, right? Whether that means you're spending more time in procurement or the decision-making is elongated. It's very clear that sort of the threshold for which multiple approvals are required is lower and thus it's more challenging, even when you've been awarded to essentially move to contracting and then execution. So for us to combat that, as Jurgi mentioned, we're obviously trying to aim for smaller ACV-type business and so far I think that's gone fine but certainly, even if we think of the portion of revenue I mentioned earlier that we had assumed would impact the forecast this year that was verbally awarded that's still sitting in procurement and contracting, that's a seven-figure plus deal and so there it's been certainly quite a journey trying to get some things actually realized. So we've adapted and I would say it's much less around the competitive environment and frankly for much of what we offer, there's not a lot of comparative companies or similar offerings and so our capabilities, I would say in many senses are unique and it's quite a new market and so there as well, obviously trying to carve out new pockets of budget in an environment where things are more challenged is not easy. But the value we bring and the continued proof points right through those smaller pilot studies and or building of other examples, I think will continue to unlock these accounts for us increasingly over time, and we can already see some of that momentum as you already mentioned.

Great. Thanks for that color, Ross and Jurgi, thanks for the clarification, appreciate that. Thanks, guys.

Thank you, Conor.

Your next question comes from the line of Tejas Savant of Morgan Stanley. Please go ahead.

Thanks for the time. So, Jurgi or Ross, perhaps, I want to dig in a little bit on the pharma weakness here again, helpful color on the value thresholds and market access and CDX work versus the rest. But as you think about your pharma revenue mix to date, how much would you say falls into that discretionary spending bucket or and how much falls into core R&D spending? Because if it's the latter, the weakness is, I guess, a little bit surprising to me because trends seem to be generally okay at least year-to-date financings and so on and so forth. Even commentary from peers seems to be holding up. So anything you can do to just parse out those two dynamics within the pharma weakness would be terrific. Thank you.

Yes. Thank you and good morning, Tejas. So our budgets don't hold on the core R&D as you define it. So there are more of the discretionary ones, although I would say the probably the easiest one to act on as well because they are mainly related to drugs that are finding their best way in the market. Right? So most of them are really related to market access on the data side, and on full-on CDX or on sponsored testing on the clinical side, and we're having some discussions as well when it comes to pre-launch on the CDX side, but nothing along the line of drug discovery. Yes, I can start and then pass it over to Ross. I want to emphasize that we view this as a temporary situation. We have indeed faced challenges in the EMEA market, particularly in three key countries for us—Italy, France, and Spain—due to uncertainty around reimbursement. For instance, in France regarding solid tumor testing, that issue is now resolved, and so volumes have increased again. Additionally, we are experiencing pressure from competitors who offer lower average selling prices for an inferior product. However, we believe that with our account-level actions and sales strategies, we can address these challenges. Moreover, I want to underscore that our R&D efforts have made our offerings more competitive. Ross, since you lead direct sales, could you explain the importance of enterprise sales at the account level specifically for the French, Italian, and Spanish markets?

So thanks, Jurgi. So first off, Tejas, I would say as we spoke to the customers, particularly those where we see saw a deviation in usage trend, honestly, most of the feedback was generally constructive and that they expected trends to resume, and that ultimately they saw this pause in some of the demand as temporal. So it's hard for us in some sense to gauge if there's a change in utilization or a change in testing patterns, etc. But I guess in our work, and we obviously have deep customer relationships, inherently, we did not detect anything that would lead to a more sustained change. Now as we think about some of the competitive dynamics or what you cited on pricing, I think we've seen very specific competitors, smaller competitors come in with aggressive pricing on a specific product, right, because typically their menu is quite limited and their capabilities are much more narrow and so ultimately, what we've done increasingly is gone back with sort of an enterprise presentation whereby we can obviously bundle quite a number of applications together as well as work with automation or chemistry partners to come up with a holistic solution for the lab. That essentially can help them lower the total cost of operation and become more efficient and scale their volumes and achieve improved pricing. But for us, grow materially our wallet share at the customer. And so I would say we've used that strategy now in our more established market successfully of notes, right? We've talked about historically, maybe two and a half applications per customer. We're seeing some customers where we can get to five, six, seven, eight bundled applications on the platform and really, essentially, it proves out our thesis and it's also a way for us to obviously defend some of the more selective, I would say aggressive pricing we've seen from some of the smaller entities and so we feel quite good that this will continue to benefit us. And again, I'll insist on sort of the new business environment, which for me is much more of a forward-looking indicator for us, which continues to be, I would say, quite strong even in the markets that we cited in terms of Italy, France and Spain. And so overall, we really see this sort of dip in usage as temporal.

Got it. Appreciate the color, guys. Thank you.

Thank you, Tejas.

The last question comes from the line of Mark Massaro, BTIG. Please go ahead.

Hi, guys, this is Vivian for Mark, thanks for taking the questions. So just when do you think we could start to see the impacts of the BioPharma reshuffling of sales resources across geographies? And does that just represent upside to the lower guide? And could you discuss when that was completed and if there's any good trends to call out here in July and early this month?

Yes, thank you and good morning, Vivian. So we start with first reassuring that we do see market growing, right? Overall, both in the pharma, both in the clinical side. And on the BioPharma side, despite we being, I would say, refocusing our activities and defining teams that are dedicated to Dx, as well as to the data, and focusing on overall deals which are lower ACV. Our pipeline continues to grow. And on the clinical side, I think that was your second question regarding the macro events that made that the volume of analysis was a bit lower than what we had thought or what we had anticipated. There as well, the first numbers that we see of July are reassuring and demonstrating that this will reaccelerate. And our booking numbers suggest that this will actually reaccelerate from Q1 next year. And just maybe as an aside, to be clear, on the clinical market, this quarter year-on-year we still grew 14%. Naturally, what has been more penalizing us as being the BioPharma related activity? Now, that said, just to make sure that we made that point clearly as well, Vivian. Despite revenue growth was not as possible as or as large as what we had anticipated and it's more modest. We're being able in the meantime to protect our margins with gross margins that were above 73% on an adjusted basis and huge improvement as well on the adjusting operating loss versus last year where we improved by 32%.

Got you. And if I could just squeeze in one more, just on the guide. I guess you guys were pretty clear in calling out BioPharma and the EMEA headwinds. Just what baked into the guide as far as the competitive pricing pressure that you mentioned?

Yes. So, I will leave it to Ross to answer you and give you some more color.

Yes. So what we're seeing in terms of pricing is on a same-store basis, capture has been around 1%. Now obviously there is some mix shift happening in the business and obviously some of that you see through the pharma weakness but ultimately, we essentially forecast that much of what you saw in the Q2 will continue throughout the year. We do have a slight benefit in the Q4 as some liquid biopsy-related business starts to come online late in the quarter. But ultimately, I would say the trend that we saw in Q2 is what we're assuming happens throughout the remainder of 2024. And so, we will see obviously how that certainly plays out, but we wanted to be conservative with respect to our assumptions just given the magnitude of the delta versus our original forecast. So again, I feel we've taken the steps and we're confident that it will improve, but we've not baked that into the back half.

There are no further questions at this time. I'd now like to turn the call back over to Jurgi for final closing remarks. Please go ahead.

Just thank you all for following us today and very much looking forward to reconnect early September at the Morgan Stanley event in New York. Have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.