GeneDx Holdings Corp. Q2 FY2021 Earnings Call

Good afternoon. Thank you for standing by, and welcome to the Sema4 Second Quarter 2021 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Vice President of Finance and Corporate Development. Joel Kaufman, Sir, give it to you.

Good afternoon, everyone. Thank you for participating in today's conference call. Participating for the company today will be Eric Schadt, Founder and Chief Executive Officer; Isaac Ro, Chief Financial Officer; and Jamie Coffin, President and Chief Operating Officer. Earlier today, Sema4 released financial results for the second quarter ended June 30, 2021. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. Actual results may vary materially from those expressed or implied in the forward-looking statements due to a variety of factors. Additionally, these forward-looking statements, particularly our target volume for 2021 and our target revenue for 2023, involve a number of risks and uncertainties and assumptions. For a list and descriptions of the risks and uncertainties associated with Sema4's business, please refer to the Risk Factors section of our definitive proxy statement filed with the Securities and Exchange Commission on July 2, 2021. We urge you to consider these factors, and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of non-GAAP measures to GAAP financial measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 16, 2021. Sema4 disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I'll turn the call over to Eric.

Great. Thanks, Joel, and thanks to everyone joining us this afternoon. Of course, this is a big day for Sema4 with our first earnings call as a public and independent company, a company that I conceived of in 2012 inside the Mount Sinai Health System. What inspired the company's formation was a foundational view that rapid advances in genomics and artificial intelligence, along with the exponentially growing oceans of molecular imaging and clinical data, could and should be integrated into an information platform able to deliver a broad array of algorithms that, when appropriately wired into physician workflows, provides state-of-the-art, clinically actionable insights to patients and physicians, allowing them to more efficiently diagnose, treat and even prevent disease and maintain wellness. This vision became my and the company's main mission. And today, we are powered by more than 1,000 professionals focused on advancing the use of big data, advanced artificial intelligence developments and machine learning and probabilistic causal reasoning to deliver better patient outcomes and transform the practice of medicine. Our success is underpinned by our access to data and by Sema4's proprietary health intelligence platform, Centrellis, one of the largest, most comprehensive and fastest-growing integrated health information platforms in existence. Similarly, the software and the machine learning and other advanced artificial intelligence learning capabilities built into the software are among the most sophisticated in the world. At the end of Q2, the platform had access to roughly 20 million patients with de-identified deep longitudinal clinical records across 12 million of these patients, hundreds of thousands of matched genomic profiles and more general data assets comprised of more than 35 petabytes of genomic test, comprehensive medical record and among the most relevant life and biomedical science data in the digital universe. These data are organized, structured and annotated and curated in a manner that provides easy access and facilitates analysis and reporting by artificial intelligence methods that reside within the Centrellis platform. Standing today as an independent company, we are in a strong position, having completed a strategic merger with CM Life Sciences on July 22, which brought just over $500 million in cash onto the company's balance sheet and transformed our Board of Directors, adding top active and former life sciences CEOs, CFOs and industry experts. With the right scale of capital and strategic talent, we are now able to catalyze our efforts organically and inorganically at a level that was simply not possible while a private company inside the Mount Sinai Health System. We can also now significantly accelerate the pace of investment in people, technology and infrastructure required to extend our market leadership position in pursuit of our mission, helping physicians deliver better health outcomes for patients. From where we sit today and incorporating future investments that Isaac will discuss in a moment, we see a path to $500 million in revenue by 2023, with each sample processed that includes clinically relevant data to our platform and further informs insights to help physicians and patients make better clinically actionable choices. Continually feeding the database is what powers our business and the long-term earnings potential of Sema4. In the last 3 months alone, we've processed more than 70,000 non-COVID samples and cataloged close to 4.5 petabytes of data, generating a number of new clinically relevant insights, some of which have recently come out in high-impact journals such as Clinical Cancer Research, Nature Digital Medicine and the Journal of the American Medical Informatics Association, some of which detail our digital phenotyping algorithms and applications to predicting risks of complications from common health course journeys such as pregnancy, where prediction significantly outperforms current standard of care assessments. Already, we have demonstrated patients' willingness to partner with us, with over 80% of patients using our diagnostic solutions and patient portal giving us their IRB-approved informed consent to retrieve, organize and manage their health records and data in partnership with them. We have grown the number of patient records to which we have access by roughly 100% in the last year, and we believe that our robust, battle-tested platform is ready to scale across an even broader network of partners in the ecosystem. In fact, Amazon recently acknowledged Centrellis as a game changer in terms of its robustness, completeness and ability to secure and manage large stores of data while scaling to execute increasingly complex clinical and research workloads on Amazon Web Services. Of course, our success to date is just the beginning. As we grow our already massive data resources, our competitive moat grows stronger, increasing the volume of tests, patient engagement and system partnerships in a more integrated and holistic way to facilitate the delivery of precision medicine as a standard of care. This all operates like a virtuous cycle, improving the available insights, powering better health outcomes and in turn driving more volumes, which, of course, we expect to lead to more revenues and more profits for our business. With a new influx of capital, we are able to build out our solutions organically and inorganically and extend our footprint. Importantly and critically, our business model is one of partnership with patients, physicians and health systems, positioning us to not only help expand the information and data available in the Sema4 platform but to deliver differentiated, clinically actionable insights to patients in the context of their care at these health systems. In fact, today, we are highlighting the 3 new partners we have brought into the Sema4 network this year: NorthShore University HealthSystem, AdventHealth and Avera Health. These deals have expanded our reach to an additional estimated 10 million lives and given us the opportunity to deliver better care at lower cost, which is the realization of precision medicine impacting the standard of care across a broad range of practices. Over the next few years, we expect to partner closely with an increasing number of health systems and to adapt our health intelligence platform to enable these health systems to deliver precision medicine across a broad range of disease categories as the standard of care. While there are many companies that seek to address various components of our solution, none have been able to wire these components together at scale and in a way that fully engages health systems as health delivery partners. We have been at this for nearly a decade and did so within one of the leading health systems in the U.S., allowing us to design a holistic delivery of precision medicine that produces results. We believe that's what makes us a partner of choice. Our sophisticated platform draws upon information from many sources, including advanced genomic testing solutions, patient electronic medical records, physician notes, hospital records and population health, among many other large-scale sets of data available in the digital universe of data. Sema4 enables patients and providers to drive differentiated insights in real time that can dramatically improve the standard of care. It is an incredibly exciting time at Sema4 as we scale up our commercial activities, invest in strategic collaborations and actively explore opportunities for inorganic growth. We envision a future where doctors and patients routinely query our platform of algorithms to help determine the most optimal health course journey personalized to each individual. Before I pass this over to Isaac to review our second quarter financial results, I'd like to take a couple of minutes to share some examples of Sema4's impact on patients that demonstrate the power of the Sema4 platform and the new emerging standard of care. After being diagnosed with Stage 4 lung cancer, one of our patients, a 76-year-old woman, was offered the current standard of care for this type of cancer, platinum-based chemotherapy and palliative radiation treatment. However, after the patient's family sought a second opinion, they connected with a medical oncologist plugged into the Sema4 oncology platform, and our whole exome/whole transcriptome sequencing solution was carried out and identified that the PD-L1 pathway was activated in the patient's tumor, a pathway that had not been identified from the initial characterization of her tumor. As a result of the insights delivered by the Centrellis platform in conjunction with a multidisciplinary team, the tumor was reclassified as a Stage IIIb tumor. With PD-L1 activated, a precision oncology combination treatment approach consisting of KEYTRUDA, pemetrexed, and carboplatin was undertaken. After 6 cycles, the patient achieved a solid response with the tumor shrinking by 85%, no cancer growth or metastases observed elsewhere with regular CT monitoring, and the patient is once again active and living a full life and planning for the next 5 to 10 years. We are excited to deliver these more advanced solutions in partnership with health systems like Avera Health and our new precision oncology program we announced with them last week. Beyond this type of individual patient story, our genomic testing and information platforms demonstrate dramatic advances in patient outcomes at the population scale. Consider that with our expanded carrier screening genomic solution, we now routinely identify a greater than fivefold increase in the rate of carrier couples compared to today's standard of care advocated by professional organizations and large national payers out of all couples tested, where these carrier couples are at a 25% or greater risk of transmitting a very severe genetic disorder to their offspring. The impact of using our reproductive health genomic solution is a dramatic increase in reproductive health choices, reduced incidence of children born with rare genetic disorders, and lower overall healthcare burden. That's the power of our platform and the potential ahead. Now I'm going to turn it over to our CFO, Isaac Ro.

Thanks, Eric. I joined the company in February of this year, and it has been an extremely exciting and busy stretch of time. I've enjoyed reengaging with many of you in the investment community already and look forward to continuing the productive dialogue with this audience in the months and quarters to come. As someone that has followed and analyzed this industry and its enormous potential, I've tracked Sema4 since inception, and I'm more excited today than at any other time about the progress of this business, the value of its data, and how it can change medicine. Here are a few anecdotes that underpin my excitement. First, we have one of the largest and most advanced NGS-based clinical testing capabilities anywhere, and we are still in the very early days of optimizing our new world-class lab in Stamford, Connecticut. In Q2, we reported nearly 72,000 tests, excluding COVID, which represents 85% growth year-on-year across our strategically important areas of reproductive health and oncology. Secondly, we are still expanding our menu of tests. In oncology, we grew over 300% year-on-year in Q2. This business is still less than 5% of our volumes today, so we are still in the early days of building out our capabilities and look forward to updating you on these efforts in the coming months. Thirdly, we have a rapidly scaling ability to partner with leading health systems with a differentiated go-to-market model. Finally, our volume momentum is very strong, growing 7% sequentially in Q2, excluding COVID. And while the impact of the COVID Delta variant is difficult to handicap, we think these core trends underscore our momentum as we gain share, sign new partnerships and expand our offerings. Now turning to our financial results. Total revenue for the second quarter of 2021 was $46.9 million, representing growth of 56% compared to $30.1 million in the second quarter of 2020. Diagnostic test revenue was $44.8 million in the second quarter of 2021, up 50% as compared to $29.8 million in the same period the prior year. Of note, our COVID testing revenue in Q2 declined by $12 million sequentially versus Q1. Other revenue totaled $2.1 million in the second quarter of 2021 compared to $0.3 million in the second quarter of 2020. The increase was mainly attributable to growth in collaboration service activities related to our new partnerships with health systems, which have higher margins, and we expect this to grow substantially in the years to come. Cost of services was $49.6 million in the second quarter of 2021, an increase of 36% when compared to $36 million in the same period of 2020. Cost of services were impacted by one-time investments, which include COVID-19 test supply stocking expenses and the rapid build-out of lab infrastructure to support continued growth and scale in our testing volumes. These investments are largely transitory and will enable us to accelerate volume growth, which we view as the most important factor in creating long-term value. This, in turn, gives us increased confidence in reaching our target of $500 million in revenue in 2023. Operating expenses for the second quarter of 2021 were $41.9 million, up 48% from $28.3 million in the same period the prior year. Overall, the increase in total operating expenses for the quarter was primarily attributable to higher personnel-related costs, coupled with professional services related to the merger transaction. The components of operating expenses are as follows. Research and development expenses for the quarter were $12 million, up 28% when compared to $9.4 million in the second quarter of 2020, driven by an overall increase in depreciation costs of $1.2 million, coupled with a $0.9 million increase in expenses for reagents, laboratory supplies, and software. Sales and marketing expenses were $16.2 million, up 87% from $8.7 million in the same period in 2020 due primarily to a $5.4 million increase in personnel-related expenses from increased headcount. Since the start of Q2, we have increased our sales force and field organization by over 30%, the benefits of which we expect to realize in the coming quarters. General and administrative expenses were $12.8 million, an increase of 58% as compared to $8.1 million in the second quarter of 2020, driven by $1.6 million related to increased headcount and $2.8 million for expenses related to the merger transaction. This has largely been around the build-out of our finance department. Moving down the P&L, we reported a net loss of $44.8 million for Q2 2021 compared to a net loss of $32.1 million in Q2 of 2020. Turning to the balance sheet, total cash, including cash equivalents, was $26.5 million as of June 30, 2021. Subsequent to the close of the quarter, we received roughly $510 million in net proceeds associated with the business combination with CM Life Sciences. Given the confidence that we have in our growth outlook, we have accelerated our investments across the organization with the mindset that we want to be unconstrained with regard to driving growth while maintaining our commitment to providing gold standard levels of patient care as part of our cultural heritage within a premier academic medical system. This means we are accelerating the evolution of the business to more efficient, scalable, and established industry practices with the goal of supporting many millions of patients and dozens of health system and biopharma industry partnerships in the years to come. We also see new opportunities to support operations and forecasting at an increasing scale with the foundation now established for best-in-class operations. It's the right time to do this. The market is fast-growing. We have the capital, we have a reconstituted shareholder base, and our branding capabilities are well established and driving tremendous business momentum. While we undergo this evolution, we believe it is most important to focus on volumes and volume growth as the primary metrics with which to evaluate our progress towards our medium- and long-term company objectives. Given the strong trends observed in the first half of 2021, our incremental investments and despite uncertainties around COVID, we are excited to share our target for total non-COVID volume growth in excess of 50% in 2021. Further, this represents sequential growth in excess of 20% in the second half of 2021 compared to the first half of 2021, and it implies 54% year-on-year growth in the second half of 2021 versus the second half of 2020. Finally, to help you with your models, we estimate that COVID-19 testing drove 12% of revenue in Q3 of 2020, 38% of revenue in Q4 of 2020, 24% of revenue in Q1 of 2020, and 8% of revenue in Q2 of 2021. Going forward, the outlook is obviously difficult to handicap, and we do expect de minimis COVID testing volume in the second half of 2021 at this time. As stated previously, we feel that core testing volumes are the best indicator of strength in our business, which does not take into account the impact of any potential M&A transactions where we do have a deep and actionable pipeline. We've been encouraged by our engagements where our differentiated data platform positions us as a value-added acquirer, and we are optimistic of being able to reach agreement on at least one transaction in the near future. As we look to expand our menu and relationships with our health system partners, we believe there is a long runway of significant growth in testing volumes based on strong underlying genetic and oncology testing market growth rates and our continued momentum resulting in share gains. We are tracking towards our long-term targets in partnership with our health systems. While it is difficult to predict the timing of closing any one prospective health system partnership, the level of engagement and excitement leaves us confident in our ability to announce developments on this front in the coming months. We are in growth mode and looking forward, remain committed to driving increased value to all of our stakeholders, including our new and future investors. Now I'll turn it back to our Founder and CEO, Eric Schadt.

Great. Thank you, Isaac. Before we open the call up for any questions, I'd like to thank all of our employees and shareholders for their dedication and support that allowed us to complete our initial public offering. I also want to recognize their performance amidst the COVID-19 pandemic, which required a tremendous reprioritization to assist in supporting patients. We have embarked upon a tremendous journey towards creating data and information-based clinically relevant insights to help patients, hospitals, and therapeutic innovators. It has required a significant amount of energy and investment, and we are just beginning to push our technology and capabilities. Sema4 is growing rapidly, and we anticipate the pace of growth to flow with innovation, adoption, and demonstrated success with our partners. We look forward to keeping the investment community up to date as we progress with our strategic initiatives as a public company. Now I would like to open the call for any questions. Operator?

And our first question will come from Brandon Couillard with Jefferies.

Eric, maybe just to start off at a high level. It would be helpful if you could discuss some of the key milestones that you would suggest we monitor in terms of how the big health system deals are progressing. Clearly, you've added three to date. I think you're pretty comfortable with the four or so right now that you sort of have under the belt. But what are some of the key metrics we can sort of look at to gauge how those are progressing and integrating?

Yes, thanks for that question. So, of course, again, our big focus is on driving volumes through the genomic testing solutions, engaging patients, engaging data around those patients and enabling those health systems to deliver precision medicine as a standard of care. So the way we think about success with those health systems is #1, to what extent are we penetrating the health systems with respect to genomic testing solutions across the broad array of diseases and conditions, from reproductive health to oncology, to population health, to drug safety, to rare disorder diagnosis, and so on. The degree of uptake of those solutions into standard of care practices throughout the system is one of the key metrics. The amount of data, the percentage of data through the system that we're engaging to help inform patient care in the context of our testing solutions or even completely independently of those solutions, is guidance we're delivering back to the system, back to physicians in terms of patient risks and so on. So it's the percentage of data in those systems that we're routinely managing and engaging. The other would be the percentage of patients that we're able to engage throughout that system. As our solutions get adopted and spread, the number of patients we're engaging and consenting to manage information and deliver insights should also increase.

Got you. And then in terms of M&A, can you sort of talk about the types of assets you're most interested in? And secondarily, the bandwidth of management to absorb an asset at a time when you're also very focused on making sure that these new health systems, those customers are happy and that you're very hands-on in terms of bringing sales numbers up?

Yes, for sure. So maybe I'll take a stab at that, what we're thinking, and then maybe Jamie can jump in regarding the ability to absorb and roll those out. So we're clearly in a very fast-moving field with opportunities to build out our technology, distribution, and increase our total addressable market. We are looking at many technologies to fill the gaps to enable better penetration, better acceleration, and uptake of our solutions into the health system. So think of broadening our portfolio of genomic testing solutions, be it liquid biopsy-based technologies for oncology or long-read sequencing technologies for better characterization of genomes, better management of commoditized components of information and structuring to achieve scale across many different health systems. Those are the kinds of target areas that we're looking at to again fill out the portfolio of genomic testing solutions, but also facilitate better information partnerships and more rapid leveraging of that information for improved insights delivered to patients and physicians.

Yes. I would just add, Eric, that as you said, we brought a team on board from this industry that has a huge amount of experience in integrating into the customer's workflow, which is incredibly important to achieve the uptake of these steps and data play. So we're very committed to making sure that we have the best people in front of these health systems. We have to do the uptake both from the physician practice level and from the enterprise level. It's something that this industry has not done a very good job of, but we have a very experienced team in doing that.

Got you. And then maybe a two-part question for you, Isaac. Appreciate the comment around the $500 million target in '23. Does the $360 million target for '22 still stand? And then secondly, how should we think about ASPs moving into next year? Should we expect another step down in '22? Or is '21 perhaps the end of that dynamic, and should we expect to see some stabilization as oncology becomes a bigger piece of the mix?

Yes. Good questions. Thank you. So let me just start with the framing statement to explain why we're thinking about building this business the way we are, which is that we're not providing 2021 revenue guidance because we're focused on volume. We think that is by far the most important KPI to measure value creation because the volumes are going to feed our flywheel. As you know, we've got volumes that we're scaling already at a significant rate. The more we do, the more patients that come into our platform to give us data to feed the database and to build out better algorithms for the future. When I joined the company in February, I really got a chance to dig into the business and our long-term strategy. Super excited about where we are. Eric and I both believe that this game will be about driving volume and data. And so those are the metrics we're solving for. As we think about the near term and medium term, we can't give you revenue guidance because there are a bunch of variables at play that could result in meaningful swings in revenue either way related to payer contracts that we think will be mostly transitory, typical of companies in diagnostics scaling rapidly and becoming important counterparts to the payers. If we do those things, we still think we're going to get to $500 million in revenue in 2023. So lots of moving parts in this environment, but the trajectory is unchanged.

And then in terms of just to address the ASP part of that question, just again, off of some of Isaac's comments, it's typical for a lab to renegotiate contracts when the status in the eyes of the payer changes. In our case, we're moving from a hospital-based system to independent, or we have made that move. We've attempted to get ahead of many of our payer partners to provide visibility on reimbursement. This process takes time, and no payer is the same. So it's reasonable to assume over time, we'll end up with contracted rates that are aligned with our industry peers. We have, for which we have comparable testing solutions. That said, we provide differentiated and advanced products that are often best in class, and we provide these to physicians and patients and hope that this will garner more favorable reimbursement. We can't say exactly when we expect the remaining contracts to be negotiated and where we'll see the ASP stabilize. Some cases, the ASPs for a given test will likely go up. In others, they will go down. Like on the oncology front, where we're working on approvals that should improve our reimbursement.

And our next question is going to come from the line of Matt Sykes with Goldman Sachs.

Just maybe first. How should we think about when you bring on a new health system? What should we expect in terms of the onboarding process in terms of duration and timing to get it fully stood up and integrated?

Yes. That's a great question, and it's one we're improving upon as we bring on additional systems. Initially, the systems are a big lift, and our first partners, like NorthShore system in the Greater Chicagoland area, required about 1.5 to 2 years of discussions and planning to get to the right framework agreement that handles the major operation of the agreement, such as IP and scope. Then you get into statements of work, which detail the initial problems you're solving with the health systems. All the health systems have a common vision that they want precision medicine as a standard of care. However, the initial projects to motivate that may vary, and you're working that out with different consulting teams and so on. Once you hit those driver projects, like genomic health testing solutions with NorthShore, expansion tends to occur quite rapidly throughout the system. In general, we think we can reduce that initial 1.5 to 2-year cycle down to 9 to 12 months for future systems.

Yes. I'll just add one thing, which is that thinking about where we are in the health system journey, there's a term that Eric uses a lot: learning-based partnerships. These are opportunities where partners have given us tremendous trust and access. We want to be respectful of implementation. I wouldn't expect a cookie-cutter number for every system. They will all be a little different, but so far so good. Our first mission is to ensure that, that partnership remains collaborative and extremely constructive. We've made pretty good progress on all those fronts.

Great. And just maybe one last one. Just on the commercial ramp. You talked about the increase in headcount and investments you're making. Where do you feel you are right now in terms of that investment and headcount and in terms of either what inning are you in or where do you feel you're at right now in terms of the overall business? And what do you think about the next 6 to 12 months in terms of commercial ramp-up?

Yes. Great question. As mentioned in the script, we've got over 1,000 FTEs today, it's a substantial operation. One of the things that drew me to this role is Eric's ability to assemble a world-class team of laboratorians, along with all the support functions you need to be a public company. Importantly, we have over 150 computational biologists, which is a notable resource in the industry. Our ability to lean into these health systems with cutting-edge technology, not just tests, but also the data science and curation work you need to bring technology to life in a clinical context, is exceptional. The marginal investment required for us will mainly be around the edges, focusing on the staff and resources needed to implement in these health systems. Additionally, G&A as an example has made tremendous progress, and there's more opportunity across this side that will be impactful to our operational output.

Just quickly add that the staffing we're doing today is geared towards uptake into these systems. The precision medicine standard of care solution does not exist today in any company. Sema4 is at the forefront of wiring all the components you need, whether it's the clinical labs, genomic testing solutions, patient physician engagement, data structuring and curation, and analytics. Once we have that figured out with these 5 to 10 systems, we plan to scale that to all systems, focusing on the $500 million target in 2023.

And at this time, I see no further questions. So I will turn the call over to Eric Schadt for closing comments.

Okay. Well, great. Thank you again for joining us today and for your interest in our progress. We remain dedicated to increasing value to all of our stakeholders and keeping you updated on our progress. We look forward to the next call in Q3.

Once again, we'd like to thank you for your participation on today's Sema4 Second Quarter 2021 Earnings Conference Call. You may now disconnect.