GeneDx Holdings Corp. Q3 FY2021 Earnings Call

Good day, and thank you for standing by. Welcome to the Sema4 Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. I want now to hand the conference over to our speaker today, Joel Kaufman, please go ahead.

Good afternoon, everyone. Thank you all for participating in today's conference call. Participating for the Company today will be Eric Schadt, Founder and Chief Executive Officer, and Isaac Ro, Chief Financial Officer. Earlier today, Sema4 released financial results for the Third Quarter ending September 30th, 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 law which are made pursuant to the Safe Harbor provisions of the Private Security 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 differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. Additionally, these forward-looking statements, particularly our 2021 financial guidance involve a number of risks, uncertainties, and assumptions. For a list and description of risks and uncertainties associated with Sema4's business, please refer to the Risk Factors section of our S-1 filed with the Securities and Exchange Commission on August 4th, 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 the live broadcast today, November 15th, 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 will turn the call over to Eric.

Alright. Thanks, Joel. And thanks everyone for joining us this afternoon. We are pleased to be here with you today to discuss our third quarter results and progress against our long-term strategic goals. I will start today's call with an overview of our operating results including our growth, and our growing health intelligence information platform, health system partnerships, and new product offerings, before I pass the call over to Isaac for a financial update. We will then open the call for questions. Overall, I'm very excited about our organizational progress in the third quarter, which was largely a quarter of investment in our operational foundation for growth across all facets of our organization. As you can see from Slide 8 of our earnings presentation, exiting the quarter, we have started to see these investments translate to a notable acceleration in volumes and patient and provider engagement with our platform, accelerating our momentum as we progress into 2022. We are building a unique Company focused on delivering clinically actionable insights based on individual longitudinal data analyses that will help inform clinical decision-making across a broad spectrum of diseases and health conditions. Since we became a public Company in July, we have ramped up our investment in technology, infrastructure, and people. The strategic roadmap for Sema4 is anchored in high dimension large-scale patient data, active clinical engagement with patients and their physicians, and collaboration with our clinical and research partners and patients. We fundamentally believe that genomic data combined with clinical patient records and other multi-omic and lifestyle data can deliver differentiated insights that drive clinical decisions to help ensure the best outcomes for patients. Our success is underpinned by our access to expansive data, and by Sema4's proprietary health intelligence platform Centrellis, among the largest, most comprehensive, and fastest-growing integrated health information platforms in existence. At the end of the third quarter, our platform was managing 39 petabytes of data or 39 million gigabytes gathered from approximately 20 million patients. Of these patients, roughly 12 million give us access to high-quality, high-dimensional longitudinal electronic medical record information. Meanwhile, our testing capacity continues to run to support our data platform and our health system partners. Our current capacity for Next-Gen Sequencing can now support more than 50% growth of our genomic data set in the coming year. In addition, we continue to invest in the infrastructure required to derive clinically relevant insights from the data. We continue to believe that our strategy to build a platform of algorithms is resonating in the marketplace. As an example, patient consent remains very high with greater than 80% of patients having engaged with our Sema4 portal, consenting to allow us to help acquire and manage their personal health information and to leverage those data to improve health outcomes for all. In the majority of cases, this partnership with patients provides us access to any and all medical record information ever generated for that patient. This includes advanced genomic testing results, longitudinal patient electronic medical records, physician notes, hospital records, population health data, and many other large-scale sets of data. The unrivaled level of access to information and partnership with patients and health systems allow Sema4 to develop deep and information-based relationships that continuously drive improved knowledge and understanding within the Sema4 platform. It is this patient-informed knowledge that we believe is a competitive differentiator for Sema4. It will drive our business and long-term value proposition to patients, providers, and pharmaceutical partners. Most importantly, we continue to engage with all of the health system partners and the feedback is very encouraging. As the breadth and scale of our data advances, our value proposition to health systems also becomes increasingly attractive. During the third quarter, we added a fourth health system partnership with Avera Health. As an example of the traction we're getting with our health system partners, let me provide an overview of our NorthShore partnership. NorthShore is a large health system in the greater Chicagoland area where we have had tremendous success to date. Earlier this year, we launched a system-wide, data-driven precision medicine program to help NorthShore's clinicians and patients prevent, detect, and treat diseases at earlier stages. In just 6 months, NorthShore has increasingly leveraged our platform, and their patients, many in underserved culturally diverse communities, to deliver an improved genomic medicine standard of care. As summarized in Slide 7 of our Earnings Presentation, more than 90% of primary care physicians at NorthShore have had patients complete testing through the genetic wellness and assessment process, which starts with a questionnaire covering a personal and family history of select medical conditions. Roughly 42,000 NorthShore patients have completed this guideline-based questionnaire, and have been advised whether to take a general genomic health screening test or a more comprehensive hereditary cancer genomic test. From this 42,000 patient group, over 6,400 have had the genomic health screen test ordered. And through the first 6 months after launch, nearly 1000 patients were identified as meeting NCCN guidelines for being at high risk of heritable cancer, and successfully tested. This represents a 54% increase from the prior 6-month period before our launch, and an 88% increase versus the same 6-month period in 2020. A remarkable increase and improvement in the standard of care in the NorthShore system. In summary, we believe our early success with NorthShore is evidence that our platform and go-to-market strategy can quickly and significantly improve the standard of care. Our deep partnership with NorthShore has also enabled us to take a non-traditional and innovative approach to providing an evidence-based program, expanding the heritable cancer testing program beyond primary care. This concept is exemplified by the introduction of the heritable cancer screening pilot program and a sample of NorthShore's mammography clinic. The program targeted females scheduled for their annual mammography screenings, starting with an August pilot performed at NorthShore's innovative mammography facility located at the clothing retailer Nordstrom in Skokie, Illinois. The pilot was quickly extended to 3 additional mammography screening facilities in the NorthShore network. The results so far are very encouraging with more than 90% of women having genetic screening orders placed in these facilities and then following through with returning the saliva samples for testing. We're greatly encouraged by the differential success we have seen in this setting. The heritable cancer testing increase Sema4 has achieved in partnership with NorthShore is substantial when compared to other heritable cancer testing partners. Both the affected patients and their families are receiving levels of medical support and counseling that generally exceed all guidelines. Earlier assessment of cancer risk, of detection and care, all have a significant positive impact on treatment and survival. Thus, in the process of growing the Centrellis engine, Sema4 can help provide an enhanced standard of care to patients and their communities. Lastly, as part of a separate research project called The Genomic Health Initiative, Sema4 has already sequenced more than 9000 samples in a 6-month span of time, and we are now embarking on the process of data structuring and curation to pair these genomic profiles with deep longitudinal electronic medical record data at NorthShore. All in all, we are pleased with the growing adoption at NorthShore, as well as with the rest of our partnerships, which include launching several somatic tumor profiling protocols with Avera Health to ultimately profile all cancer patients in the Avera system as the standard of care. Integrating the expansive molecular profiling data with longitudinal electronic medical record data collected on patients through the Avera system to provide more personalized actionable clinical guidance. We believe these many types of engagements will be mutually beneficial for our health system partners and for Sema4. It is the combined levels of dedication from both organizations that is leading to improved access and treatment in the geography spanning our partners. As we continue to gain traction with existing partners, we look to establish a limited number of new learning-based health system partnerships to expand our patient and clinician engagement strategy. Then longer-term, new health system partnerships will focus on scaling the types of solutions developed with the first learning-based partnership. Although it takes time to develop these relationships, we believe that our distinguishing feature of integrating ourselves within health systems to provide state-of-the-art care as a collaborative partner will ultimately position us as the preferred partner of choice to an increasing number of systems who are driving precision medicine as the standard of care. In addition to the Health Systems, our sophisticated platform draws upon information from many sources that provide unique advantages to pharmaceutical companies looking to leverage big data insights to support more progressive research from drug development to clinical trials in real-world evident studies. We have a growing level of engagement with pharmaceutical companies that span the spectrum of drug discovery to post-marketing surveillance. We expect pharma contributions to grow significantly in 2022. Similar to our Health System partners, we look to partner with pharmaceutical innovators as they seek to improve the efficiency and accuracy of drug development, and the delivery of the right therapeutics to the right patient at the right time. Our goal is to understand what a biopharma partner needs in order to provide the insights from data to help them make better-informed decisions. The connectivity of Sema4 to the hospital systems and patients is what we believe can bring highly accurate and clinically actionable data to our pharmaceutical partners. On the new product front, we are working diligently to broaden our offering. In September, we launched Sema4 Elements. This is our portfolio of data-science-driven products and services to support reproductive and generational health. These genomic solutions, digital tools for patients and providers, and services enable providers to treat patients holistically during their reproductive cancer and generational health journey. The portfolio encompasses solutions for the diagnosis, prevention, treatment, and management of reproductive inheritable disease conditions for more holistic family care, to include a newly enhanced version of Sema4's expanded carrier screening for pregnancy planning, which includes the molecular ancestry component to more accurately assess high-risk types derived from specific population groups, even at the specific level, to provide superior risk prediction. Alongside are non-invasive prenatal testing, Natalis newborn screening, and heritable cancer testing. For those of you who don't know the IVF market, it is a highly concentrated market comprised of sophisticated and science-driven prescribing physicians. We're proud that the upgraded version of our ECS product is resonating well and has allowed us to take market share in key national IVF accounts. While the volumes associated with these account wins are not part of our third quarter results due to timing, we are encouraged by the ordering trends we're seeing out of these accounts in the fourth quarter thus far, as highlighted in our earnings call deck. Shifting back to our longer-term mission and vision of developing and monetizing a platform of health insights and algorithms. I'd like to highlight a pair of published studies conducted in collaboration with our founding Health System partner, the Mount Sinai Health System, demonstrating the utility of our health intelligence platform to predict more accurately clinically meaningful outcomes. In this case, for improving the prediction of risk of postpartum hemorrhage over current standard care assessment. The studies were featured in a special informatics for sex and gender-related health issue of the journal of the American Medical Informatics Society. Postpartum hemorrhage is the leading cause of maternal mortality globally accounting for roughly 35% of maternal death and often occurs in patients with no known risk factors for hemorrhage. U.S. health systems are not immune to this high mortality rate, especially in underserved communities. These two new papers are among the first to use large-scale, comprehensive real-world data to both accurately digitally phenotype patients and then predict clinically meaningful outcomes in pregnant women. By implementing our predictive model into the clinical standard of care, healthcare providers may be able to improve postpartum hemorrhage risk assessment and medical management for their pregnant patients resulting in better health outcomes. To support our partnerships and increased adoption of our growing database, we have expanded our headcount to 1,150 employees as of the end of the third quarter. This includes commercial headcount growth of 32% during the third quarter and 47% since the beginning of the second quarter. We believe we are adequately staffed for our growth objectives, and as we march through the third quarter, we began to see improvements in sales cycle and sales force productivity as our new reps were ramping toward full productivity. Turning to the lab, we have made a number of key hires and are working toward improving operating efficiency and our overall margin profile. We have outlined a number of initiatives including portfolio optimization, new limbs implementation, and automation initiatives. These internal initiatives combined with an improving reimbursement dynamic in oncology, our fastest-growing segment, will help us pace for more normalized margins as we progress through 2022. Additionally, in September, we hired a world-renowned expert in computational biology, Dr. Gustavo Stolovitzky as Chief Scientific Officer. His expertise is key to accelerating the development of our platform of algorithms to help researchers, health systems, providers, and patients translate the information contained in health data into actionable knowledge. We also lead the translation of our top-notch research into future Sema4 product, and further solidify our collaborative partnerships with Health Systems in the biopharmaceutical industry. In summary, we have made substantial progress on core business objectives as we grow our proprietary health intelligence platform. Coupled with our software, machine learning, and other advanced artificial intelligence learning capabilities, our team is building one of the most sophisticated platforms in the world and setting the bar for high-value patient engagement. We continue to be incredibly confident in our ability to drive differentiated insights in real-time that can dramatically improve the standard of care for all. As we scale up our commercial activities, investments, strategic collaborations, and actively explore opportunities for inorganic growth, the future of Sema4 remains very bright. And now I will turn it over to Isaac for the financials and guidance.

Thanks, Eric. Turning to our third quarter 2021 financial results, total revenue for the third quarter of 2021 was $43.2 million, representing growth of 12% compared to $38.6 million in the third quarter of 2020. Diagnostic test revenue was $41.4 million in the third quarter of 2021, up 9% as compared to $37.9 million in the same period prior year. COVID testing revenue in Q3 was $4.2 million, down 21% year-over-year and down 8% sequentially from the second quarter of 2021. Excluding COVID-19, total revenue for the third quarter was up 17% year-on-year. Turning to volumes. We resulted in approximately 70,000 diagnostic tests during the third quarter of 2021, excluding COVID-19. That was up 36% compared to the same period in 2020. We recorded 166% volume growth in oncology, and this category now accounts for 6% of our total volume, excluding COVID-19. Women's health volumes grew 33% compared to the same period in 2020. Other revenue totaled $1.8 million in the third quarter of 2021, compared to $0.7 million in the third quarter of 2020. The increase was mainly attributable to growth in collaboration service activities related to new partnerships with pharma. Cost of services was $58.8 million in the third quarter of 2021, an increase of 61% when compared to $36.5 million in the same period, 2020. Adjusted cost of service, which excludes stock-based compensation expense was $55.1 million in the third quarter of 2021 compared to $33 million in the same period of 2020. Cost of services were impacted by the rapid scale-up of lab infrastructure to support continued growth in our testing volumes, and the launch of our latest Expanded Carrier Screening product. We are excited about the growth prospects of the business, and believe these upfront investments are critical to realizing that opportunity. Operating expenses for the third quarter of 2021 were $74 million, up 27% from $58.1 million in the same period prior year. Adjusted operating expenses, which exclude stock-based compensation and non-recurring transaction costs associated with our go-public process, for the third quarter of 2021 were $53.9 million, compared to $32.1 million in the same period of 2020. Overall, the increase in total operating expenses for the quarter were mainly attributable to higher personnel-related costs coupled with professional services related to the merger transaction. The components of GAAP operating expenses are as follows; Research and Development expenses for the quarter were $17.8 million, down 7% when compared to $19.1 million for the third quarter of 2020, driven by an overall increase in depreciation costs of $1.8 million for fixed labs fixed assets purchased, offset by a $3.4 million decrease in stock-based compensation costs. Sales and marketing expenses were $22.1 million, up 74% from $12.7 million from the same period in 2020, due primarily to a $5.7 million increase in personnel-related expenses from increased headcount. Since the start of Q3, we have increased our sales force and field organization by 32%, and we began to see a notable uptick in volume as a result of our year-to-date investments here at the end of the third quarter. General and administrative expenses were $32.8 million, an increase of 35% as compared to $24.3 million in the third quarter of 2020, driven by a $5.6 million related to increased headcount and $8.7 million for expenses related to the go-public transition. Moving down the P&L, we reported Q3 2021 net income of $31.4 million compared to a net loss of $56.6 million in Q3 2020. Net income was aided by $122.2 million of other income, attributable to the change in fair market value of warrant and earn-out contingent liabilities. Turning to the balance sheet. Total cash and cash equivalents was $461.3 million as of September 30th, 2021. In addition, we secured a $125 million revolver earlier in the fourth quarter that is currently undrawn, and now available to help support our growth strategy. Now let me spend a few minutes providing some context on the business environment we observed during the third quarter. First, the IVF market continues to expand, which we think bodes well for the long-term outlook of our business. Against this backdrop, we expect our recent investments in sales force expansion will translate to accelerating growth as we turn the page to 2022. In oncology, our strategy is primarily focused on driving uptake of our platform with our health system partners, as well as cross-selling into our women's health channel. We're making a number of investments to enable that strategy and expect adoption and reimbursement for our oncology portfolio to inflect in 2022. More specifically in hereditary cancer, we have identified and are pursuing key opportunities in revenue cycle management, improving contracting terms to expand coverage, and driving institutional relationships with our health system partners to accelerate growth into 2022. On the somatic side, we're moving ahead with plans to utilize MolDx, with a goal to leverage this favorable reimbursement pathway by the middle of 2022. In summary, we believe the key drivers of growth in our business remain intact, and are excited about the outlook as we enter 2022. In the meantime, there are a number of factors that are unique to the third quarter that muted our reported volume and margins. We wanted to address these items directly to provide clarity and explain why we are confident that the fourth quarter will represent a meaningful, positive inflection point for our financial performance. I would like to provide three points regarding the trend in the third quarter. First, we are still early in the days of reaping the benefits of our expanded sales force, and the COVID Delta wave made it challenging to capitalize on these investments. I'm happy to report that volumes have begun to ramp at the end of the third quarter and have continued to progress into the fourth quarter as evidenced again, on Slide 8 of the earnings presentation, where you can see our 4-week rolling average of the accession volumes accelerated late in the quarter, and that volume has continued quarter-to-date. These numbers translated into the highest monthly accession volume in September, only to be exceeded again in the month of October. Second, it's important to highlight that there is a long tail of testing products outside of our core diagnostic testing menu that account for a large percentage of our volumes but a very small percentage of our revenues. We provide these tests as part of our complete solution in women's health. During the quarter, the volumes of these non-core tests fell short of our expectations, and this resulted in a sequential headwind of 400 basis points to our reported volumes. Meanwhile, our core portfolio of tests, which includes next-generation Expanded Carrier Screening, NIPT, hereditary cancer, and somatic oncology was flat sequentially. Volume trend in the core business has improved markedly through the month of September and October. Third, as Eric mentioned earlier in the call, we launched Sema4 Elements in the third quarter. With the launch of Elements, we shifted our Expanded Carrier Screening v2 from smaller private pilot programs to becoming broadly commercially available. The transition from v1 to v2 took longer than expected, and we exited the quarter with a material backlog of work in progress that was not recognized as revenue in the third quarter. We estimate this dynamic reduced sequential volume growth, excluding COVID, by roughly 200 basis points. This product transition is behind us, and we are continuing to make significant investments in talent and infrastructure to improve our product launch capabilities in the future. Now turning to guidance, we estimate revenue for the full-year 2021 will be in the range of $201 million and $204 million. We expect fourth quarter results in volume, excluding COVID, will be in the range of 73,000 to 79,000 tests, which implies 20% to 30% growth versus the fourth quarter of 2020 and 9% growth at the midpoint, versus the third quarter of 2021. We anticipate fourth quarter non-GAAP operating expenses to be roughly in line with the third quarter of this year. As we think about the longer term, we continue to believe the underlying market growth rates in the key markets we serve are healthy, and will grow double-digits for the foreseeable future. We are encouraged by our continued success executing our market share gaining initiatives in Oncology, Women's Health, Rare Disease, and Pharma, that should help us drive organic growth well above the double-digit market growth rates in the markets we serve. Additionally, a robust pipeline of M&A opportunities and our current balance sheet provide us with the financial flexibility and growth opportunities to achieve our goal of $500 million of revenue in 2023. Now I will turn it back to our Founder and CEO, Eric Schadt.

Great, thanks, Isaac. We're making substantial progress as we work to build and leverage the digital universe of data to make precision medicine standard of care for health systems, as well as patients and providers. With our future investment plans, we are confident we are on the path to long-term sustainable revenue growth. I would now like to open the call to any questions, Operator.

Thank you. Our first question comes from the line of Brandon Couillard from Jefferies. You may begin.

Thanks. Good afternoon. Starting with Isaac. I have a couple of questions. Could you elaborate on the non-core tests that you performed which fell short of expectations in the third quarter and resulted in a negative 400 basis point impact on volume? I'm interested in understanding what those tests are and the overall size of that testing volume. Additionally, as we approach the fourth quarter, what is your outlook regarding COVID revenue? Should we anticipate a further decline in average selling prices for the core portfolio in the fourth quarter?

Thank you, Brandon. It's essential to consider the broader context; the franchise was primarily established to cater to IVF clinics, which are sophisticated users of various testing services. The non-core portfolio we provide consists mainly of non-NGS tests, such as cytogenomics, which these physicians frequently use, but which are not central to our long-term strategy focused on genomics and data advancements. While we do offer these tests, they typically have high volume and low average selling price, resulting in lower margins. They are important for the customer but may be less strategic for us. I wouldn't pinpoint any specific categories that underperformed relative to expectations this quarter; it was a general trend across the entire portfolio for various reasons. However, we noticed an uptick in activity as we moved toward the end of the quarter and into Q4, indicating improvement across the portfolio. Our commercial team has excelled in focusing on the core portfolio, with these other areas benefiting as a result. Regarding COVID, we're projecting around $3 million in revenue for Q4, though the situation remains fluid. We take pride in serving our local communities and broader customer base in this area, but it isn't part of our long-term strategic focus.

Just a high-low, would you level set us on where we stand in terms of the reimbursement process, how discussions have progressed on that front, and where your expectation that perhaps we begin to see the ASP trend bottom out kind of by mid-next year that you alluded to in terms of some milestones on the oncology front?

Yes. That's exactly right, Brandon. So in general, on reimbursement, I'd say there are puts and takes there that together lead us to our expectation that 2022 will be far more stable reimbursement year than this year has been. We're most of the way through the contract conversations that we touched on last quarter, and that's something where we feel very good about the path to driving upside over the long term. You may recall that we still do not have proper reimbursement for our Oncology portfolio, and those tests are actually gross margin negative until that gets sorted. So there's a huge opportunity for the Oncology business to be a tailwind, both the ASP and gross margin, as we get that reimbursement put in place in 2022, which is why we called it out in the script. And in the meantime, I think if we just get reimbursement in line with the market rate on ECS, we'll be just fine. And that's exactly the path that we're on. So no change there, but it is not something that happens overnight. It will be a 2022 dynamic, and that's the core focus.

Got you. And then last one, maybe for Eric. You alluded to the other part of business kind of growing substantially next year. Just curious how that side of the business has developed relative to your expectations and perhaps what the current pipeline looks like in terms of the nature of conversations with new biopharma partners?

We have several exciting collaborations with the biopharmaceutical industry. Over the past year, we have focused on engaging pharma with our extensive patient data and more research-driven drug discovery partnerships. Many of the collaborations have been trial-based, particularly around real-world evidence studies and clinical trial matching. The success from these initiatives has created a strong pipeline for potential follow-up deals that are likely to be more significant. We are confident that in the coming year, we will establish deeper and more substantial relationships with pharmaceutical companies. Our strategy is akin to our partnerships with health systems, as we are aiming for more comprehensive engagements on the pharma side as well. We are particularly interested in pharma companies that can fully utilize the various aspects of our patient engagement, including data, models, and testing, to provide a well-rounded package throughout their drug discovery processes.

Our next question comes from the line of Max Masucci from Cowen. You may begin.

Hi, thanks for taking the questions. Starting on health systems, it has been 7 months since you launched the system-wide Genomics program with NorthShore. About 6 months since you broke ground with AdventHealth's Orlando network. It's great to see the updates around NorthShore. It would be great to hear how NorthShore progress versus expectations and whether you think some of these positive data points on Slide 7 of the presentation can be harnessed as a tool for new wins. And then just separately, if you could just touch on the state of the organization and team that are targeting those opportunities just given some of the recent changes. Thanks.

Thank you for the question. Regarding our Health System engagements, there's a lot happening in that space. We've seen quick traction, particularly with NorthShore, and through protocols we've launched with Avera and the genomic data reanalysis we are conducting with AdventHealth. The adoption of genomic testing solutions and comprehensive interpretations, along with the engagement from physicians integrating these with clinical data for better decision-making, has progressed very well. These solutions seem to fit naturally within health systems and are easier to implement on a large scale. For example, we initiated our genomic health screen program with NorthShore about 6 or 7 months ago at one site with around 10% of their primary care physicians, and this quickly expanded to over 90% across all hospitals in their system. However, the challenges primarily arise from the data side. These health systems have complex data and specialized systems focused on managing patient care but are not structured for the type of analysis and integration we aim to achieve. This means we have to move at a slower pace as we provide more support for their IT infrastructure and address their concerns about data sharing. We believe that our experience will allow us to scale genomic testing solutions across various health system types, whether in population health, obstetrics, or oncology. We're still learning how replicable and transferable these engagements will be across different systems; some components will be easily applicable, while others will require more tailored development. Also, our Health System team's role is growing significantly, as the level of support needed for successful implementation and coordination of these solutions is substantial—not only for us but also for the health systems themselves. They are making a significant investment in their IT infrastructure and clinical care coordination.

Yeah. Makes sense. And just curious how does the final LCD for MRD monitoring published last week inform how you think about your entry into this testing application, whether it be organically or through an acquisition, and also just balancing your test performance and capabilities with time-to-market.

Yes. So great question, and we think a lot about that. Again, the whole aim for burning into these health systems is again, providing holistic genomic testing platform, and the data sophistication integration to deliver the most differentiated insights, truly personalized precision medicine. What I would say is there are definitely gaps that we have on the genomic platform. MRD would be one of them. And of course, we've been clear that M&A is a key part of our strategy to fill those gaps. And we have a very healthy pipeline of explorations going that span many of the gaps, we think that if we could provide services like MRD in conjunction with our state-of-the-art whole exome, whole transcriptome test, the heritable cancer testing, the drug safety test, and so on will make for a very competitive, holistic precision oncology solution.

And Matt I will just add that as we look at M&A and deploying capital, we're very cognizant that we have to strike a balance between serving the growth strategy and filling up the portfolio and creating value for shareholders. And so as you probably know, asset prices are what they are in this space, they're high. And so we're really trying to be smart about finding deals that we think serve our purpose of enabling data in genomics while also creating value. And so if you think about what we're likely to do first versus what we're likely to do over time, I think it's really important that we walk before we run on the M&A front. So I think absolutely we believe that MRD, there's a lot of exciting stuff happening there. We're very aware of some of the favorable things happening on the regulatory front. And we'll aim to be participants in a way that makes sense, but that's sort of the framework that we want to make sure we articulate to you.

And if I can maybe make one more point. It's the M&A is one aspect to fill that gap, but strategic partnership is also another way, and we've been pretty clear that we don't have to be able to spin up every single possible test to put into play for a holistic solution. We're happy to partner on that and be the ones who are wiring together that solution for the health system to really deliver that more integrated, holistic kind of care.

Great, thanks for taking the questions.

And our next question comes from the line of Mark Massaro from BTIG. You may begin.

Thank you for taking my questions. My first question is about the Sema4 Elements. You're launching a molecular ancestry genome-wide risk assessment, which I'm not very familiar with compared to carrier screening panels and other women's health companies. Could you elaborate on the potential impact this might have on adoption, especially in terms of competition with other providers? Do you see this as a valuable addition that certain clinicians are requesting, or is it primarily intended to enhance your overall offering? I'm trying to gain a clearer understanding of how this feature differentiates your services and its clinical relevance.

Yes. First, I would say that our current Expanded Carrier Screening test, which covers over 500 diseases and conditions, is one of the most comprehensive carrier screening tests available. This matters in terms of actionability for patients making reproductive health decisions. With our current test, about 5% of individuals tested, primarily in the IVF setting, are identified as carrier couples. In comparison, tests based on ACOG guidelines identify less than 1%. Therefore, we offer a product that significantly enhances decision-making for reproductive partners. The molecular ancestry component we discussed involves using genome-wide genomic information to improve risk calculations for our Expanded Carrier Screening products. For instance, in the case of cystic fibrosis, even if someone tests negative for known harmful mutations, there remains a residual risk of passing on the disease due to genetic background. This residual risk is influenced by the population group from which the DNA originates. Currently, most assessments rely on self-reported ancestry, which can be quite complex, especially in the U.S. Knowing one's ancestry does not guarantee insight into which population group a cystic fibrosis gene comes from. As a result, current reports on residual risks based on self-reported ancestry are often inaccurate, which is why guidelines recommend not reporting these risks without proper information. We are the first to integrate comprehensive genome-wide data to provide a more accurate standard of care. We anticipate that as we leverage this information across various diseases and conditions, not just in Expanded Carrier Screening but also in heritable cancer and polygenic risk scoring for conditions like cardiovascular disease, depression, anxiety, and drug safety, we will achieve better outcomes for patients. We believe this systematic integration will be very appealing across the board.

Got it.

Sorry; I talked for so long.

No worries, no sweat. Recognizing you guys are still pretty early as you think about the next 5, 10 years as a Company and how you can address unmet needs in Precision Oncology, there has been a rise in the medical imaging, big data, AI-type companies that are raising money and perhaps planning IPOs in the future. I guess, Eric, what are your thoughts as to whether or not you think medical imaging can be complementary to similar diagnostic portfolio that you're looking to build out?

We appreciate the question. We approach data in a broad manner. Although we generate a significant amount of genomic data due to our advanced technology, we also consider various types of data, including clinical records, imaging, proteomic, and metabolomic data. All these are crucial elements in our research. Imaging data, in particular, plays a vital role in cancer treatment. Some of our collaborations with pharmaceutical companies involve imaging data, where we extract features from that data and integrate them with clinical medical records to improve patient diagnosis, especially for lung cancer. We have a paper forthcoming on this topic. We see the integration of imaging data with genomic and clinical data as essential for making more accurate predictions, and we are dedicated to further developing this aspect.

That's great. Last question from me. Obviously, Sema4 was born out of Mount Sinai, which is now a strategic partner. I guess, what does Mount Sinai's collaboration have that maybe you haven't yet implemented at NorthShore, Advent, and Avera, such that you think that you can increase the standard of care at maybe the other three health systems?

I would say it goes back to my earlier comment about the differences between the easier and more challenging health systems we are encountering today, such as North Shore. The engagement with data, including the scale of that data, the distinction between structured and unstructured data, the integration with pathology nodes, and the imaging data you mentioned, is significant. We are much more advanced with the Mount Sinai Health System, allowing us to provide a broader range of capabilities from auto-immune to cardiovascular, OB-GYN, and oncology back to the system. What we are learning is that it takes a bit longer than we initially expected to work with these systems. However, we believe that everything will come together and foster even more enthusiasm as we help them master that information in a more integrated manner. We think the key is in mastering the data, where we are further along than others, but we expect to achieve the same level of mastery in the other systems as well.

Thank you. And I'm not showing any further questions in the queue at this moment. I like to turn the call back over to Eric Schadt for any closing remarks.

Alright. Well, thanks.

Thank you.

Yeah, thanks everybody for your interest in Sema4 and a great round of questions. We're pleased to be able to have presented to you today our update on our third quarter progress. We're super excited for what the future holds and look forward to keeping everyone up to date along the way. Thank you.

Thank you. This will conclude our program for today. Thank you for participating. You may now disconnect.