Conference Transcript - WGS 2026-09-08

Speaker 2

So we are kicking off the Life Science Tools and Diagnostics portion of the Wells Fargo Healthcare Conference. I just want to thank everyone for joining us. We have Kevin Feely here from GeneDx. And so we'll get started. So I'd love for you to just tell us a little bit about GeneDx and the problems that you guys are trying to solve within rare disease.

Speaker 1

Yeah, great, and thanks for having us, Evan. Yeah, GNDX has been operating for 26 years now. Main operating lab down in Gaithersburg spun out of the NIH two scientists who wanted to focus on rare disease diagnosis, and that's what GNDX does best. We are in the mission of ending what we call the diagnostic odyssey, which is the fact that far too many families face a prolonged period, not finding an answer for what oftentimes can be devastating symptoms as disease progresses through the course of a child's lifetime. We have the technology today in whole exome and whole genome sequencing to diagnose rare disease, frankly, close to at birth. The average age of diagnosis, when I started with the company more than a decade ago, was 15 years old. We've gotten that now down, cut nearly in half. But we have the ability to diagnose children far earlier in age. One in every 10 Americans walking around with an undiagnosed rare disease. It's a large, unmet medical need out there. and we're focused on bringing our industry-leading technologies to those patients every day.

Speaker 2

That's great. Thank you for that background of the company. So I guess, you know, moving to, you know, you reported 2Q a couple weeks ago. Results were slightly above expectations. You returned to profitability, I think, a quarter earlier than you expected. Can you just give us a recap of the quarter and just the various moving parts?

Speaker 1

Yeah, if you look at the second quarter, it boils down to unbelievable demand for our services. If you look at what we've embarked on, 20 years of serving the expert geneticist community across the globe, it was just 2023 that we moved beyond those experts and into the first of what over time will be additional call points, that being pediatric neurology. It's just been since 2014, sorry, since 2024 that we began commercial efforts in the neonatal intensive care unit. Later this year, really approaching primary care for the first time in terms of general pediatricians. And the second quarter saw a continuation of what has been multiple years of high growth. Demand has never been stronger for our services as we continually bring more and more answers to families. So that culminated in 32% volume growth in the second quarter. And if you look at what we've outlined in terms of the second half of the year, the primary focus will be to continue to grow volumes at that level, but at the same time turning our attention to really optimizing the revenue cycle to get paid more often for our services as we begin to expand the scope of clinician types. As I said, in the second half of this year, moving to the primary care setting in general pediatrician. And that's underpinned by that strong level of demand we saw in the second quarter.

Speaker 2

Great. So I want to stick with the volume part that you're talking about. And so, like you said, 32 percent growth for volumes, broad based, it sounds like. And again, for the full year, 30 percent. So kind of similar levels. I mean, how much headroom do you think remains in kind of your foundational channels? And at kind of like what point if you kind of, you know, to sustain this kind of growth, does it start to depend more on these newer call points that you referenced?

Speaker 1

Yeah, I mean, what was most exciting, the second quarter driven primarily by those markets we have most experience with. So geneticists, PNURO and the NICU driving most of that 32 percent growth. And that was on the heels and an acceleration of the 30% year-over-year growth we saw in Fiscal 25. The innermost core of those channels, geneticists, we're serving 8 out of 10 expert geneticists in the U.S., but even they still have large untapped patient populations. As you think about what will be multiple years ahead of putting down multi-gene panels and single-gene tests and replacing them with exome and genome. Still about only 30% penetrated in the patient size across the geneticist community. You compare that to pediatric neurologists, about one in every three pediatric neurologists now are ordering from GeneDx, and that's after only three years of entering into that call point. But still, in terms of patient penetration, in mid-teens, in terms of patient penetration within Pneuro. And then the NICU, a massive untapped opportunity. There's about 800 level three and level four NICUs in the U.S. About a third of all those are active ordering accounts for GeneDx. We think over time there ought to be 225,000 tests that come out of the neonatal intensive care unit in the United States. That's underpinned by a study called Seek First we put out in partnership with Seattle Children's and University of Washington that called for the fact that roughly 60% of babies in the NICU could have a meaningful change in care with intervention with a rapid genome. The reality today is only about mid-single digits of all babies in the NICU are getting a genetic test, let alone a rapid genome. And so significant headroom in even those most experienced channels we're operating in. With geneticists, it's about continuing the conversion cycle from multi-gene panels and into exome and genome. Within pediatric neurology, it's about reaching the second two-thirds of DOC activation. And then in the NICU, it's really boosting up that utilization rate over time. And so the 32% growth in the second quarter really driven by those three channels alone, and that's before seeing brand-new growth curves start. in new markets the largest of which is general pediatricians on the back of new aap guidelines that came out in 2025 that called for either exome plus cma or whole genome as a first line diagnostic for children with global intellectual developmental delay that's 600 000 kids annually In February, we launched into a new product offering a prenatal genome that's servicing the prenatal market, really with a focus on maternal fetal medicine. About 4% of pregnancies in the U.S. show up with some form of abnormal ultrasound that make them an ideal candidate for a prenatal genome. And so, again, that is a brand new market to us just this year. I think those are just two examples of significant growth curves ahead on top of what is untapped potential, even in our most experienced markets.

Speaker 2

Great. So we talked earlier about, you know, really in the second half, strong focus on getting paid for the services that you are providing. So really, you know, since the last quarter, I feel like most of the questions we fielded were kind of around the, I think, 32% of your insurance-based outpatient volumes were, sorry, 32% of your genome volumes were insurance-based outpatient, which was down from 40% in one queue. And I think just kind of running through the math, people thought that your ASP would actually move up sequentially based on that. So can you help us sort that out?

Speaker 1

Yeah, and it's the right area to ask questions because one of the single largest opportunities we have here at GeneDx is to improve them. The reality today is in the outpatient setting, we're collecting on one out of every three cases for exome and genome. And we ought to be able to do much better than that. So as you mentioned, in terms of overall mixed dynamic, we did see outpatient genome mix decline from 40 percent down to 32 percent. That is not an indication of overall demand, but more so some measures we're taking as a leader in the space to properly moderate and manage through some mixed dynamic. IT REALLY WAS IMPACTED BY THE INTRODUCTION OF A NEW PRODUCT OFFERING WE LAUNCHED MID FEBRUARY, THAT BEING AN EXOME TO GENOME REFLEX. SO ACTIVE ENGAGEMENT ACROSS THE GENETICIST COMMUNITY IN PARTICULAR TO SPEAK TO THEM ABOUT THIS REFLEX OFFERING. IT GIVES THE PHYSICIAN AN IMMEDIATE ANSWER OR NEAR IMMEDIATE ANSWER, THE QUICKEST ANSWER POSSIBLE IN TERMS OF OUR LEADING EXOME. And then, if relevant, a fast follow with an additional report with the genome content. And then what you saw from the 40% in the first quarter of genome outpatient mix down to 32% was direct impact of uptake by that Reflex product, which is being really well received out in the marketplace. overall we'd expect mixed levels to maintain around these levels potentially genome in a range of about 30% for the second half of the year but again that that's not that's not a reflection of overall demand but more so we think the reflex product being accepted as an appropriate bridge to allow more time for us to reduce the cost curve on genome over time. I think if you look at where that product fits most neatly today, it's within the expert geneticist space. In those additional call points that I mentioned earlier in Pedneuro, Exome is still the predominant product today. It's serving those physicians really well. Exome finding the answer for nearly all conditions they're searching for. And, again, in the general pediatrician space, AAP guidelines call for exome plus CMA, and that will be our focus for that call point moving forward.

Speaker 2

And then so how should – so as GenomeMix settles in at about 30%, how should we think about ASPs, I guess, evolving from, you know, flat sequentially? And I think the expectation is that they're kind of flat again in 3Q. How should we expect that to kind of evolve going forward then?

Speaker 1

I think, look, beginning in the fourth quarter and in 2027, we expect meaningful improvements in that collection rate. that 32% collected, stands in contrast to 88% of commercial payers now have some level of policy coverage for genome. If you look, even in the second quarter, we submitted claims 68% of the time to payers with policy coverage for genome. The gap there, effectively, the gap of denied claims. And if we look across the reasons those claims are being denied, over two-thirds of all denials or what I would call procedural or administrative. So call that things other than disputes around medical necessity. There has been a sea change in policy coverage supporting genome and supporting exome over the past several years. And we've not kept pace with the revenue cycle processes necessary to be able to operate at the size and scale. GeneX has been through several years of hyper growth now and we've long passed the point at which we can rely on legacy manual processes in order to submit claims. You look at the payer universe there's about a thousand different payer plan combinations all having very different rule sets and we have to get better as an organization using technology and using AI and ML to get payer specific workflows. We're hard at work, that's the number one priority of the company right now, is to implement those payer-specific rule sets so that we can avoid the two-thirds of denials that are for superficial reasons and we think are wholly addressable and something we can avoid in the future.

Speaker 2

Gotcha. No, that's helpful. I mean, maybe you can, I mean, you've touched on this a decent amount already, but in terms In terms of the two-thirds that seem very addressable by you and just changing some of your, the workflows. Can you just maybe talk about some of the things that you're doing to improve documentation, billing, appeals, some of the internal processes that you're doing?

Speaker 1

Yeah, so maybe I'll start on the front end and then move to the back. And on the front end, we're about 18 months into our own journey to implement Epic Aura. We've got a number of hospital systems now with a bi-directional interface through EPIC Aura that certainly gives us a better advantage at collecting clinical documentation upfront. I think the number one thing we can do is ensure that at the time we're submitting claims that we're capturing the right clinical notes to adhere to payer specific policies around medical necessity. The only way to do that in today's world is in a bit of a seamless way is to scrape those medical records electronically so that we're not pushing that burden onto the physician. And so we've got a number of initiatives underway. Epic aura is one example, but some improvements in our own physician portal to be able to scrape those records electronically to take that burden off of the physician's plate, but to ensure that we're getting all the THE REQUISITE INFORMATION UP FRONT AND TIMELY. PAYER PRIOR AUTHORIZATION PROCEDURES CONTINUALLY PRESENT THEMSELVES. 99% OF PAYERS STILL REQUIRE PRIOR AUTHORIZATION FOR THESE TESTS. AND SO ENSURING THAT SOMETIMES WE GO SLOW TO MOVE FAST TO HOLD TESTS PROPERLY FOR PRIOR AUTHORIZATION TO MAKE SURE WE'RE CHECKING EVERY BOX APPLICABLE ON A PUNCH LIST REQUIRED BY PAYERS IS AN EXAMPLE. some payers give you more time than others and so ensuring that there's an automated queuing of that is an example. And then on the back end in terms of fighting to overturn denials, escalating through and up through things like physician peer review processes are just examples of some of the tactics that we're designing as we speak in order to combat that that denial rate over time.

Speaker 2

Great. I guess, you know, on a related point, on the last call you talked about your 35 percent collection rate that you think should be closer to 70 percent, I believe you said. So really, you know, double where you are today. But you also have this shift that's dynamic where you're going from exome to genome. And so, like, given these kind of two curves that are intersecting, like, how should we think about kind of a longer-term ASP as, you know, in the future?

Speaker 1

I'd maybe flip that on you to say, if we look at today's collection rate for genome at 32%, and exome is right around there. Look, every five percentage point increase at today's volume, all else equal, is equal to about $50 million of revenue. And, yeah, we think a viable target would be to get today's collection rate up towards 70%. We've done extensive benchmarking against other specialty diagnostic products. We think there's a proven playbook in order to combat the denial rate and improve collections over time. IT MIGHT TAKE A COUPLE OF YEARS TO GET THERE, BUT ALONG THE WAY WOULD EXPECT TO UNLOCK SIGNIFICANT IMPROVEMENTS IN THE COLLECTION RATE ON A ROLLING BASIS. WITHOUT PUTTING A NUMBER, WE THINK THE AVERAGE REIMBURSEMENT RATE AND MORE IMPORTANTLY TODAY'S COLLECTION RATE HAVE SIGNIFICANT ROOM TO IMPROVE OVER TIME. WE WERE AT A POINT WHERE THAT AVERAGE REIMBURSEMENT RATE WAS ABOUT $4,000 A TEST AND THERE'S NO reason to think that we can't get well past that over time with some of these structural process improvements that we know we have to make.

Speaker 2

Great. You referenced the AAP guideline update from I think about a year ago. How has this changed conversation with health systems and clinicians and what is its typical the lag between guideline adoption, order and protocols, and reimbursed volume?

Speaker 1

When those guidelines came out the summer of 2025, we thought it was important to condition the market that we typically see a good 18 to 24 months from guidelines to when we see volumes materially inflect. That will put us to the fourth quarter of this year, and I think we remain on track for that. We've spent the better part of the last year engaging with the pediatrician community, attending their conferences, extensive market research surveys to really understand what it will take to get these primary care docs to move to this next generation of technology. Underpinning that has always been a thesis around customer experience. So how do we make these tests easy to order? How do we make them easy to understand? And how do we make the pediatrician a hero in the story to the family? So more than a diagnosis, how do we arm them with educational materials, support materials in order to guide the family on what to do next? And so we've been releasing a number of customer experience features. WHAT WE CALL ONE MINUTE OR MORE SEAMLESS ORDERING PROCESS EARLIER THIS SUMMER, A MORE SIMPLIFIED REPORT LAUNCHED EARLIER THIS SUMMER, THAT BACK-END SUPPORT ON TRACK TO BE DELIVERED IN THE NEXT SEVERAL WEEKS, ULTIMATELY AIM TOWARDS ADHERING TO WHAT HAS ALWAYS BEEN OUR EXPECTATION, THAT 18 TO 24 MONTHS AFTER GUIDELINES WE CAN REALLY START TO MOVE THE NEEDLE IN TERMS OF VOLUME FLOW THAT STARTS IN THE FOURTH QUARTER OF THIS YEAR. and early signals are strong. We're seeing new account activations continually ramp up and we're seeing repeat orders from some of those first accounts in terms of unlocking greater volumes and remain absolutely convinced that the pediatrician market will be a large market for us to serve well into the future.

Speaker 2

Okay and I believe you've built out a whole sales team around this effort internally. Can you frame the economics that you kind of expect from this effort, productivity ramp, revenue per rep or maturity, and how ARR in general pediatrics maybe compares to the geneticist channel, given that payer mix is probably different there?

Speaker 1

Yeah, so we added about 50 new reps that may evolve up over time. If you think about the pediatrician community, there's 60,000 pediatricians in the U.S. We're certainly not targeting all of them out of the gate. There's 25,000 that have ordered a chromosomal microarray or some form of genetic test in the past. And when you further double click into that cohort, ordering dense physicians like developmental behavioral specialists would be the initial target over the next several quarters. In terms of sales rep productivity, look, over the past couple of years, we've been averaging about $4 million per rep in those more mature channels like geneticists. I think there's an acknowledgement as we move outside of dense orders like geneticists. Nearly every patient who sees a geneticist will get a genetic TEST ORDER TOWARDS A PRIMARY CARE DOC LIKE A PEDIATRICIAN, THAT SALES TEAM WILL BECOME LESS EFFICIENT, BUT WE THINK WE'RE PROPER TARGETING TO MAKE SURE THAT WE'RE FINDING THOSE ORDERING DENSE PHYSICIANS, THOSE AFFILIATED WITH LARGER SCALE HOSPITAL SYSTEMS, MULTIPLE PHYSICIANS WITHIN A PRACTICE, THOSE ARE OUR TARGETS OVER THE NEXT COUPLE OF YEARS AND WE THINK CAN BE A VERY EFFICIENT AND EFFECTIVE WAY TO GO ABOUT BUILDING THE MARKET OVER time.

Speaker 2

Maybe a bit of a longer term question on gross margins. I think you're at 70% right now with genome about a third of the volume. But genome cogs, I think, are about two times exome. So kind of as this mix evolves, you take this journey down to really have more genome as part of the mix, what does that math kind of look like in terms of a longer-term gross margin for you guys and how much of kind of the internal stuff you're doing with automation and lab utilization, et cetera, how much does that help you get to where you want to be?

Speaker 1

Yeah, gross margin improves with that improvement in the collection rate, but it also comes through What we see is a pretty clear roadmap to reduce cost per test, in particular on genome. Our processes have been optimized in the past for exome, but that gives us a lot of confidence that we have the ability to optimize for genome in the same way. If you look at the COGS profile between exome and genome, the reality is the reagent kit alone, the consumables for genome are considerably higher compared to exome. And so if you look at overall reagent consumable wet lab costs, I think over time, as utilization for these tests increases, we're able to show more demand for the genome that invariably will put some pressure on our manufacturing partners to play their part in reducing the consumable price towards parity with exome. To us, that is something that is high confidence will come over time. Pinpointing the exact timing of when that cost curve will come down becomes a little more difficult. But there's no doubt that it will come down over time. And there's the benefit of some increased competition in the sequencing market. I think more importantly, the proprietary analysis and interpretation platform we built is agnostic to the sequencer manufacturer. And we have a pretty exciting roadmap to use ML and AI to further reduce dry side costs on the back end after the sequencer. About a third of all costs reside in that dry side labor component. And those are fairly expensive resources at that. And it's an area certainly where technology will be our friend over time. And so you look at gross margin, it has room to expand through reduced cogs. It has room to expand through increased collection rates. Ultimately, if you look at the profile of GeneDx, this is a company that should grow at a really high rate through the second half of this decade and beyond. We've got a gross margin total company wise around 70 percent today and at or higher than that rate is where the company ought to reside for the foreseeable future.

Speaker 2

Okay. I think you mentioned one-minute ordering earlier and that being an important thing for unlocking the general pediatric market. Can you just talk about where you are in this rollout and how important it is for the ramp in the back half of the year?

Speaker 1

Yeah, so a number of features being released in our own physician portal, I'd say have been released over the past month or so. And so if you think about the three customer experience foundations, one is one-minute ordering, the simplified report, and the care pathways, one-minute ordering is out, and it's in the marketplace. There's a number of shots on goal in order to effectuate that. One is improvements we've made to our own portal, and the other is, as I mentioned earlier, continuing to activate more health systems onto Epic Aura. And along with that comes an experience to order the test in a fairly seamless, seamless way. And so one minute ordering, I think, a full check check mark next to that. The more simplified report looks at what used to be about a 20 page detailed report that geneticists love with respect to ancillary findings and variants of unknown significance. A primary care doc doesn't have time or an inclination to want to see such a thing. And so we did, about a month ago, launch a more simplified report where the physician can choose what type of experience they want to see in the reporting process. And then the last to come is the care pathways on the back end towards the second half of this year.

Speaker 2

Helpful. I guess jumping around a little bit, but in terms of we've talked a bunch about these expansion markets. outside of your traditional foundational markets. I think in Tukey you kind of talked about strong growth across all end markets. So can you talk a little bit about this? Where in these new markets are you finding the most traction? And are they more interested in exome or genome? And kind of any differences you're seeing within those markets?

Speaker 1

Yeah, for us, it's about finding the right fit product-wise for the right patient at the right time. In the prenatal space, we put out the prenatal genome in February. Uptake has met or exceeded expectations. We've got a small team there, about 10 individuals, really with a focus on maternal fetal medicine. And but signals are are really strong after just a few months on the marketplace to tell us that that market will be a large and important portion of the portfolio moving forward. As we touched upon general pediatricians, the real inflection point comes in the second half of this year into the fourth quarter and into 2027. But all conditions are now set for us to go after that market in a big way. What was most encouraging was the second quarter growth, that 32% really coming from geneticists, PNURO, and the NICU. I think showed that the foundation of those three markets alone still have significant room to run in terms of untapped potential.

Speaker 2

Great. I think earlier you mentioned competition. We've got a decent number of questions about that. You've seen people enter the market. I mean, what does the actual market look like today from a competitive standpoint? Where are you losing? And, you know, how does your reflex strategy hold up against a competitor that's using genome and pricing aggressively to buy share? And then I also would love for you, if you can, to touch on, I saw, I guess, ARPA-H.

Speaker 1

And now some funding for some, you know, exome genome projects.

Speaker 2

Wondering how that might, or what your thoughts on that are.

Speaker 1

Yeah, look, for us, at least mine works. We get shared. Competition comes down to the differentiators that the physicians and hospital systems look for. They look for diagnostic quality and yield. They look for turnaround times. They look for customer experience. All of that's underpinned by trust. And we've got two decades of serving this market. I've been now at the company for about 11 years. We've seen competitors come and go. Our market share has stayed relatively consistent during that time. We continually enjoy 8 out of 10 geneticists ordering their services from GDX. There's certainly some churn in there from time to time, but more times than not, when we see a clinician leave GDX, we see them boomerang back after trying the experience elsewhere. And the underpinning to that is the GDX Infinity data set. So more than a million exome than genome, almost 3 million genetic tests since inception, 8 million well-characterized phenotypic data points in the data set. Two-thirds of every case we've run since inception, parent-child trios. Over half of our data set since inception are non-Caucasian individuals where these tests have resided elsewhere in the world. It's an unmatched data set which our team has the ability to reference when physicians trust our firm over others with finding an answer more differentiated, more complete, and quicker than others. And so as competition enters the new market, we view it as our responsibility to set the bar, which they need to live up to. It starts with that data set that moves into turnaround times and the ability to operate at extreme scale. and the customer experience features we think are important as we move out of that realm of serving experts in the space and into more primary care settings we think we've got a customer experience through some of those features that we've launched that really sets GNDX apart beyond the clinical expertise but of course is underpinned by unmatched clinical expertise and so from a competitive landscape like I said we've seen waves of competition in the past I expect that to continue the rare disease market ultimately from a diagnostic perspective should catalyze more diagnosis equaling more drug discovery and development ultimately more therapeutics there's a large market out there that happens to be about 20 years behind oncology and we're just getting started.

Speaker 2

Great. Got about two minutes left. Maybe on the balance sheet, I think you took on, you expanded your facility, $50 million of debt on the facility. Blackstone invested, you have about $200 million of pro forma cash.

Speaker 1

I mean, you're profitable and you just, I think, took out 25 million dollars of costs um so why what what was the reasoning behind um expanding the death of the facility and what are your priorities for capital allocation yeah part of it was opportunistic uh blackstone life sciences uh is a relationship we entered into earlier this year they've proven to be um really great strategic partners thought partners um look we did burn more cash than we anticipated in the first half of this year you mentioned that the cost out cost reduction program we fully effectuated a plan to take about 25 million dollars in net costs out of the organization wanted to take funding off of the table and in terms of any sort of concern or overhang but we do expect to generate significant cash beginning beginning beginning in the fourth quarter this year but into 27 and and beyond um and took the opportunity to expand the debt facility with what we think is a really high quality partner that um has been valuable at helping us think about uh where to bring the company next great um 22 seconds left anything else you want to leave investors with that about gene dx yeah well thank you for coming and thank Thank you, Evan, for the participation. Look forward to updating you all on our next earnings call after Q3. Great. Thank you so much.