GeneDx Holdings Corp. (NASDAQ:WGS) Q4 2023 Earnings Call Transcript

GeneDx Holdings Corp. (NASDAQ:WGS) Q4 2023 Earnings Call Transcript February 20, 2024

GeneDx Holdings Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to the GeneDx Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s program is being recorded. And now I’d like to introduce your host for today’s program, Sabrina Dunbar, Chief of Staff. Please go ahead.

Sabrina Dunbar: Thank you, operator, and thank you to everyone for joining us today. On the call, we have Katherine Stueland, President and Chief Executive Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the fourth quarter ended December 31, 2023, and shared guidance for the full year 2024. Before we begin, please take note of our cautionary statement. We may make forward-looking statements on today’s call, including about our business plans, guidance and outlook. Forward-looking statements inherently involve risks and uncertainties and only reflect our view as of today, February 20, and we are under no obligation to update. When discussing our results, we refer to non-GAAP measures, which exclude certain items from reported results.

Please refer to our fourth quarter 2020 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measurements and additional information regarding our results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. And with that, I’ll turn the call over to Katherine.

Katherine Stueland : Thanks, Sabrina, and thank you all for joining us. 2023 was a pivotal year for us at GeneDx. We’re on a stronger path forward and closer to our goal of reaching profitability in 2025. Last year, we centered our entire team on three goals: one, increasing utilization of our industry-leading exome and genome; two, improving our average reimbursement rate; and three, dramatically reducing our cash burn. The combination of these three organizational goals ultimately ensures that our teams were focused on what’s clinically best for patients and what’s best for the financial health of the company. And that focus paid off. Our teams worked with deep commitment in the fourth quarter and delivered $58 million of revenue, driven by more than 68% year-over-year growth in exome and genome test revenue, expanded our adjusted gross margins to 56% and ended the year ahead of our expected cash position, demonstrating a 51% year-over-year reduction in burn.

We’re proud of our team’s performance, and we’re prepared to rinse and repeat that same level of commercial and operational execution. As we look to 2024 and based on what we’re seeing so far, you can continue to expect this level of focus on exome and genome revenue growth, gross margin expansion and disciplined cash management. The investments that we’re making, whether it’s in commercial, operations, medical affairs, our product and technology are directly tied to these goals. In the fourth quarter, we realigned our sales strategy to focus on account profitability. We have right-sized our sales territories and further refined our commercial tactics and tools with account profitability in mind, and we’re seeing good progress. Our strategy continues to include efforts that drive exome conversion with current customers, but we’re taking a more precise yet high impact approach with new customer acquisition, mainly targeting pediatric neurologists.

We continue to see better traction and faster growth ramps with these new ordering providers compared to lower productivity accounts, including general pediatrics. We’re also keeping our operations team focused on the biggest levers for our P&L. Reports out, billing operations and COGS reduction, among other efforts to ensure we maintain our turnaround time. Our product and tech team is working on our strategy to further scale our operations, improve our customer experience, open up access with the EMR integrations, automate our billing operations and drive greater efficiency in every aspect of the business. The total addressable market in pediatrics is large, and while we are the dominant provider of whole-exome sequencing today, we’ve only penetrated about 3% of the total addressable market of $3 billion in the US-only pediatric setting.

It’s a market that we’re developing in pediatric neurology where clinical evidence and health economics strongly support the transition to exome analysis. We will also expand further into the general pediatric setting over the coming years as guidelines and payer policy continue to evolve to become more ready for commercial expansion and execution. On the other side of that is an entire $10 billion market in the US only for adult conditions that we’ll be working to develop over the mid and long-term, and along the way, there’s a growing data opportunity in rare disease drug development. We’ve steadily added biopharma partners and have 20 active programs, mainly with biotech companies who are relying on us to find patients with a specific variant for clinical trial purposes.

We’re expecting that business to continue to grow at a similar pace. We think there’s great promise in the role that diagnostics can plan rare disease drug development. In fact, the New York Times recently highlighted a new gene therapy for children with hearing loss. They featured an 11-year-old boy who had no ability to hear until researchers at the Children’s Hospital of Philadelphia gave him an experimental gene therapy from our partner, Akouos and Eli Lilly Company. The boy was able to hear sound for the first time ever and now the company is expanding its research to several other centers. And just a few weeks ago, FDA Commissioner, Dr. Robert Califf said the agency will need to get creative about regulatory pathways, given the tsunami of rare disease and gene therapies that the FDA is anticipating.

Rare disease treatments are reliant upon rare disease diagnosis, and that’s what we do best at GeneDx. We believe this market is developing and are well-positioned to be the genetic testing partner of choice for these companies. Looking forward to 2024 guidance, we expect a similar growth trajectory as demonstrated quarter-over-quarter in 2023 as we continue to focus the teams on driving exome and genome utilization and improving our reimbursement rate. With that in mind, we expect to deliver between $220 million to $230 million in revenue this year, and Kevin will provide some additional commentary. With a growing proportion of our test mix shifting to exome, we will continue to unlock greater gross margins, effectively converting more of the market to better volumes, and with the continued decrease in cash burn, we will end the year with strong operating leverage to put us on the precedence of profitability heading into 2025.

And with that, I’ll hand the call over to Kevin.

Kevin Feeley: Thanks, Katherine. Fourth quarter 2023 revenues from continuing operations grew to $58.1 million compared to $45.9 million in 2022 and $50.4 million in the third quarter. That is an increase of 27% year-over-year and 15% sequentially, driven by exome. Our team resulted over 15,600 whole-exome and genome tests in the fourth quarter, which generated revenues of over $39 million this quarter from the exome portfolio. That’s an increase of 68% year-over-year and 15% sequentially. Adjusted gross margin from continuing operations was 56% in the fourth quarter of 2023, up from 41% a year ago and up from 48% in the third quarter. The margin expansion during the quarter is driven by favorable mix shift towards exome and continued cost per test leverage.

The fourth quarter did have certain non-recurring items, which positively impacted adjusted gross margin by approximately 400 basis points, so the underlying rate is 52% for the fourth quarter. On mix, exome and genome represented 27% of all tests resulted in the fourth quarter of 2023, up from 16% a year ago and up from 23% in the third quarter. The exome portfolio continues to operate north of 60% gross margin, which means the total gross margin will continue to benefit as exome picks up greater share of our overall test volume and replaces lower-margin products. On cost per test, the team is driving scalability and cost efficiency across both the wet and dry lab processes and while we are very pleased with where exome and genome costs are today, several initiatives are in our pipeline to further improve the cost base over time.

Automation and AI across clinical interpretation and analysis offer large untapped long-term opportunities ahead. Now, let’s move down to operating expense. Total adjusted operating expenses were $49.4 million for the fourth quarter of 2023. That is a reduction of 46% year-over-year. We once again delivered reduced costs as we further separate from the legacy Sema4 business. Our team has a relentless focus on improving operating leverage and efficiency throughout the business, and that will continue into 2024. And on the bottom-line, total company adjusted net loss for the fourth quarter of 2023 narrowed to $17.8 million, that is an improvement of 76% year-over-year and 16% sequentially from the third quarter. Our fourth quarter net cash burn, excluding any financing proceeds, was $32.9 million, which improved 51% year-over-year and improved 22% from the third quarter.

The net cash burn this quarter included $5 million in scheduled payments under the 2022 legacy Sema4 payer settlement, $3 million to discharge operating payables for the exited reproductive health business, and $1 million in severance payments related to the previously announced cost reduction initiative. Excluding these items, representative cash burn from continuing operations was $23.9 million in the fourth quarter and we expect the net cash burn to continue to decrease as we couple high-margin growth with our cost reduction initiatives. Cash, cash equivalents, marketable securities, and restricted cash was $131.1 million as of December 31st, 2023. And as a reminder, in October 2023, we announced that we entered into a five-year senior secured credit facility with Perceptive Advisors.

The agreement provides for up to $75 million in capacity, consisting of an initial tranche of $50 million, which was drawn in October 2023 and an optional second tranche of $25 million, which is available to us through December 2024, subject to certain criteria. And now turning to guidance for 2024. We expect to deliver revenues between $220 million and $230 million for the full year 2024. Historically, we see the first quarter as our seasonally weakest and the fourth quarter is our seasonally strongest in terms of both revenue and gross margin. We expect to continue to expand gross margin and land full year 2024 adjusted gross margins in excess of 50%. For comparison, full year 2023 was 45%. We anticipate using $75 million to $85 million of net cash for full year 2024.

We’ve now delivered seven consecutive quarters of cash burn reduction since the acquisition of GeneDx and expect to drive quarterly sequential declines in cash burn throughout 2024. And finally, we once again reiterate our expectation to turn profitable in 2025. With that, I’ll now turn it back to Katherine for any closing remarks.

Katherine Stueland: Awesome. Thanks, Kevin. I’d like to acknowledge that on February 29th, it is Rare Disease Day, and it serves as a reminder of why we do what we do. Our overarching goal is to create a vibrant company that drives a new standard of care using genomics, ensures financial success and profitability, and creates meaningful shareholder value. Our team is fully committed to that. I’d like to thank our employees for their deep dedication and passion to serve the providers and patients who put their trust in us. And I’d like to thank our shareholders who continue to support us as we transform GDX for growth, for scale, and for profitability, all in service of an ever-growing population of patients and partners who benefit from our work. And with that, I’ll turn the call over to the operator for Q&A.

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Q&A Session

Operator: Certainly. [Operator Instructions] Our first question comes from the line of Brandon Couillard from Jefferies. Your question please.

Brandon Couillard: Thanks, Good afternoon. Katherine the exome volume mix shift certainly played out in the fourth quarter. Do you think that 27% of volume is a good baseline off of which to think about for 2024? How do you expect that to evolve as you move through the year? And where do you think that could be exiting 2024?

Katherine Stueland: Yeah, so I’ll kick it off and let Kevin comment as well. We do think that’s a good baseline. I think looking back to where we were a year ago, we are really, really focused on continuing that exome conversion. And I think in the fourth quarter, we really started to see even stronger Salesforce performance on that. And so we’re building off of that momentum moving forward and really continuing to drive continued conversion. Again, it’s part of the reason why we’re focusing our efforts with pediatric neurologists. That segment, from a customer perspective, is just primed to be able to convert faster. So, we feel confident we’ll continue to expand that throughout the course of the year.

Brandon Couillard: Sorry, go ahead, Kevin.

Kevin Feeley: No, go ahead. I was saying I have nothing to add to that, so fire away.

Brandon Couillard: Okay. Kevin, you talked about realigning the Salesforce in the fourth quarter to target more profitable accounts. Can you just unpack how you go about that, how you have Intel in terms of profitability by account, and should we expect any other Salesforce tweaking? Do you expect to add headcount capacity in 2024 outlook for the commercial organization?

Katherine Stueland: Yes. What were your outlook for the commercial organization? Yeah, so what we did was we took a look at where there is volume, and we took a look at where there is favorable payer policy and where there’s unfavorable payer policy. So those were the main factors that we took a look at in terms of being able to really better define account profitability. And as we put that lens on it, it was super clear that there were just some territories that they’re not going to be productive or profitable in the near-term and therefore not worthy of a dedicated sales rep. So we actually scaled back some of the territories. Of course, where there may be an account that’s an outlier in some of these lower profitability segments, we have a rep who’s able to extend and be able to ensure that we’re maximizing that.

But we’re happy with where we landed in terms of $3.5 million of revenue per rep for 2023. That was an improvement over the prior year. And with the new territory cuts, we feel really confident that we’re going to be able to grow at that same rate that we saw last year with the team that we have. We also are really taking a look at the inpatient setting to ensure that we can continue to drive utilization. It’s a really small segment of revenue today, but it’s really healthy revenue for us and then it’s institutional like. So, we’re not having the noise that you see from commercial payers. And that’s mainly with rapid full genome sequencing. So we’ve got a small and targeted team to really drive enterprise sales in patient setting. So I don’t expect that we’re going to have any major sales force expansion this year.

but where we can be opportunistic as we start to see additional progress with the team, we may add in that enterprise team that we’ll see. It’s a longer sales cycle.

Brandon Couillard: That’s helpful. Last one for Kevin. Could you unpack the 400 basis point gross margin benefit in the fourth quarter, what that was attributable to? And then, how much of the cash burn, I think you said $75 million to $85 million for the year. What’s incorporated in that for legacy restructuring, some of outlays, what have you?

Kevin Feeley: Yes. So the fourth quarter, the benefits included the reversal of certain bonus and other incentive accruals that we had built up throughout the year and determined would not be payable. Some of those ran through COGS. And we received some favorable reimbursement on our stop-loss insurance. Frankly, earlier in the year, we had some very high extraordinary claims that went through expense related to COGS, and we saw some relief in the fourth quarter that came through. So when you adjust out those benefits, I think it’s fair to say the operating run rate was about 52% in the fourth quarter, which, frankly, we’re very pleased with. And then on the full year guide for cash burn, as a reminder, December of 2024, we will have a scheduled payment the next scheduled payment on the 2022 settlements between Sema4 and one of its payers.

So that number is burned by that next scheduled payment and then anywhere from $2 million to $5 million of other payments to put the entirety of legacy Sema4 to bed. If you look at the Q4 cash burn, excluding the settlement payment that we made in December of ’24 and severance and some old payables as Sema4, Q4 was $23.9 million. I think that’s more representative of what’s our run rate today. And we have every confidence that as the business grows and in particular, with high-margin exome business. We’ll continue to expand gross profit. And we continue to drive down operating expense. So you should expect us to see a reduction in cash burn sort of with each sequential quarter in 2024.

Brandon Couillard: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Matt Sykes from Goldman Sachs. Your question, please.