SomaLogic, Inc. (NASDAQ:SLGC) Q4 2022 Earnings Call Transcript

SomaLogic, Inc. (NASDAQ:SLGC) Q4 2022 Earnings Call Transcript March 29, 2023

Operator: Welcome to SomaLogic’s Fourth Quarter and Full Year 2022 Earnings Call. All participants are in a listen-only mode. We will take questions following prepared remarks. I will now turn the call over to Marissa Bych of Gilmartin Group for introductory disclosures.

Marissa Bych: Thank you. Today, SomaLogic released financial results for the quarter and year ended December 31, 2022. 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 forward-looking statements during this call 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. All forward-looking statements, including without limitation, those relating to our market opportunity, gross margin and future financial performance, protein content, and database growth, customer base, diagnostic pipeline, expectations for hiring and growth in our organization are based upon our current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the risks factor section of our Form-10 filed with the Securities and Exchange Commission today. This conference call contains time sensitive information and is accurate only as of a live broadcast today, March 28, 2023. SomaLogic 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.

I will now turn the call over to Troy Cox, Executive Chairman of SomaLogic’s Board of Directors.

Troy Cox: Thanks, Marissa. Good afternoon and thanks for joining us. As a long-time believer in the potential of proteomic, I had the opportunity to join the SomaLogic board in 2021 and was appointed Executive Chairman in October of last year. Before Adam and Shaun discussed our fourth quarter results and announced for 2023, I’d like to address the management and leadership transition we announced today. Roy Smythe has stepped down as CEO and Board Member effective today, March 28. Roy has been an important contributor to the company, advancing the technology and overseeing the process to becoming a public company, and we’d like to thank him for his efforts. Over the last six months, working at a more operational level, I’ve gained a better understanding of the company and the people.

Given my extensive background running commercial functions, it was clear that SomaLogic was at a stage that it needed seasoned leaders to accelerate market adoption. Adam Taich is an example of that kind of talent, having joined SomaLogic over a year ago with highly relevant and diverse experience across multiple senior roles at Thermo Fisher Scientific. In the third quarter of last year, we promoted Adam to Senior Vice President of Life Sciences with ownership of all commercial activities and operations functions, which is about half of SomaLogic’s employees. There was more work to do, but together with Adam and the rest of the management team and board, we made some really important decisions to focus the company and deliver results in a more efficient manner.

Adam will talk about this as well as how he has strengthened our commercial foundation and pipeline. Adam has earned the confidence of his peers and the board that he’s the right leader for SomaLogic as we make this important transition. To help fuel the company’s next chapter, we are bringing some really impressive talent to the SomaLogic Board of directors with the additions of industry veterans, Jason Ryan, Kathy Hibbs, Tom Carey, and Tycho Peterson. I’m very pleased that Jason Ryan will join the board as Chairman. I will remain on the board and support Jason’s transition. I personally had the opportunity to see Jason’s unmatched ability to move from strategy to tactical execution and connect all the dots in between when we work together at Foundation Medicine.

Since then, Jason has further demonstrated his proven track record in expanded and diverse roles. Kathy Hibbs will also join our board bringing towering strengths in many areas such as regulatory, legal, compliance, quality, privacy, technology and public company considerations, all coming from diverse experiences in the areas of SomaLogic’s focus. I’ve personally seen Kathy deliver impressive value from these strengths and much more over the last few years from our work together with SOPHiA GENETICS. When it comes to people related competencies, there’s no one better than Tom Carey. I’m thrilled that Tom will also join our board. Tom has strengthened leadership and teams across so many companies, while gaining a deep knowledge of the landscape, players, strategies and adjacencies that will serve SomaLogic well.

His expanded breadth via leadership and growth life science companies, including over eight years on the exact sciences board, will bring tremendous value. I don’t think it’s possible to be in our industry and not know Tycho Peterson, who will also join our board. I’m excited for the board and the company to benefit from his unprecedented experience from 23 years at JPMorgan as Managing Director and lead equity analyst covering medical devices, life science tools and diagnostics. This experience is being leveraged and enriched from serving as a CFO of another innovative life sciences growth company, adaptive biotechnology. So welcome, Tyco, Tom, Kathy, and Jason, our next chapter is fuelled by great leadership with some of industry’s top talent.

Before I turn it over to Adam, I want to reiterate what I said in the press release. We recognize that it is a dynamic time in the industry and a volatile one in the broader market. It puts SomaLogic in a unique position having an attractive and growing core market. Combined with our strong balance sheet, we are well positioned to pursue strategic options. As mentioned, we plan to work with our advisors and our newly strengthened board leadership to evaluate strategic and transformative opportunities and will provide updates as appropriate. Now, I’ll turn the call over to Adam to review 2022 key achievements and strategic priorities looking forward.

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Adam Taich: Great. Thank you Troy, and thank you all for joining us here on the call this afternoon. I’m absolutely thrilled to have the opportunity to lead this company into the next phase of growth and evolution. Having taken on broader commercial leadership responsibilities in the third quarter of last year, I’ve been encouraged by the early momentum an opportunity to expand our reach in the proteomics market. There is work to do, but the mandate is clear and I’m committed to it, driving sustainable growth, while importantly bringing improved operational discipline and cash management to this organization. I’m accountable for this mandate. Before I dive in, I’d first like to thank our committed teams across the globe. I took over broader leadership in the second half of last year and have watched the organization undergo significant changes in that time.

While challenging, the team has been impressive in their dedication and focus, but I’m confident that as we navigate through this leadership transition, it will continue to remain focused on consistent execution and improving every day to meet our customer’s needs and expand our commercial impact. Together with the Board, we are employing a deliberately simple business strategy, bringing an acute focus on delivering innovative solutions to our expanding global customer base of biopharma, academia and government institutions, while maintaining tight expense and cash discipline. Everything flows from this strategy and is built on the core business belief that if we build an efficient and profitable business that can accelerate an improved customer’s R&D productivity, we will as a company increase value for customers and importantly for you, our shareholders.

We need to recognize that while SomaLogic is a 25-year old leading innovation company, it is only a two year old commercially focused enterprise. It has been a journey to transition the company, but we are firmly on page now. In the coming quarters and years, that pace will accelerate with a target of getting back to 20% top line growth exiting this year. That is our commitment. To help do it, we need the right people and right processes. Success is all about the team, and we recently brought on a new Global Commercial Leader, Mike , to add significant industry depth and global experience to the commercial effort. We have a great product. We just need to do the basic blocking and tackling of commercial execution to make that product easier and better for customers to use.

Mike and his team are doing the necessary work and building the right processes and early indications are that it is having an impact, and of course, if you can’t measure it, you can’t manage it. Simple yet informative metrics are now in place and visible daily to monitor our forward progress. To achieve commercial growth in our core base proteomic solution, we must continue to make it easier to access our technology platform and we need to diversify the number of users on it. We have two strategies to do this. One is through the work we are doing with Illumina, which brings the flexibility and power of SomaScan to Illumina’s market-leading install base of instruments. There’s is the largest install base in the world, and there is already significant interest from customers to utilize our combined solution.

Once our SomaScan assay is available on NGS, it will change the way proteomic research is done at scale across the world. Second, we are going to accelerate the expansion of our authorized sites or Kits business and open up more SomaLogic authorized sites to allow institutions around the world to run the SomaScan assay in their own labs. This is the type of format solution that other vendors use, and we’ve been slow to catch up. We only formally launched this initiative late last year, but are now in full scale launch of our authorized sites program and see growth in it over the years ahead. As of today, we have eight authorized sites up and running and we are expecting that number to more than double exiting the year. Across all of our biopharma engagements, we must continue to operate as a thoughtful partner to our customers, ingraining ourselves into their clinical, translational and early discovery projects by helping them understand how to maximize the application of our technology.

In the long term, we expect our positioning with these key accounts to enable migration to larger, multi-year partnerships. We are also expanding our geographic reach to better serve the needs of the global scientific community. Our team is focused on establishing footholds in EMEA and Asia Pacific. In December of last year, Tokyo-based signed on as the first SomaLogic authorized site in Asia. Early in 2023, G42 Healthcare became the first announced site in the Middle East. Many more agreements are in the works with a substantial increase in our pipeline, since we first announced the program. It is critical to say that while growth is important, we must manage the business efficiently and with more disciplined cash management. As stewards of shareholder capital, I’m committed to diligence spending, tight investment prioritization and commercial initiatives that deliver results consistently.

I recognize that our balance sheet is one of our key assets, and I and the team will make sure to protect it. Sean will provide more details on our financial performance and historic spend with some cash burn expectations later in the call. There are more efficiencies to drive in this business and my day-one focus is to deliver them. The life science tools business model when run at scale and run well as one of the most lucrative in the industry. We will do everything operationally, organically and as Troy said, inorganically to get to that scale and profitability. Now, let me conclude with a couple of product development objectives for 2023 to look out for. The launch of our 10-K SomaScan product is on track to launch by the end of the year, which will extend our leadership in proteomics measurement capabilities.

We remain confident that our leadership and content allows our customers to discover even more biologically important proteins in a precise manner. Our work with Illumina to develop NGS proteomics products also remains on track, with expectations to fully commercialize in 2024. Based on the focused and disciplined approach I’ve just described, we are optimistic that we are repositioning the business for success. I look forward to providing updates on these strategic and product milestones over the coming year. I will now turn the call to Shaun Blakeman, CFO to review our financial performance and outlook.

Shaun Blakeman: Thanks, Adam. Turning to our financial results for the fourth quarter and full year, revenue for the three months ended December 31, 2022 was $18.8 million, an 18% decrease from $23 million in the same period of the prior year. Revenue for the full year of 2022 was $97.7 million, a 20% increase from $81.6 million in the prior year. Fourth quarter, 2022 revenue reflects early traction in our kit rollout, nearly tripling our kit business over Q4 2021, which to echo what Adam said, is a critical component of our strategy to return to above-market growth, but the current quarter also reflects the change in our New England biolabs royalties recognition with zero recognized this quarter versus $1.9 million in the fourth quarter of 2021.

Gross margin for the fourth quarter of 2022 was 31.1% compared to 54.5% in the fourth quarter of the prior year. Gross margin for the full year 2022 was 55.6% compared to 59% in the prior year. Full year margins were in line with expectations, and our fourth quarter growth margins were primarily in effect of Human Technopole or HTI volume, as signaled in previous earnings calls. Net of HTI, our core service margins remained approximately 50%. Total operating expenses for the fourth quarter of 2022 were $60.4 million, a 48% increase from $40.9 million in the fourth quarter in 2021. Operating expenses for the full year 2022 were $230.1 million, an 89% increase from $121.5 million in the priority year. R&D expenses for the fourth quarter of 2022 were $22.6 million compared to $11.2 million in the fourth quarter of 2021.

Full year, 2022 R&D expenses were $73.4 million compared to $43.5 million in the prior year. Sales, general and administrative expenses for the fourth quarter of 2022 were $37.8 million compared to $29.7 million in the fourth quarter of 2021. SG&A expenses for the full year 2022 were $156.6 million compared to $78 million in 2021. The year-over-year increase in our expenses was primarily associated with our commercial team expansion, public readiness and stock-based compensation charges associated with restructuring. Adjusted EBITDA for the fourth quarter of 2022 was a loss of $49.9 million compared to an adjusted EBITDA loss of $27.7 million in the fourth quarter of 2021. Full year 2022 adjusted EBITDA was a loss of $160.5 million compared to an adjusted EBITDA loss of $63.6 million in 2021.

Please see our press release on file with the SEC as of this afternoon for a reconciliation between GAAP net loss and non-GAAP adjusted EBITDA and we ended the year with $539.6 million of cash, cash equivalents and short term investments. Turning to our full year outlook, we project 2023 revenues to be within the range of $80 million to $84 million. Taken into effect the significant accounting impact of our new NEB agreement, this represents 12% to 17% growth on an apples-to-apples basis at the midpoint of our guidance. As we continue to ramp up our distributing kit business, our guidance is also driven by a return of substantial growth in our service business, as we are starting to see the benefits of our commercial expansion, with more sales reps in front of customers in an international presence.

Our Q4 2022 results are reflective of operations going into Q1. So we expect similar revenue. In terms of gross margins, we expect full year gross margins in the low 50% range, which is a result of our assumption for little or no NEB revenue this year. However, there will be a phasing as we have some carryover in ATI sample impact in Q1. We will drive Q1 margins in the low 40% range, with subsequent quarters improving to drive the full year number back over 50%. And as promised, we’ve made significant expense reductions for 2023 to reduce our cash burn. Excluding M&A related cash burn, our Q3 2022 burn rate was an organic high point at nearly $40 million, and our expense reductions are expected to drive that down by 50% to a yearend burn rate of approximately $20 million a quarter this year.

Keep in mind that in Q1, we will see the cash impact of our 2022 restructuring items, but from there, expect our cash burn to start significantly declining, to reflect our improved cost structure. Including these restructuring related items, we still anticipate 2023 cash burn to be less than $120 million. As Adam expressed, our primary objective in 2023 is to continue to focus on applying process and fiscal discipline to the commercial strategy to remove costs and preserve cash. We see opportunities that make meaningful improvements over what is projected above and look forward updating you in the coming quarter on our success. At this point, I would like to turn the call back to Adam.

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Q&A Session

Adam Taich: Great. Thank you, Shaun. Operator, we are now ready for Q&A.

Operator: Our first call will be coming — question will be coming from Dan Brennan of Cowen. Your line is open.

Dan Brennan: Great. Thank you. Thanks for taking the questions. Congrats on the new role, Adam and team, maybe, Adam, could you start off just it was listed as Interim CEO on the press release. It sounds like you are the full-time CEO. Just want to clarify that if you don’t mind. And then B, you laid out a lot of the things that you’ve already seen traction with in your current role, but I’m just wondering, like, as we look ahead, you talked about making products easier to use, better for customers to use them, building the right processes. Could you just maybe speak to, as we think about ’23 and ’24, how you would articulate what are the kind of key changes or initiatives that you’ll be deploying to drive more efficient growth?

Adam Taich: Sure. Thanks, Dan. Let me take the second part of the question first and then I’ll hand it over to Troy to speak to the interim title. In terms of the comments around making the products easier, it’s really the pivot that we’re making from what is almost entirely a services business today to a distributed solution. So really getting that kits or authorized sites business up and running. Another item to mention as it relates to that, sort of easier to use frankly, is the technical support and bioinformatics required around our solution and what we have here, it’s not any more complex than other innovative market leading solutions out there in the market. At the same time, I think we were underestimating the amount of lift required to get a customer up and running and confident on the platform.

And the last thing I would mention as we think about ease of use is really the incredible program we’ve got in place with our partner Illumina. And so in part ease of use is really just allowing and enabling our customers out there who have NGS systems in house who are considering buying one to be using an NGS format as the backend readout. Troy, do you want to touch on the first part of Dan’s question?

Troy Cox: Hey, Dan, it’s Troy. The board is confident in Adam. He’s the right leader to further strengthen our pipeline and our performance as well as manage expenses and preserve our cash. We felt interim as simple as this was appropriate in the context of simultaneously bringing on four seasoned strategic leaders as new board members.

Dan Brennan: Okay. So he — I’m sorry. So, he’s the full-time guy or you’re not — you’re not conducting a simultaneous search in addition to having Adam in the seat, or you are?

Troy Cox: Yeah, Adam’s in charge of the company, affected today as CEO. We’re — in the near term; we’re going to focus on onboarding our new board members and empowering Adam to execute on our strategy.

Dan Brennan: Terrific. Great. And then maybe a follow up; I know Troy, you mentioned this at the onset, unique position to leverage our balance sheet and new board leadership to pursue strategic and transformational options for maximum shareholder value. Can you just maybe speak to that a little bit? The balance sheet’s in great shape, the technology’s terrific. You guys should have a real pathway ahead to accelerate growth, hopefully, but what else are you guys considering with the balance sheet? Are you guys looking to do big deals? Are you looking to be acquired just maybe a little more color on what the plans are here for this balance sheet?

Troy Cox: Sure. The overall context is as you — as you’ve mentioned, we find ourselves in a unique and fortunate position to expand our footprint further in a really super attractive and growing market of proteomics and now with a strong team and board in place, and combine that with a healthy balance sheet, we have $539 million as the end of 2022. The board is committed to proactively pursuing strategic and transformational options that leverage that unique position and it’s all about, maximizing shareholder value. I think to get into more specifics, Dan is difficult, because I think this effort has diverse possible outcomes and will only be pursued if we meet that simple goal of maximizing shareholder value. So we’ll keep you updated at key milestones and as we reach conclusions.

Dan Brennan: And maybe if I can sneak one more and just on the kit business and then the base service business; can you just give us a little color on how you’re thinking about the rollout of the kits? Like what — why is the rollout so gated? Is there a lot of technical complexity for a customer to adopt the kits? Are these ready for prime time and is there a lot of interest rolling this out? So maybe a little color on the rollout itself, and then how would we think about the split implicit in your guidance for the year 80 to 84, between how much of that will be kit generated versus the service related? Thank you.

Troy Cox: Sure. Dan, let me just start with the second part of your question. So we’re not going to break out that difference between kits and service, but what I would say is we still expect the services business here in 2023 to be the primary driver of our growth and of our business for this year. In terms of some of those gating items that you mentioned, and I think the company mentioned it in the past, there were some supply chain challenges that sort of got in our way of getting the sites up and running. We’re past that. So we’re making incredible progress getting sites up and running. We’ve built out a field application support team that’s really required to be there on site for about the week that it takes to get a site installed, trained and up and running and the pipeline is tremendous in terms of the opportunities that we have.

Operator: Thank you. And our next question, one moment, our next question will be coming from Dan . Your line is open.

UnidentifiedAnalyst: Okay, that was close enough. Hi guys. Adam, welcome to welcome aboard. Wanted to ask a question about customer growth if I could, Adam, you guys have done a really nice job growing out the account base. I think on the slide it says 60% plus over the last year, but obviously the revenue growth is well below. So where do you see the disconnect there? Is it just that the new accounts are taking time to contribute more to or less, to your point on sort of underestimating the ramp up there? Or is it that they are contributing and it’s just being offset by some that are existing and that are trending downward? And then I guess within that, if you could just talk to how you feel about volume growth at some of your sort of anchor pharma accounts; that would be great.

Troy Cox: Sure. Dan. Yeah, I think you — as you rightly noted, we’ve done a fantastic job, the commercial team out there building up the account base. And, as you would expect in a business like this, the accounts that we onboard come in and they come in, typically with a small, maybe even a pilot study. So fairly small amount of revenue, they go through the cycle of analyzing and understanding, how to best use and utilize that information and their discoveries, and then ideally, we’re doing our jobs around customer retention, they come back. And so yes, a lot of the customers that we onboarded during the course of last year, do really start as small accounts. What we have demonstrated is a track record though, of bringing on customers and if you go back and look at customers for instance, that came on in the second half of 2021.

We’ve got a fairly good demonstrated track record of increasing from a sort of land and expand. When you think about getting into the account and then expanding our reach within that, whether that’s a different therapeutic area or whether that’s moving from discovery into translations and translational a pretty good track record of working through that. And so that’s really what the expectation is, and we’ve got the right metrics in place to be measuring that. As it relates to, some of the larger accounts, we still have a tremendous relationship with Novartis as an example. Continues to be an incredible partner for us, and we would expect that some of those larger orders you could be lumpy from time to time. But that’s why it’s so important that we diversify the customer base, which is really where we’ve been focusing our time and effort, Dan.