GeneDx Holdings Corp. (NASDAQ:WGS) Q3 2023 Earnings Call Transcript
GeneDx Holdings Corp. (NASDAQ:WGS) Q3 2023 Earnings Call Transcript November 4, 2023
Operator: Good day, and thank you for standing by. Welcome to the GeneDx Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Sabrina Dunbar at GeneDx. 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 third quarter ended September 30, 2023. 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, October 30, 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 third quarter 2023 earnings release and slides available at ir.genedx.com for definitions and reconciliations of non-GAAP measures 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. We have a lot of news to cover on our call today, so I’m going to jump right in. Our third quarter results were strong with $53 million in revenue, gross margins of nearly 50% and a 52% year-over-year reduction in cash burn. We also saw the highest mix of exomes as a percentage of total volume coming in at nearly 30% in September. Our industry-leading exome and genome dove almost 2/3 of our revenue this quarter, and we continue to grow the market and offer clinical insights to more and more patients. And at the same time, we are materially reducing our cost structure in effective and scalable ways. The fundamentals of our business have never been stronger. We have organized our entire team around three major efforts: one, increasing exome and genome volumes; two, reducing claim denial rates to increase revenue per test and three, driving down our cash burn.
Our exome focused strategy is taking hold. Our goal is to transform the market from single gene tests, multi-gene panels and microarrays to exomes and genome. And with exome representing 63% of our revenue in September, we’re well on our way. This quarter, we saw a 12% increase in the number of clinicians ordering exomes in the outpatient setting with the fastest-growing clinician count coming from neurology, representing 18% quarter-over-quarter growth. Pediatric neurologists continue to make up the largest portion of our new ordering clinicians. The building markets takes time. This year, we had our sights on an aggressive growth trajectory in the second half of the year centered around a faster conversion of single and multi-gene tests to our exome business.
With $50 million in core revenue in Q3, we expect continued growth in Q4 and full year revenue now in the range of $187 million to $192 million. We have just moved through the final stages of setting down the former Sema4 business. That took longer than we anticipated, but is officially complete. Excluding those final shutdown costs and onetime severance costs. Our cash burn in Q3 from continuing operations was approximately $25 million. That is today’s steady-state burn rate from which we plan to improve moving forward. Today, we announced that we’ve effectuated a cost reduction plan of approximately $40 million from the Q3 base, which includes vendor spend as well as a reduction in force. We are prioritizing efforts that support exome and genome growth and increases in paid claims.
We’ll continue to invest in this -- in the teams responsible for these efforts as we’re seeing that they are making tangible progress, thanks to the addition of some key leaders across commercial, operations, finance and product and technology. Some of the efforts that have been deprioritized include R&D and other longer-term strategies that we’ll earn our right to invest in once we get closer to profitability. Today, we also announced that we have entered into a debt facility of $75 million with Perceptive Advisors, and we’re grateful to them for believing in our team and the strength of our business in the near and long term. This fortifies our balance sheet and with the reduction of burn that we have just effectuated, provides balance sheet flexibility in 2025.
Balancing our investment in growth while removing cash burn from the business is no easy task. But with the plan we’ve assembled, I’m confident we are making the right choices to ensure we grow our leadership position in the most cost-effective way possible. I know we’re not alone in navigating these waters. Other companies are facing similar challenges, but I’m proud of how our team has come together in close partnership with our Board on a clear-eyed view of the market we’re living in, a meticulously focused strategy that prioritizes growth of our exome and genome offering and course correcting as we move forward. You have our commitment that we’ll continue to do so in order to drive shareholder value. I want to extend an immense thank you to our teammates and leaders past and present, who have invested their time and passion to get us to where we are today.
And I thank you to the incredible team who continued to stay committed in our mission despite the winding path we’ve been navigating. No path to profitability is easy nor straightforward, particularly when introducing a new technology to improve health care. But with the generous support and patience of our shareholders, we’re all grateful for the opportunity to make a meaningful impact on patients and are committed to delivering value for those shareholders that continue to interest us to realize that vision. Kevin?
Kevin Feeley: So I’ll repeat what Katherine said, it was a strong quarter. Total revenues were $53.3 million for the third quarter of 2023. Revenues from continuing operations were $50.4 million compared to $47.2 million in the third quarter of 2022 and $45.2 million in the second quarter of 2023. Excluding a onetime appeal benefit in the third quarter of 2022, revenues increased 14% for this third quarter. Whole exome and genome volume this quarter was over 13,000 tests, which represents a 71% increase year-over-year, an 11% increase compared to the second quarter of this year. We generated $34 million this quarter from exome and genome testing, a 42% increase year-over-year and 18% compared to the second quarter of this year.
Adjusting for the same onetime appeal benefit in the third quarter of 2022, revenue specific to exome and genome increased 61% year-over-year. In the third quarter of 2023, adjusted gross margin from continuing operations was 48%, up from 37% in the second quarter. The margin expansion is coming from 3 places. The first is Test Mix. To level set, our adjusted gross margin for exome remains over 60%. Exome and genome represented 23% of all tests in the third quarter with a high of 28% in the month of September. Total gross margins will continue to benefit as exome picks up more share of our overall test production volume, replacing lower margin and, in some cases, negative margin products. The second is on cost per test. We now have 2 lower cost per test Illumina X Plus machines live, and we will aim to replace the remainder of our APS legacy NovaSeq fleet at the right time over the next several quarters.
We also have recently received our first PacBio Revio machine. Beyond our long-read sequencing collaboration, the team here is excited about the potential use of this technology to lower cost by replacing older orthogonal confirmation platforms. Additionally, we’ve now completed the consolidation of disparate library preparation platforms to a lower-cost solution offered by [Tuas] Biosciences. And while we are pleased with where exome costs are today, a number of initiatives are already underway or plans to further improve the cost base. Automation and AI across review analysis, report writing and certain genetic accounting steps offer real near- and long-term cost reduction opportunities. The third was from average reimbursement rates. The fully loaded average reimbursement rate on the exome and genome portfolio was over $2,500 in the third quarter, slightly up from over $2,400 last quarter.
The Exome portfolio operates at over 60% gross margin today despite a high denote that we know has opportunity to be improved upon. As Katherine mentioned, new leaders have been brought into the company to lead billing, market access, sales, product and technology and finance-related teams to bring enhanced experience and new perspectives specific to these efforts. The majority of our denials, we continue to believe are addressable. Let’s now move down to operating expense. Total adjusted operating expense was $49.4 million for the third quarter of 2023, down from $91.8 million in the third quarter of 2022 and $60.1 million in the second quarter of 2023. That’s a reduction of 46% year-over-year and 18% from last quarter. We’ve once again delivered reduced costs as we further separate from the legacy Sema4 business and search for efficiency.
For awareness, this quarter includes a $1.8 million onetime benefit. This baseline will further reduce over the next couple of quarters with the cost rationalization plan affected earlier today. On the bottom line, total company adjusted net loss for the third quarter of 2023 narrowed to $21.1 million compared to an adjusted net loss of $69.8 million in the third quarter of 2022 and $38.6 million in the second quarter of this year, improvements of 70% and 45%, respectively. Our third quarter cash burn of $42 million included nearly $17 million in final Sema4 payables and onetime costs and otherwise would have been approximately $25 million for the quarter. Our total cash, cash equivalents, marketable securities and restricted cash were $115 million as of September 30, 2023.
And today, we announce that we have entered into a new 5-year senior secured credit facility with Perceptive Advisors. This agreement provides for up to $75 million in capacity, consisting of an initial tranche of $50 million, which was drawn on October 27, 2023, and an optional second tranche of $25 million, which is committed through December 2024, subject to certain criteria. Interest is payable at a rate of SOFR plus 7.5%. And under the terms of the agreement, Perceptive will be issued warrants to purchase 800,000 Class A shares of the company’s stock at closing with an exercise price equal to the 10-day VWAP. That price is $3.17 a share. Upon barring of the subsequent tranche, Perceptive would be issued warrants to purchase an additional 400,000 Class A shares.
Personally, I want to thank the Perceptive team for the hard work involved in the transaction. We are excited to have yet another strong thought partner in the mix. In giving rise to the net proceeds of the initial tranche, our pro forma cash on hand at September 30, 2023, is $163.7 million. Now turning to guidance. We expect to end 2023 with full year revenue from continuing operations in a range between $187 million to $192 million. We’re narrowing the expected cash burn guidance for the second half of 2023 to a range between $75 million to $79 million, inclusive of servicing obligations of the exited business activities. As a reminder, in December 2023, the next scheduled installment payment of $5 million will be made with respect to the legacy Sema4 payer settlement.
And as we have expressed, the outlook to turn profitable in 2025 remains unchanged. So while we’re not providing specific long-term guidance beyond 2023 at this point, I did want to speak to how we view that path to profitability by the end of 2025. There are 3 primary drives. The first is rationalizing the operating expense base. Our current adjusted operating expense is roughly $50 million a quarter or a run rate of $200 million annually. We’re taking out an additional $40 million in specifically identified costs to get down towards $160 million over the next several quarters. We firmly believe these cost reductions will not impact our ability to drive exome growth. The second is by expanding gross margin. We just reported Q3 adjusted gross margin of 48%.
Remember, our blended exome gross margins are greater than 60% today. So as exome test continue to make up more of our revenue, our total margin moves towards that 60-plus percent. We also believe exome margins can expand beyond their current level given COGS reductions and reimbursement work. The third is revenue growth. We just reported Q3 revenue of $50.4 million for continuing operations or a $202 million run rate. Our future revenue growth is all exome and genome and exome just grew 62% year-over-year this past quarter. If one were to assume even a much lower exome growth rate in the zone of 20% over the next 2 years, that generates a very reasonable breakeven level given the cost structure I just mentioned. That said, we certainly aim to achieve stronger exome revenue growth than that.
So with the cost saving initiatives announced today, margins continuing to trend towards our current exome margin and revenue growth tracking to even moderate levels, we see a clear path to breakeven by the end of 2025. And finally, in terms of cash, our cash burn for continuing operations was approximately $25 million this quarter. And on a go-forward basis, you should expect adjusted net loss and cash used to more closely conform to each other, except for the payer settlement severance and fairly minimal CapEx. I’d also point you to the liability section of our balance sheet, which will show huge structural improvement as we’ve now put substantially all Legacy Sema4 operating payables behind us. We, therefore, anticipate the new debt financing proceeds will primarily serve as balance sheet protection as we shift towards sustainable profit.
I’ll now turn the call back to Katherine for any closing remarks.
Katherine Stueland: Our commitment to turning to profitability in 2025 is our unquestionable focus. As we’ve commented today, that is possible with growth, efficiency and cash management and our planned support to these 3 drivers. In managing the business to this goal, we are well positioned to lead the market to diagnosing all inheritable diseases with our exome and genome backbone and ultimately realize our vision of using genomic and clinical data to inform disease diagnosis, treatment selection and to accelerate drug discovery and development. For now, by focusing our business on exome and genome we will drive value creation for our shareholders while continuing to serve more and more patients. Now we’ll turn it back to the operator for Q&A.
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