Q4 2023 GeneDx Holdings Corp Earnings Call
Participants
Katherine Stueland; Chief Executive Officer, Director; GeneDx Holdings Corp
Kevin Feeley; Chief Financial Officer; GeneDx Holdings Corp
Brandon Couillard; Analyst; Jefferies LLC
Matt Sykes; Analyst; Goldman Sachs
Daniel Brennan; Analyst; TD Cowen
Mark Massaro; Analyst; BTIG, LLC
Presentation
Operator
Thank you for standing by, and welcome to the GeneDx Fourth Quarter 2023 earnings conference. (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.
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 statements. 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 2023 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 XL and genome to improving our average reimbursement rate and three dramatically reducing our cash burn.
The combination of these three organizational goals ultimately ensured 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 offer 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 or 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 refine our commercial tactics and tools with account profitability in mind, and we're seeing good progress. Our strategy continues to include efforts to drive excellent 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 are also keeping our operations team focused on the biggest levers for our P&L, reports out billing operations and COGS reduction among other efforts and ensure we maintain our turnaround time our product and tech team is working on our strategy to further scale our of our operations, improve our customer service experience, open up access with 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 a long way along the way, there's a growing data opportunity and 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 this specific variant for clinical trial purposes, we're expecting that business to continue to grow at some at a similar pace. We think there's great promise and the role that diagnostics can play in 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 researcher that the Children's Hospital of Philadelphia gave him an experimental gene therapy from our partner, AcuDose and Eli Lilly company. Italy 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 Taylor said the agency will need to get creative about regulatory pathways given as you know, many of rare disease and gene therapies that the FDA has anticipated.
Rare disease treatments are reliant upon rare disease diagnoses, and that's what we do best at gene Dx. 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 and 2023 as we continue to focus the teams on driving our film and GM utilization and improving our reimbursement rates. 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 commentary with a growing proportion of our test mix.
Shifting to X now we will continue to unlock greater gross margin, effectively converting more of the market and better volume. And with the continued decrease in cash burn, we will end the year with strong operating leverage to put us on the precipice 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 excellence.
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 Exxon 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 Xome 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 Exxon portfolio continues to operate north of 60% gross margin, which means that total gross margin will continue to benefit as Xome picks up greater share of our overall test volume and replaces lower margin product 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 Semafo 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 semi for 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 initiatives. 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 coupled high-margin growth with our cost reduction initiatives.
Cash, cash equivalents, marketable securities and restricted cash was $131.1 million as of December 31, 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 is 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 for 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 GTX 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
Asset banks. Kevin, I'd like to acknowledge that on February 29, 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 create 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 GTx 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.
Question and Answer Session
Operator
(Operator Instructions)
Brandon Couillard, Jefferies.
Brandon Couillard
Thanks. Good afternoon, Katherine, the exome volume mix shift of turning played out in the fourth quarter. Do you think that 27% of volume is a good baseline off of which to think about for '24, how do you expect that to evolve as you move through the year and where you think that could be exiting 2024?
Katherine Stueland
Yes. So I'll kick it off and let Kevin comment as well. We do think that's a good baseline. And 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 sales force performance on that. And so we're building off of that momentum moving forward and really continuing to drive and continued conversion.
Again, it's part of the reason why we're focusing our efforts with pediatric neurologists in that segment and a customer perspective is just primed to be able to convert faster. So and we feel confident we'll continue to expand that throughout the course of the year.
Kevin Feeley
I'm going to talk to sorry, I know I've got everything. I've nothing to add to that so far.
Brandon Couillard
Okay. Kevin, you talked about realigning the sales force in the fourth quarter to target more profitable accounts where you just unpack how you go about that or how you have Intel in terms of profitability by account? And should we expect any other salesforce tweaking the expect to add headcount capacity in 2024. Our outlook for the commercial organization?
Katherine Stueland
Yes. So what we did was we took a look at where there's 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 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 it was super clear that there were some territories that they're not going to be productive or profitable in the near term and therefore not worthy of a dedicated sales reps.
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'd have a rep who's able to extend and able to ensure that we're maximizing that, that and 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. And 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 is really from a whole segment of revenue today, but it's really healthy revenue for us.
And then it's institutional type so we're not having the noise that you see on the from commercial payers, and that's mainly with rapid whole genome sequencing. So we've got a small and targeted team to really drive enterprise sales in the inpatient setting.
And so I don't expect that we're going to have any major sales force expansion this year, but where we can be opportune to NASDAQ as we start to see additional progress with the team we may add in that enterprise team on that loan, we'll see it's a longer sales cycle.
Brandon Couillard
As a last one for Kevin, to can you unpack the 400 basis point gross margin benefit in the fourth quarter, what that was attributable to it and how much of the cash burn? I think you said $75 million to $85 million for the year. What can be incorporated in that for legacy restructuring, some up or outlays on Avio?
Kevin Feeley
Yes. So the fourth quarter and 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. And 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, in December of 2024, we will have a scheduled payment, the next scheduled payment on the 2022 settlements between Semafo and one of its payers. And so that that number is burdened by that next scheduled payment and then anywhere from $2 million to $5 million of other payments to put the entirety of legacy Semafo or to bed.
If you look at the Q4 cash burn, excluding and the settlement payment that we made in December of '24 and severance and some old payables I said before, Q4 was $23.9 million. I think that's more representative of what's our run rate today. And we have ever every confidence that as the business grows and in particular with the high margin Xome business will continue to expand gross profit and we continue to drive down operating expense. And so you should expect us to see a reduction in cash burn sort of mid each sequential quarter in 2024.
Brandon Couillard
Thank you.
Operator
Matt Sykes, Goldman Sachs.
Matt Sykes
Hey, guys, this is Sean on for Matt, just with the key competitor in rare disease, do you anticipate being able to capture some of that market share? And if so, what's your strategy to trying to capture some of those?
Katherine Stueland
Yes, it's a fantastic question. And we absolutely feel confident in our ability to be able to step in and and provide our services to them to that market. I think in particular, a lot of the focus that we saw and with some of the rare disease testing was exactly in the market that we're aiming to drive greater utilization of Exosome and which is the pediatric neurology setting.
And and so we're grateful for the efforts of others who have really gotten pediatric neurologists to start ordering genetic testing. Historically, they hadn't. So we now have customers who and understand how to order testing know which patient should utilize it. And we have a growing body of evidence, including data that we presented at the American Epilepsy Society last fall that shows that Exosome is going to drive and a higher diagnostic yield than panels.
So these are customers who we have been converting already we have a proven ability to convert them from panels to exomes, and we'll continue to drive, I think, our market and brand to those clinicians and be able to convert the business throughout the course of the year. All of that really would be upside in terms of our outlook for 2024.
Matt Sykes
Got it. Thank you. That's helpful. And then what is the current split between overseas sales you have and how large COGS and how long will it take to start realizing cost savings given the?
Kevin Feeley
Yes, that the axes represent the new machine. The X represents about 20% of our fleet, and it will take us through the end of the year based on our scheduled deliveries to replace and the entirety of that fleet. We've got two machines live with the second only going live in November. And so there's not yet a full quarter effect on the benefit to COGS for that second machine, we're seeing good experience.
And I'd say, more importantly, the larger flow cell that has come out, we launched subsequent to the end of the year. And so in February that went live and so and really won't start to make an impact on COGS until the second quarter, at least from a full quarter perspective. So we've got two machines live and intend to replace the remaining or the fleet over the next year or so.
And the benefits I'd say, more importantly, will start to be seen once we are producing at scale with all of those machines. And with that larger flow cell in place, which again and just went live for us in February here, so still to come.
Matt Sykes
Got it. And then just a last quick question on what's the process of retiring a panel? Could you just state that how long does that take?
Katherine Stueland
Certainly, I mean, first, you know, what we've done is establish a set of criteria for determining whether or not and we should be keeping we should be keeping a panel and it starts with what's best for patients. And then there's a number of factors that we take a look at and to really assess whether or not the gross margins are there? Is it the type of panel where it's actually primed for conversion to Exosome, and we should just be driving on Exosome first versus clinicians who may be on to ordering via a panel.
And so we as we establish that rubric, we identified about 350 tests that we determined we could retire. We did retire them earlier this month, and that'll be a process that we continue to utilize as we drive more and more utilization of exome and genome and it represented that on, I would say a small portion of them have utilization. So it really was on maintenance for us to be able to keep those up and running.
And once we've made that determination, it usually takes several months just to be able to put the product and tech teams and in place to ensure that we're communicating with customers ensure that we have a good strategy for ensuring that there isn't a discontinuation of care and that we can kind of have a warm transfer to whatever that new test is if it's a new panel or if it's an exome or genome, that's something we intend to continue to drive and feel like we're developing kind of a strength and with that being a muscle organizationally.
Operator
Daniel Brennan, Cowen.
Daniel Brennan
Great. Thanks, thanks for the questions. Congrats on the quarter. Um, maybe first one would be, I think, maybe brand and I think gas on the first question, Bob, you exited the year in the fourth quarter being 27% mix, as you kind of commented on Exxon's genome. So I believe you said that is a reasonable point for all of '24. I'm just wondering why that wouldn't continue to move higher?
Katherine Stueland
We'll continue. It's a good starting point, Dan, and thank you for for the clarifying question. We think it's a good starting point we intend to continue to increase that mix percentage throughout the course of the year.
Kevin Feeley
Yes. Yes, Dan, to be clear, we think it's the right exit point, but absolutely with each sequential quarter, we should expect to pick up some mix there towards exome and genome. But each passing quarter throughout the year.
Daniel Brennan
Like a level, I mean, we can play with the math, is there a level, but it should exit the year at 30, 35? Or is it up to us to kind of back into that?
Kevin Feeley
Yes, I think the way we've always viewed it is in order to reach profitability. We've said that that rate needs to get closer to 40% of all tests being exome and genome. And then we're anticipating that point of breakeven early 2025. And so I think something in the mid 30s by the end of this year to exit the fourth quarter is likely the right landing spot, and we'll evolve towards that. It's passing quarter of 2024 for.
Daniel Brennan
Great. Thanks for that. That's helpful. And then on I think the guide right is for greater than 50% plus gross margin. So the 4Q underlying was 52%. Is there a reason if mix is going up? Is there a reason why the fourth quarter 52% shouldn't be like the floor for '24 or was there something else going on with the mix shifts that could drag gross margins down?
Kevin Feeley
No, look at it overall the comparison is 45% for full year 2023. I think we just want to see a little bit more data come through before we rely on Q4. Historically, Q4 seasonally has been our strongest, both in terms of revenue reimbursement and therefore gross margin. And so we want to see a little more data come through and before we call Q4 and an ongoing trend.
Certainly, we're optimistic that there's more room to improve average reimbursement rates and further conviction that we can continue to drive down COGS and with each percentage point we pick up in overall test mix. It should benefit because the Exxon portfolio continues to operate at sort of mid 60% gross margin. And but we just want to see a little bit more data come through before we call Q4, the new normal, if you will. And but extremely confident we'll end the balance of the full year at 50% or higher.
Daniel Brennan
And then maybe the final one, just biomarker bills, like is there just how could those impact you on to the extent these 15 states kind of you begin to see payment rates and there's another, I think five sits behind it. Just is it are you getting paid pretty universally? And just any color on the level of tests today in those 15 states, to the extent you were to see commercial coverage go up to 100%, what kind of impact could that have? Thank you.
Kevin Feeley
Yes, there's no doubt point that any improvement in underlying policy coverage is a net positive for us to the extent payers or state systems and pickup exome and genome coverage. Right. But that should be a net positive to us. We expect it to be a net positive to us. At the same time, we want to make sure we're not getting ahead of ourselves as a long way between enacting a biomarker bill or putting in place a positive coverage decision and getting paid.
And so we want to make sure we have the operational experience and more so can see it translate into actual cash collections before we start to rely on improved reimbursement. But and recent momentum with respect to policy and in particular, these biomarker bills, it's great thing for patients, we believe ultimately and should be great for our business. And our expectations are built into the guide, and we'll learn more for the year once there's more clarity on how some of these will be enacted in practice by.
Daniel Brennan
Terrific. Thank you.
Operator
Mark Massaro, BTIG.
Mark Massaro
Well, this is Kevin on for Mike. Thanks for taking the question and talk about in some detail and what you're expecting for 2024 in terms of Exxon conversion? And aside from that, it sounds like you might be expecting a somewhat back half-weighted year. And I think you've also highlighted picking up that competitor business has upside and maybe just walk us through any other puts and takes to discuss for 2024. Thanks.
Kevin Feeley
Yes, I'll start. I'd say video at the low end of the guide represents about 13% year-over-year growth. That's consistent with what we just delivered. And we want to acknowledge that exomes to genomes are still relatively new technologies for some physicians and we're expanding markets that takes time. And we've learned some lessons from 2023 and we don't want to get over our skis with respect to the expectation on the rate of change to exomes beyond what we can clearly see in our data.
And I'll just remind you that offsetting excellent growth is roughly 30% or $60 million of full year revenue today comes from non exome tests. And so as these non Exxon tests, which, as you know, were relatively low gross margin core to our strategy, they will be running off in some fashion. And so we expect to see some declines in volumes and revenue from non exome tests offsetting volume growth. And so tried to ensure that we acknowledge that in the guide that we provided.
Katherine Stueland
Yes, just to add a little bit of color. I think our original guide from '23 was heavily back half of the year weighted. And what we are anticipating this year is kind of the steady growth we really want modeling in a similar to what we saw in terms of actuals and '23 on, as Kevin said earlier, I think seasonally our strongest quarters are usually Q2 and Q4 on that. And I would say continued steady growth throughout the course of the year.
Mark Massaro
Perfect. Thanks so much. And then just a quick follow-up and kind of maybe dig into the EMR integration a little bit. Just how you're thinking about potential upside from that opportunity it also sounds like you guys have consolidated the menu a little bit. So how should we be thinking?
Katherine Stueland
Yes. So it's starting with the EMR on, you know, I wouldn't say it's something that we do routinely and we will continue to focus on that and to open up access. So I can put that in as kind of table stakes in terms of how we how we operate, how we make it easier to work with us on how we continue to smooth out the customer experience. So that is something that we'll continue to invest in because it honestly pays for itself.
And in terms of test retirement, we're really pleased, as I mentioned earlier, that we were able to retire those on 350 or so tests. And we feel like we have a healthy test menu and a very focused sales team and operations team that's going to continue to drive the conversion to exome and genome.
And as we keep making progress with that, we'll continue to have a healthy approach to this and reviewing that test menu to retiring tests over time on we want to make sure that we can continue on on this the steady growth rate, we feel like we're in a position of strength in terms of the overall commercial strategy and how that links up to our operations team.
And there's a really beautiful handoff that we're seeing between those two teams. It keeps everyone really focused on on near-term execution. So we feel like we're in a great place in terms of getting volume in the door, getting reports out and on continuing to get good volume and continue to focus on that account profitability and on drivers former and toward profitability in 2025.
Mark Massaro
Martin, thank you for your question.
Operator
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Katherine Xu and for any further remarks.
Katherine Stueland
And thank you so much, Jonathan, and thank you to everyone for joining us. We're excited about 2024 and will be at upcoming conferences and the coming weeks and look forward to seeing you all then. Thanks so much.
Operator
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
