Sema4 Holdings Corp.
Q3 2022 Earnings Call Transcript

Published: 14 Nov 2022

[Operator:]

Welcome to the Sema4 Third Quarter 2022 Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. . I will now turn the call over to Joel Kaufman. Sir, you may begin.

[Joel Kaufman:]

Thank you, Cheryl, and good morning, everyone. Thank you for participating in today's conference call. Participating for the company today will be Katherine Stueland, Chief Executive Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, Sema4 released financial results for the third quarter ended September 30th, 2022. A copy of the press release and our third-quarter earnings slide deck are available on the company's website. Before we begin, I'd like to remind you that management will make forward-looking statements 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. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. Additionally, these forward-looking statements, particularly our 2022 financial guidance, our expectations for revenue growth, gross margin and profitability over the next several years and our expected cost savings and reduction in cash burn involve a number of risks, uncertainties and assumptions. For a list and descriptions of the risks and uncertainties associated with Sema4's business, please refer to the Risk Factors section of our latest Form 10-Q filed with the Securities and Exchange Commission. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures to GAAP financial measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 14th, 2022. Sema4 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. And with that, I'll turn the call over to Katherine.

[Katherine Stueland:]

Thanks, Joel. Since joining Sema4 in May, my top priority has been to drive long-term, sustainable, profitable growth and to preserve cash. This has been the case for 2 reasons

[Kevin Feeley:]

Thank you, Katherine. This morning, I will start by reviewing our third quarter results, both for the total company and for the GeneDx portfolio specifically and then turn to guidance for the remainder of the year. I will also provide some color on our improved financial profile going forward. We have a strong team in place ready to maximize value for patients, customers, employees, and shareholders. I'm excited to highlight for you today what is real strength embedded in our results. During the third quarter of 2022, consolidated Sema4 revenue was $83.2 million compared to $43.2 million in the third quarter of 2021. The increased year-over-year results from the inclusion of GeneDx, which contributed $46 million to the top line, partially offset by declines in Sema4 somatic oncology, reproductive health and COVID revenues. Importantly, GeneDx quarterly revenue growth was approximately 50% year-over-year. As a reminder, we completed the GenX acquisition on April 29th, 2022. We resulted roughly 128,000 tests this quarter, representing a 19% year-over-year increase on a pro forma basis versus the third quarter of 2021, excluding COVID. We saw strong growth in our pediatric and rare disease testing business, that's namely GeneDx, generating over 20% volume growth in the third quarter. Turning to gross margin. I will be referring to our non-GAAP results. Adjusted gross margin in the third quarter was 20%, up from negative 15% in the third quarter of 2021. The substantial turnaround reflected in gross margin results from the inclusion of GeneDx, which delivered over 40% gross margin in this third quarter of 2022, led by our flagship exome and whole genome sequencing solutions. Across all business lines, we had solid execution on various other operational improvements stemming from the transformation and cost-reduction initiatives I referred to on our second-quarter earnings call. As Katherine shared, we are discontinuing reproductive health testing before the end of the year. Combined with restructuring announcements earlier this year, we have dramatically reduced the total cost to operate the Sema4 business and are on track to reduce cash burn 50% in 2023. Today's action alone reduces annual cost by approximately $65 million. Combined with all actions previously announced this year, we are on track to surpass previous cost reduction targets of $50 million this year and approximately $200 million of cumulative cost savings through 2023. It is both a hard and exciting day here. I want to acknowledge and thank our departing colleagues for their service to Sema4 and to GeneDx. We carry forward their unwavering commitment to patient care and quality service. With a strong and passionate team now in place, we are focused on operating with discipline in order to maximize value creation going forward. As of September 30th, we had cash and cash equivalents of $191.3 million with a cash runway into 2024. Now turning to guidance. We are maintaining the previously issued full year and second half 2022 reported revenue guidance of $245 million to $255 million and $154 million to $164 million, respectively. We are also maintaining the previously issued full-year and second-half 2022 adjusted gross margin guidance of 4% to 9% and 15% to 20%, respectively. Finally, I would like to spend a few moments on the newly restructured business. Annualized revenue combining the GeneDx and Data Insight business based on Q3 results is approximately $185 million, with adjusted gross margin of 43%. With the changes we've affected this year, including those announced today, we are now confident that we can achieve annual revenue growth in excess of 20% gross margin in excess of 40% with a long-term target of plus 50%. And a very meaningful reduction in cash burn. The takeaway from the announcement today is a newly structured business that has significantly improved financial profile and leverages our most differentiated assets to expand our leadership position in pediatric and rare disease testing, data and health insights. With that, I will turn the call over to the operator for Q&A. Cheryl?

[Operator:]

. Our first question comes from Mark Massaro from BTIG.

[Mark Massaro:]

Can you hear me?

[Katherine Stueland:]

Yes, we can.

[Mark Massaro:]

Okay. So yes, certainly, a little bit of a surprise. But on the other hand, I understand the focus on lowering cash burn. Before I get into other questions, I guess, can you just confirm that you did a thorough analysis and market check that there were no material interested buyers of your women's health business? And then related to that, my understanding is that ACOG is planning to review coverage of expanded carrier screening, which theoretically could have increased your margins and/or pricing. So maybe can you just expand on those topics as well as where you stood with commercial payers with respect to carrier screening?

[Katherine Stueland:]

Yes, you got it. And those are all the right questions. So one, with regard to the market dynamics, what we continue to see are declining ASPs. So that is a reality. And the costs associated with moving our operations down to Gaithersburg in order to really realize some of the lab operations efficiencies and pull that through to COGS. Given where we are, it's just from an overall strategic and cash perspective was not the right call. And I think one of the key things that we've been really focused on for the long term for Sema4 and GeneDx is where are the market opportunities where we have a truly differentiated offering in markets that are not really highly commoditized. And so when it becomes a decision of, are you going to continue to build a product where you already have an incredible opportunity with a $30 billion market opportunity ahead versus trying to bring up to scale a part of the business where there is a high degree of competition and it becomes a bit of a sales force expenditure in terms of how dominating that market. I think the other aspect, though, if you just zoom out a little bit, our view has been the entire market, including carrier screening is going to go to working off of an exome genome. So we would envision that we are going to be able to actually provide carrier screening to a woman who is thinking about having a family at some point that absolutely is part of the strategy because realistically, we are – the cost efficiencies associated with running exome genome versus trying to keep hundreds of panels rev and the operational expense associated with that and all of the billing expenses, that's a very expensive endeavor for any company that's in the panel space. And so we get such great operating efficiency on running exome and genome beating the need for panel. For the sales process, we ran a thorough process, an official one and a thorough one and arrived in a place where others in the space did their own economic analysis. And while we had hoped that, that would have been an option for us from an employee perspective as well as possibly an infusion of cash. Unfortunately, it didn't. In many ways, though, it really validated the fact that if we were unable to make it work here, others in the space who clearly have the scale, we're not able to make it happen either. So I'll see if Kevin has anything to add. But I think you're asking the right questions, but I can confirm it was an exhaustive analysis.

[Kevin Feeley:]

Yes, I'd say that's right, Mark. And then just back on the previous point. What we're most excited about on a go-forward basis is the focus that we now have on executing to bring in more exome and genome which by far, is the most data-enriched genomic information that we can combine with the clinical data that the company has access to in order to drive the Centrellis data part of our strategy moving forward.

[Mark Massaro:]

Okay. And then obviously, the GeneDx business, if it's okay to call it that, grew by 50% year-over-year on a revenue basis and 20% on a volume basis. Can you maybe just walk us through the puts and takes? Were there any catch-up payments? And which particular product lines do you think will carry that 20% run rate growth going forward?

[Kevin Feeley:]

Yes. It will be the exome and genome products. And much of what you see there as price appreciation is coming from an improvement in overall test mix year-over-year. What you should expect from us is the overall test mix as it relates to exome and genome and in particular, exome and genome on a rapid basis being ordered in an inpatient setting. You should see the mix of that within our overall portfolio grow over time. We put some data in the earnings release and slide deck associated with that. And what you're seeing is the execution of a strategy that we put forth about 18 months ago to really take advantage of what we believe is a best-in-class rapid exome offering in the inpatient setting. Today, particularly focused in the NICU and pediatric markets, those carry higher ASPs, higher reimbursement amounts. And over time, you'll see the legacy portion of the GeneDx portfolio, which is individual gene tests and panels diminished over time. So I look forward to updating you throughout the year on how that test mix shift continues to evolve.

[Mark Massaro:]

Okay. Great. And just maybe last one. I know today's actions, I think you've lowered the annual cost by about $65 million. Understanding that your new business has a higher margin profile. Can you just give us a sense for what you expect the pro forma or annualized cash burn would look like?

[Kevin Feeley:]

So we have some wind-down activities. We're going to continue to accept samples through this fourth quarter. We are expecting that we have cash runway into '24. And on a quarterly basis, expect by the second half of the year to reduce current cash burn roughly 50%.

[Operator:]

Our next question comes from Max Masucci from Cowen.

[Unidentified Analyst:]

This is Joe on for Max. It'd be great if you could just dive into a little bit of the health systems signed in the quarter just in terms of size and economics of the partnership you signed.

[Katherine Stueland:]

So the health systems, I think there's ways to think about health systems moving forward. So historically, Sema4 talked about Founder Health Systems, where each one has had a unique product approach, where you're seeing either somatic testing that we're exiting or you're seeing hereditary cancer screening that drives a tremendous amount of utilization and value for the health system. So each one of the founder health systems that we've been working with have had a unique approach. We haven't added any founder health systems because we wanted to move away from having unique programs at each one and drive towards a place of how do we scale. Frankly, it's just costly to have bespoke programs at each one of these. And so what we're doing on a go-forward basis as it pertains to health systems, GeneDx actually has relationships with hundreds of health systems. What we're going to be doing is selling clinician by clinician in a more traditional sense, but we're going to start going into health systems with a top-down approach of selling our exome and genome services in the NICU in the pediatric setting. Some of these health systems, we will target to be able to see if there is a strategic opportunity to be able to procure and ingest clinical data from them that will help us continue to fuel Centrellis generate additional health economic data. So on a go-forward basis, what we're intending to do is go to the customer base, which we're at 100 children's hospitals apply more of a top-down approach from a selling perspective, and see where there might be some opportunities to be able to procure data moving forward. I will say though, I think the importance of being able to procure data from additional partners beyond health systems is going to be one of the key results that I think defines our ability to really have a good diverse expanding data set that is one of the goals is to continue to grow the data set for Centrellis on the clinical data side, the genomic data that we're going to be able to procure will, of course, grow with our -- with selling our GeneDx platform. But we want to be able to pair that with an ever-growing set of clinical data that really has been stagnant. And so that is a big strategic shift for us moving forward.

[Unidentified Analyst:]

Got it. And I believe the previous cash guidance was a runway into 2024. And if I heard correctly, it sounds like that's largely unchanged. Can you just walk through the puts and takes with the much higher margin existing business here?

[Kevin Feeley:]

Yes, Joe, we've got to extinguish some liabilities of the exiting businesses. So we'll be focused on executing an orderly and orderly transition away from reproductive health and exit of the business and those liabilities that exist and expect that we have cash available into '24 at this point in time.

[Operator:]

Our next question comes from from Jefferies.

[Unidentified Analyst:]

Sorry, . I think that -- I think it was by accident, sorry.

[Operator:]

No worries. Our next question comes from Matt Sykes from Goldman Sachs.

[David Delahunt:]

This is Dave on for Matt. Could you walk us through how you calculate the $30 billion opportunity in rare disease?

[Katherine Stueland:]

Yes, happy to. And the $30 billion opportunity for exome genome, just as a point of clarification, it starts in rare disease and then we expand out of rare disease and into what the entire industry has been chasing, which is how do you have on genome test to be able to diagnose all disease. So we're starting today in the NICU and outpatient setting indeed in rare disease. We do expand into -- and those are all obviously children who are affected. But as we're doing in New York State and talking with other states, there's also an opportunity for newborn screening. So doing a genome on a healthy baby and being able to have that information, should there be any symptoms. So it begins the entire service and business that many in our space have talked about of sequence and hold and be able to provide information throughout an individual's lifetime. So that newborn screening market is another $10 billion above the $3 billion for NICU and outpatient on exome and genome. And then we get into a broader genomic health screening market that centered on the adult setting and being able to ensure that everyone can sequence, hold and if there is a symptom, be able to rule in or rule out whether or not there is an underlying genetic condition that needs to be treated. So as I mentioned earlier, some of the conditions that we're treating today and adults include stroke, neurodegenerative diseases, et cetera. So how do you use that information in a more proactive way? So that's an additional $16 billion on that. So the opportunity really is centered around the service of sequence and hold. And because of our underlying interpretation platform, what we're able to do, and this was true of some of the data that we presented at ASHG, we're able to provide fewer variants of unknown significance, which when you're sequencing a genome's worth of data is absolutely the key to being able to ensure that you can provide a more definitive answer. So that's the breakdown of the market. It's $3 billion NICU an outpatient, $10 billion for newborn screening and then another $16 billion for genomic health screening.

[David Delahunt:]

Okay. And so if we could drill down into the newborn screen more so $10 billion, there's 3 million or 4 million pregnancies or birth a year in the U.S. So you've got a couple of 2,000-something dollars per test. Is that -- can you tell us more how you get to that? And also how long do you expect for it to take to fully penetrate that?

[Katherine Stueland:]

So this is a 10-year arc that we're talking about. And the work that we're doing right now in newborn screening, we're doing it without charging them. So this is an opportunity for us to generate data that really tests the actionability. So we'll -- once we learn more about how the commercial model can work for that, we’ll be essentially assembling more of a subscription-type model. It's also something that we want to work more proactively with payers because being able to get into value-based care. This is one area where we know that there's an interest from payers in terms of being able to essentially pay for positive results. So I would say more to come, but it's -- we're in the early stages still of the NICU and outpatient opportunity. That's where we're focused today in the next several years. Newborn screening were in an even earlier segment. So no commercial model to share yet but more to come in the future.

[Kevin Feeley:]

And on newborn screening that were linked back to the announced launch of the GUARDIAN study that we initiated this quarter.

[Operator:]

And presenters, at this time, I show no further questions in queue. I will turn the call back to Catherine for closing comments.

[Katherine Stueland:]

Great. Well, thank you all for joining. Looking forward to being able to share more about the go-forward strategy that we are excited about and with a year of impressive execution against this core plan on the exome genome in the pediatric setting, we're very much looking forward to continuing to deliver on continued growth over the next several years. So thank you.

[Operator:]

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.