Q4 2021 Sema4 Holdings Corp Earnings Call

Thank you for standing by and welcome to the Seattle for fourth quarter 2021 earnings Conference call I would now like to turn the call over to Joel Kaufman, Vice President of finance and corporate debt.

Element. Please go ahead.

Thank you good afternoon, everyone. Thank you all for participating in today's conference call.

Dissipating for the company today will be Eric shop, founder and Chief Executive Officer, and Isaac Ro Chief Financial Officer earlier today, <unk> released financial results for the fourth quarter and full year ended December 31 2021.

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.

Within the meaning of federal Securities Law, 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.

Our 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 involve a number of risks uncertainties and assumptions for a list and description of the risks and uncertainties associated.

So forest business. Please refer to the risk factors section of our Form 10-K filed with the Securities and Exchange Commission on March 14th 2022.

We urge you to consider these factors and you should be aware that these statements should be considered estimates.

And are not a guarantee of future performance during our call. We may discuss certain non-GAAP financial measures a reconciliation 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 our Investor Relations section of our website.

This conference call contains time sensitive information and is accurate only as of the light broadcast today March 14th 2022, semaphore 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 Eric.

Thank you Joe and thank you everyone for joining us on our fourth quarter and full year 2021 financial results conference call.

I will begin with an overview of our performance, including the recent drivers of our success and future drivers of growth before passing the call to Isaac for financial update we will then open the call for questions.

2021 was a transformative year for <unk> during which we drove record test volumes and grew our clinical molecular and patient databases listed on NASDAQ as a public company and advance our strategic objectives to accelerate the growth of our platform of algorithms overall I am very excited by our org.

Based on our progress during a year that had more disruptive macro issues that I would have imagine heading into 2020 one.

Because I'm a pork continues to build capabilities anchored in clinically relevant genomic and patient data with artificial intelligence and machine learning.

We continued to establish <unk> as the partner of choice for health systems therapeutic innovators and other health care companies.

Some are poor we are building a unique company focused on delivering clinically actionable insights based on longitudinal data analysis that will help inform clinical decision, making across a broad spectrum of diseases and health conditions.

We are delighted that our health intelligence platform is being increasingly recognized for its potential ability to predict more accurate and clinically meaningful outcomes.

In the fourth quarter, we delivered revenue of $47 $3 million, excluding COVID-19 , representing 24% growth compared to $338 $2 million in the same period a year ago. Importantly, we continued to make substantial progress advancing key initiatives as evidenced by the nearly 83.

<unk> thousand result that test in the quarter, representing 37% growth compared to 61000 result attached in the same period a year ago.

We exited 2021 well positioned to grow our data and Jim with for health system partnerships 47, Petabytes of data from more than 20 million patients, including approximately 12 million patients for which we have access to high quality longitudinal electronic medical record information.

We believe that centrella is it's the most extensive and fastest growing database of clinically relevant patient data in the industry.

Meanwhile, our nextgen sequencing capacity continues to expand where we are expecting to grow genomic patient records more than 50% in 2022 over 2021.

While we are pleased with our performance in the fourth quarter and are well positioned for growth in 2022, we will remain conservative in our full year 2022 revenue guidance of $215 million to $225 million.

Building upon the success that has propelled semaphore, we recently announced our plans to acquire <unk> a world leader in the delivery of clinical genomic solutions for rare disorders. The acquisition of <unk> will transform <unk> into a larger and stronger company with a faster path to profitability.

Together, we will create a company that is changing the landscape of outpatient care is delivered while leveraging efficiencies that are unparalleled in our industry.

We believe that becoming a larger and stronger company gives us a clear and achievable path to 50% gross margin.

We expect to accelerate our pathway to profitability with a pro forma revenue growth profile in excess of 30%.

And accomplish positive free cash flow by the end of 2025.

We remain on track to close the acquisition in the second quarter of 2022.

On a pro forma basis, we project that the combined company will deliver annual revenue of approximately $350 million in 2022.

We are excited to partner with Catherine stool, and CEO of <unk> and the team from <unk>, who share our vision of leveraging genomics and large scale clinical and multi helmick data to enhance the standard of care through precision medicine in partnership with patients and providers.

Combining gene D access clinical genomic solutions with our core women's health business allows us to better serve health system in pharmaceutical or biotech partners had a more holistic way.

This transaction will significantly enhance the power of our centrella database by adding more than $2 1 million expertly curated phenotypes and well over 300000 clinical excellence that <unk> has generated to date.

Following the close of the acquisition <unk> will have the most comprehensive clinically relevant data set available for our research and development purposes.

Turning back to our performance in 2021, I would like to provide a detailed update on our progress towards advancing our strategic objectives, starting with our health system partnerships.

As you know <unk> partnered with four health systems, three of which were added during 2021.

These partnerships spanned across our key targeted geographic areas and we continue to be very pleased with the performance of their relationships and traction we are gaining toward our mission to standardize precision medicine within these systems.

Earlier this month, we held our first founder Health system Consortium meeting with all four of our health system partners.

The goal of this meeting was to establish a formal network dedicated to sharing our collective approaches to implementing precision medicine as a standard of care bye.

By bringing these groups together, we aim to foster a learning based culture across our partners that we think will enable a virtuous cycle as our health system partnerships expand.

The event was successful in these goals and very well received by our partners.

<unk> and our partners aligned on the fact that we share many common challenges that can be a better address collectively, particularly as the network expands over time.

This was encouraging as each of our partners have different areas of a natural focus of maturation levels up their previous precision medicine initiatives.

We believe this network is now building a combined point of view that will help the industry understand the power of shared data.

A standard implementation methodology, including ways to overcome significant educational needs and provide evidence of improved clinical care, providing headlights into the future of health care.

We expect to meet quarterly starting with our next session focusing on creating a formal charter and priorities for the network of partners to focus on as a group.

Since we updated you last quarter <unk> has continued to work with Northshore University Healthsystem to scale their population health program.

This program is focused on understanding the needs of primary care providers and their mission to advance care by leveraging genomic information within their patient population.

Not only have more than 90% of primary care physicians ordered attached as part of this program, but 80% of those physicians reported substantially improved standard of care as a result.

The total number of patients who have been offered the program in the past 11 months now exceeds 46000 to date, we have identified over 11000 patients with positive family history and over 800 patients have moved forward with hereditary cancer testing meeting NCC and guidelines for being at high risk for heritable cancer.

These results represent a 78% increase in adoption versus the result of a similar program not powered by semaphore.

Evidence from this study will now informs him before at Northshore University health system on how to introduce insights at the point of care to ensure patients receive standard of care treatment. Among other insights gained through this study and expansion of additional studies to understand how to leverage the insights gained to improve care.

Turning to Avera and November of 2021, <unk> in a very health launched the Avera health semaphore oncology and analytics protocol referred to as the <unk> App protocol. The purpose of this study is to understand the breadth of molecular characteristics present, among patients within a large integrated community based health care system.

Using comprehensive genomic profiling in proteomics, we are identifying the underlying genomic drivers of premalignant or malignant growth in patients across different stages of disease development in cancer types.

The comprehensive molecular profiling consist of somatic tumor testing using 704 as whole exome whole transcriptome proteomics and in selected instances whole genome sequencing. In addition, we are performing broad heritable cancer testing and effective patient populations.

Hereditary cancer has implications and screening prognosis and therapeutics for affected patients as well as broad implications for genetic counseling and Cascade testing.

Information collected across the patient population will aid in advancing our knowledge of cancer biology, discovering and validating biomarkers associated with clinical outcomes and sharing and collaborative projects in order to promote the study of cancer.

We have curated the initial clinical data set by combining it with the genomic findings and creating initial clinical quality dashboards, which will provide additional insights to bear a health providers.

We look forward to leveraging <unk> to expand existing partnerships and enhanced discussions with future partners.

I am confident our ability to integrate within health systems and provide state of the art care will ultimately position us as a preferred partner of choice to an increasing number of systems.

We are well on track to achieve our plan of partnering with a total of at least five systems by year end 2023.

A strong connection to the health systems and patients is a significant point of differentiation with pharmaceutical companies are looking for partners. Our sophisticated platform draws upon clinically relevant longitudinal patient information to provide unique insights to pharmaceutical companies looking to leverage big data to support drug development.

We can be a partner of choice for research as well as clinical development and post market surveillance.

A component of our long term strategy is to partner with pharmaceutical innovators to help improve the efficiency and accuracy of drug development and therapeutic delivery.

During the fourth quarter, we increased our engagement with several potential pharmaceutical partners to gain a better understanding of their needs.

We are pleased to have recently announced our partnership with Biosimilar tricks focusing on data driven drug discovery to advance precision medicine, together, we will leverage our proprietary health intelligence platforms, and trellis and combination with elegant biopsy metrics phenotypic drug discovery platform to both experimentally validate our AI based <unk>.

These and risk models and to discover new treatments initially in cardiovascular rare and neurological diseases.

We'll look to launch up to 10, new therapeutic programs in areas of high unmet need where multi <unk> offers a differentiated approach to discovering drugs and leverage these programs to drive enhanced collaboration between <unk> pharma and Biopharma companies.

We expect Biopharma partner contributions to grow throughout 2022, as we work to demonstrate the tangible value of the time of our platform.

Our partnerships with patients and health systems are also crucial for providing us with access to information that allows us to develop deep and information based relationships to.

To continuously drive improved knowledge and understanding within our platform our ability to receive strong patient consent provides us with confidence that our strategy to build a platform of algorithms is being accepted in the marketplace.

Following the fourth quarter patient <unk> remained strong at greater than 80% in 2021 for those who engage our digital platforms through the testing process.

This ability to acquire manage and leverage the scale of individual patient data is what feeds our platform of algorithms and differentiates us in the market.

This brings me to an update on our expanding data platform. We are pleased to see our growing patient and provider engagement translate into increasing test volumes with a total of 292000 tests resulted in 2021, excluding COVID-19 .

This represents annual growth of 41% when compared to 208000 tests resulted in 2020.

All areas of our core business are contributing to test volumes, including our recently launched products <unk> elements. Some upper elements as part of our women's health portfolio and enables providers to treat patients holistically during their reproductive cancer in generation all health journeys.

During the fourth quarter, our sales team increased uptake and began addressing the backlog of pent up demand from existing customers as well as the new users.

Initial feedback has been very positive and we look forward to increasing utilization and adoption lastly in mid December we announced our plans to exit the COVID-19 testing business.

Today, while the pandemic still lingers circumstances relating to testing are very different than when we joined the fight against COVID-19 in early 2020 and.

And we want to continue to drive innovative solutions to other pressing medical needs in the core components of our business such as oncology and reproductive health. We therefore believe it is now appropriate for us to dedicate our resources to <unk> core mission.

In 2021, we made key investments in our organization and infrastructure to build our platform of algorithms in January of 2021, we hired renowned oncologist Dr. William out to help establish our leadership in delivering data driven precision oncology solutions that support improved patient outcomes.

In June we hired help data expert in precision medicine scientists, Andrew <unk> as Chief data officer to help optimize our data strategy and security to drive continued innovation of our health intelligence platform.

In September we hired Gustavo still levitsky, a world, leading computational biology expert as Chief Science Officer, as we look to accelerate development and monetize our platform of algorithms.

To validate our platform of algorithms and support growing adoption, we remain committed to bringing industry guidelines together with our data to demonstrate the clinical benefits of data driven insights and potential to improve patient outcomes.

In November 2021, we published a pair of studies in collaboration with the Mount Sinai Health system that demonstrated the utility of our health intelligence platform to predict more accurately clinically meaningful outcomes.

The studies were specifically focused on improving the prediction of risk of postpartum hemorrhage, leading cause of maternal mortality globally over current standard care assessments.

The results demonstrated the potential for health care providers to improve postpartum hemorrhage risk assessment and medical management for their pregnant patients, resulting in better health outcomes, when implementing <unk> predictive model into the clinical standard of care.

The publication of these results in the journal of the American Medical Informatics Association marks an important advancement for the industry. As we are among the first to use large scale comprehensive real world data to both accurately digitally phenotype patients and then predict clinically meaningful outcomes in pregnant women.

These advances are happening in college as well were among many papers a recent study of stomach for it was just accepted in nature communications, which identified a molecular biomarker that could not only stratify early stage lung adenocarcinoma patients into different subtypes of disease.

But identified Aurora kinase as a novel target for treating this disease at an early stage.

Publications in leading journals will also help support our reimbursement initiatives recently, we hired Gerry Conway to strengthen our market access team and drive improvement in our relationships with payers.

Yeah.

In addition to the team's focus on commercial and reimbursement capabilities. The team will also look to develop new partnerships and strengthen existing relationships with payers and clinicians and establish broader patient access.

We are also honored to have recently been included in past companies prestigious annual list of the world's most innovative companies for 2022.

We were named as one of the top three most innovative companies in the data science category.

Fast company recognized <unk> for closing the gap between the practice of medicine, and the availability of more clinically actionable guidance, allowing for enhanced decision, making by physicians and patients to improve the prevention management and treatment of diseases.

Uh huh.

2021 has been a year of investing for growth during the year, we expanded our entire team to over 200 employees as of the end of 2021. This includes commercial head count growth of roughly 50% since the beginning of 2021, we continue to see improvements in sales cycle and sales force productivity during the fourth quarter as our newly high.

<unk> grabs ramp towards full productivity with the opening of our Stanford lab, we have increased the square footage of our lab operations and support infrastructure by 138%.

R&D was up 45% in 2021, when compared to 2020 to support growth and development within both our diagnostic testing solutions and health intelligence platform.

Looking towards the remainder of 2022, we believe we are adequately staffed and resource to support our growth objectives.

As we have discussed previously we continue to make investments to improve operating efficiency and margins throughout the fourth quarter, we made tangible progress across all priority areas, including portfolio optimization implementing a new laboratory information management system and additional lab automation initiatives when combined with an improving reimbursement.

Dynamic in oncology, our fastest growing segment, we remain on the right path towards more normalized margins through 2022, we do believe that the acquisition of <unk> will help improve the combined company's operational excellence with best practices from each organization implemented in the early days following the closing of the acquisition.

Overall I'm excited with our progress in building the largest and most comprehensive integrated health information platform.

The strategic objectives, we have outlined and can you do advance provides a solid foundation for sustainable future growth.

With the acquisition of Gtx, we will further distance ourselves as a market leader in comprehensive reproductive health genomics testing solutions and will be positioned to revolutionize patient care delivery.

I am confident in our ability to deliver on our plans and drive differentiated insights with the potential to dramatically improve the standard of care for all.

I would now like to turn the call over to Isaac for an update on our financial results and guidance.

Thank you Eric.

Turning to our fourth quarter and full year 2021 financial results.

Total revenue for the fourth quarter of 2021 was $57 8 million down 10% compared to $64 million in the fourth quarter of 2020.

Diagnostic test revenue was $56 1 million in the fourth quarter of 2021 down 9% compared to $61 6 million in the same period of 2020.

COVID-19 testing revenue in Q4 was $10 5 million down 59% year over year, but was up 151% sequentially from the third quarter of 2021.

Other revenue totaled $1 7 million in the fourth quarter of 2021 compared to $2 4 million in the fourth quarter of 2020, excluding COVID-19 total revenue for the company in the fourth quarter of 2021 was up 24% year over year.

Total revenue for 2021 was $212 2 million up 18% compared to $179 3 million in 2020 diagnostic test revenue was $205 1 million in 2021 up 17% compared to $175 4 million in 2020.

COVID-19 testing revenue in 2021 was $34 4 million, representing an annual increase of four 8%.

For the full year other revenue totaled $7 1 million in 2021 compared to $4 million in 2020. The increase was mainly attributable to growth in collaboration service activities related to new partnerships with biopharm.

Excluding COVID-19 total revenue for the full year of 2021 was.

21%.

Turning to volumes, we resulted in approximately 83000 diagnostic tests during the fourth quarter of 2021, excluding COVID-19.

It was up 37% compared to the same period in 2020.

We recorded a 142% volume growth in oncology and this category now accounts for 6% of our total volume excluding COVID-19.

Women's health volumes grew 33% in the fourth quarter compared to the same period in 2020.

For the full year of 2021, we resulted approximately 292000 diagnostic tests, excluding COVID-19 up 41% compared to the full year of 2020.

I would now like to spend a minute discussing our path to driving improved gross margin I am pleased to report that we have reclassified certain P&L expenses in conjunction with the filing of our 2021 10-K. Please see the Reclassifications section of the 10-K for additional detail. The following items reflect these kind of quit reclassifications.

Cost of services was $60 6 million in the fourth quarter of 2021 compared to $69 6 million in the same period of 2020. The decrease was driven by lower volumes in our COVID-19 business and lower stock based compensation expense, partially offset by increased head count investments in systems higher logistical and supply costs due to incur.

Volumes in our non COVID-19 business.

Typically these new investments will enable us to support continued volume growth with significantly higher cost efficiencies overtime costs and services was $228 8 million for full year 2021, compared to $175 3 million for the full year 2020.

The increase was driven by increased stock based compensation expense increased head count and increase in logistical expenses as a result of our expanded operations.

As a result of the reclassification as mentioned earlier, our adjusted gross margin in Q4 with zero percent and positive 3% for the full year 2021 on a dollar basis adjusted cost of services, which excludes stock based compensation expense and other onetime COVID-19 related expense.

$58 million for the fourth quarter of 2020 compared to $43 5 million in the same period of 2020 adjusted cost of services was $206 2 million for the full year of 2021 compared to $142 8 million for the full year of 2020.

Operating expenses for the fourth quarter of 2021, well $113 million compared to operating expenses of $119 million for the fourth quarter of 2020.

The decrease in operating expenses was due in part to higher personnel related costs as we built out our laboratory operations and further investment in their health intelligence platform as well as incremental public company expense offset by lower stock based compensation expense.

Operating expenses for the full year of 2021 were $429 5 million.

Compared to the operating expenses of $246 million for the full year of 2020.

Adjusted operating expenses, which exclude stock based compensation for the fourth quarter of 2021 were $78 6 million compared to $38 9 million for the same period of 2020, adjusted operating expenses, which excludes stock based compensation expense and other nonrecurring transaction expenses for the full year of 2021 were 220.

$7 2 million compared to $138 7 million for the full year of 2020.

Net loss for the fourth quarter of 2021 was $40 2 million as compared to a net loss of $125 7 million for the same period of 2020.

Fourth quarter 2021, net loss included other income of $76 2 million tied to the decrease in liabilities associated to warrant an earn out contingent liabilities recorded in connection with the merger with <unk> Sciences.

Net loss for the full year 2021, with $245 4 million compared to a net loss of $241 3 million for the full year of 2020.

So when you get the balance sheet total cash and cash equivalents was $408 6 million as of December 31, 2021.

Now turning to guidance.

Current revenue volume and gross margin guidance excludes any contribution from the pending acquisition of GBS. We expect our full year 2022, resulting volume growth will exceed 20% versus full year 2021, excluding COVID-19 testing.

Full year 2022, adjusted gross margin is expected to exceed 10%.

We expect gross margin to improve throughout the course of the year with gross margin higher in the second half of 2022% in the first half of 2022 with Q4 being the highest gross margin for 2022.

Turning to share count we estimate the full year 2022 weighted average basic share count for <unk> four will be in the range of 247 to 250 million shares on a standalone basis.

Regarding gene Dx, we continue to expect to close in the second quarter of 2022 on a pro forma basis. We expect the two companies would deliver a combined total of approximately $350 million in revenue for the full year 2022.

This implies $220 million for Singapore, and the midpoint of our guidance range and $130 million of Gtx. We have provided these figures to illustrate the scale of the combined company's revenue base as if they were combined retroactive to January one 2022 as a reminder, <unk> revenue for 2022 will only include a.

Pro rated amount of <unk> $130 million in 2022 revenue based on the expected timing of the acquisitions closing.

We will provide formal 2022 revenue guidance for the combined company after the deal closes.

On a pro forma share count.

Pro forma share count will incorporate an additional 130 million shares that will be issued in conjunction with the closing of the <unk> acquisition, meaning our share count at the time of deal close will be approximately $377 million to $380 million.

Our full year 2020 weighted average share count will be lower based on the timing of the deal close. This includes 80 million shares issued Opco apparent gene Dx and 50 million shares that will be issued to investors that are subscribed to our $200 million pipe, which we funded upon the closing of the <unk> acquisition.

This does not include any shares that may be issued in conjunction with potential milestone payments are also after the closing.

Long term, we continue to expect the combined company will deliver compounded revenue growth of 30% or higher 50% gross margins and positive free cash flow by the end of 2025.

Now I'll turn it back to our founder and CEO Eric Schoen.

Excellent. Thank you in summary, I am proud of our substantial progress during the year. We are on the right path to build and leverage the most comprehensive clinically relevant dataset and make precision medicine in a standard of care for health systems I would now like to open the call to any questions operator.

Thank you.

Ladies and gentlemen, if you'd like to ask a question. Please press Star then one touchstone telephone I need if you will.

Like to ask a question. Please press Star then one one moment please for our first question.

Our first question comes from Brandon Couillard of Jefferies. Your line is open.

Hey, Thanks, good afternoon.

Maybe just start with Eric.

In terms of the health systems.

Great to just maybe get some more details and more color on how you think those relationships are progressing and just trying to get a feel for how much.

These are contributing today, what the right metrics are that we should look at and where you kind of see those.

Partnerships that you have today advancing over the next 12 months.

Yes, again, where we're like Super pleased with the with the health system partnerships, we formed today and the performance we between the Mount Sinai system North shore.

And our Vera in terms of testing volume now accounts for a substantial percentage of the testing volume so the uptake.

And drive into those systems is going well we talked about.

The level of.

Uptake in the north North shore system with respect to the genomic.

Screening as part of their population health program in the amount of.

Translation of.

Screenings into heritable cancer screening so that's all gone.

And having over 90% not only 90% of those primary care physicians ordering.

That testing, but over 80%, indicating changes substantial increases in standard of care biker Amazing we've launched.

As well a protocol.

<unk> is an oncology protocol with avera, that's now recruiting.

Really good clip and.

So all of all of that kind of standardizing the genomic testing.

Across a broad array of diseases and conditions continues to go very well.

And increasing engagement as well around the data and collaborating with the systems around the data and how.

The kind of restructuring and annotation and so on December four can do can drive.

While you're back so in my view, where.

Straight on track on what I would look for over the next 12 months are first of all bringing on.

One or a couple of new systems.

And then also growing the.

The information asset getting more and more partnership around the data.

Growing also the patient base and the volume of testing.

Yes, Brendan I, just add one more thing to that answer which is Eric called out in the script. This founder a health system consortium that we held at the beginning of March I want to underscore that event is something that's really special in the industry. Because it was really a unique opportunity to get all of these health systems with whom we're partnered together in the same room multiple representatives.

Each institution and that really we think is going to start creating this flywheel effect in this go to market strategy that we have because now you've got partners that we're working with helping each other take advantage of our technology figure out ways to apply it and implement it and so that's something that we think we can build upon and we're going to be doing those quarterly I just wanted to mention that because coming that you just haven't seen.

For in this industry and this is.

The feedback from the partners was awesome.

Yes, it's a great callout, Isaac thanks for bringing that up and just the ability again.

With the health system data driving that in a common data model is harmonizing those data unifying across systems, enabling systems to cross leverage those data to have learnings or validate learnings from other systems like super exciting to see that come together.

Okay.

Thank you. Our next question comes from Max Masucci of Cowen <unk> Company. Your line is open.

Hey, thanks for taking the questions.

It would just be curious to start.

What was the deal biometric is driven more by some forest core capabilities with centrella or did G&A actions whole axiom database play a factor.

Yes, driven.

Initially completely by the centrella platform engaging partner with significant.

High content screening type capabilities, the ability to experimentally validate across a broad array of it.

Bare metal systems, the kinds of predictions, we make in the complex models, we put together for disease, so helping <unk>.

Validate and progressed those models for better action ability, whether it's in clinical test.

The clinical genomic testing or in the drug discovery partnerships, we have with pharmaceutical companies, but then also better leveraging.

Our information assets to progress targets on a run in partnership with <unk>. The add of gene Dx into that mix does kind of accelerates in my view the utility.

Of that platform, especially in the rare disorder.

We know where the scales of data gene Dx brings to the table the breadth.

Of their testing across all of the.

Children's hospitals, and kind of that rare disorder space kind of gives us definitely a strategic advantage in.

From identifying and prioritizing targets that we may progress to finding the right patient populations to further assess those models.

That's great.

It's a bit unique.

It's not necessarily sequencing as a service that's more focused around drug discovery. So I'd be curious if there is a.

Downstream economics component of the partnership.

Yes, so downstream what we see is we will have more to say on this in coming quarters, but it's advancing some of these drug discovery programs ourselves.

Moving the ball further down the field in terms of getting to a.

Clinically validated our preclinical model to carry forward into the clinic and then we envision pharmaceutical.

Partners are partners in Biopharma to do that and take up what will be deemed a much more valuable and progressed asset for faster clinical.

Clinical studies, so that's kind of the.

Where I would expect us to drive.

The most value from that program, but won't won't underestimate the need to have that kind of experimental platform to be validating models that we're using to deliver clinically actionable guidance as well through the genomic testing solutions, so think cancer and the ability to better match.

Patients based on their molecular profiling to be most appropriate kind of therapeutic intervention or clinical trial like there'll be utility.

For that platform in that arena as well.

Great final one for me.

If you look at the attractive Cogs profile.

In the gene Dx facility, it seems like you're well positioned to enter new liquid biopsy applications on your own.

Or you could partner with liquid biopsy players that stand to benefit from the whole exome capability. So it would be great to hear.

Whether you think that gene Dx lab operations opens up some new opportunities for partnerships in the liquid biopsy space.

Yes, yes definitely in exactly along the two fronts you had indicated both progressing internal programs, we have around liquid biopsy and I'll note that that exploration is not necessarily just in the oncology arena, but has reproductive health care.

<unk> as well.

And the.

So I would say we are actively exploring and.

And driving some internal research that way, but also partnership strategic partnerships with others.

To help progress their programs, where again by lower Cogs profile to generate some of the upfront data say you might need for MRV.

As highly attractive so we have a number of those discussions going on.

Great. Thanks for taking the questions.

Thank you. Our next question comes from Mark Massaro <unk>. Your line is open.

Hey, thanks for taking the questions.

First one is for Isaac pretty basic but you did.

<unk> reported about $6 million above where you pre announced earlier in the year with nearly 3000 tests above do.

Do you have visibility as to what constituted the change in actual versus pre announce.

Yes sure Mark good question so.

The good news there is the upside relative to our pre announcement was both within the core business as well as COVID-19. So yes, COVID-19, what is the majority of the upside because we obviously had a huge.

Bumping volume related to the omicron wave like probably most companies in our peer testing group and so that was the biggest single source when we pre announced in January we were still working through the revenue recognition piece of it, but but but the underlying core business is testing likewise.

So I would just attribute it to the street across the business relative to plan a.

A little bit of market dynamic with Amazon and I would say all of that in the context of a pre announcement in mid January when it's tough to to ensure proper Rev. Rec. So here. We are in March the books are closed and we're happy with where we landed.

Perfect.

So it sounds like you pretty much reiterated all of the numbers for the pro forma combined company with your base business and gene Dx.

One nuance just to ask on I think you initially talked about 16% pro forma gross margin.

And now I think you've guided to.

Pro forma.

Gross margin in excess or to exceed 10% should we think of those two numbers is substantially equivalent and then maybe can you just expand a little bit more Isaac about what types of specific initiatives you have in place to.

Really to expand gross margins in 'twenty, two and beyond.

Yes sure. Thanks for asking that question to clarify so just to be very clear the 16% number that you're referring to is pro forma for the combined company.

And recall that Gtx has higher gross margin than we do so there was a gross margin accretion just by factored by by way of merging the companies.

Embedded within that percent number was a single digit gross margin.

Full year assumption for assembly for Standalone. So what that means is that 10% number that we're guiding to for standalone timber floor, we're actually raising our gross margin outlook a little bit for the year in part because of the reclassification work that just got done.

So just to simplify it we're actually raising our underlying gross margin outlook for the year, a little bit when we close the <unk> deal the pro forma gross margin will be updated according to the current information we'll have at that point in time and again at this point it looks like the pro forma number will also be higher.

The point here is to say that we're making great progress on gross margin and we're certainly not done there's a lot to do.

And so as a segue from there would be just sort of to your question I would like the specific things we're doing so.

In prior public forums, we tried to disclose very clearly that there were simplistically like two major baskets to improving gross margin. This year that we were really working on the first was really an accounting.

Effort, which is now concluded with the 10-K, where we have reclassified a lot of expenses out of out of Cogs into other areas of the P&L. So that were consistent with other public companies in our peer group. So this is a great opportunity for us to sort of catch up to best practice across the peer group. So that were more comparable to everyone else in the result of that as a material.

Improvement you saw in Q3, we had a substantially negative adjusted gross margin and then in Q4 were coming in about flat and a lot of that not all of it but a lot of it was related to the reclassification. So that's sort of the accounting piece, that's done with and on a go forward basis.

This reflects that.

The second category of gross margin improvement really relates to the more classical kind of operational things that you would expect it actually impact cash flow rate. The first category has no bearing on cash flow revenue net income. It was just a classification within P&L, but really operationally improve.

The business, we're doing a bunch of things number one is we are reducing our cogs on a unit basis by focusing really on labor.

Reagents I mean, those are really the two major input costs two to our business as it stands today and testing rates. So we've made a lot of progress we hired Tony <unk>, who is our head of ops.

Last fall and he has spent the last six or so months, making a ton of progress on our lab efficiencies. So I want to recognize the team for ramping a new product cycle, while also getting more efficient and so the labor piece of it is coming down significantly.

Wanted to go there with automation and.

Thats I mean thats to come this year and then on the reagent side.

Done a lot of work to start trimming down our vendor lists get more efficient with inventory.

Negotiate more in many cases for the first time with our Counterparties and so I certainly don't want to ignore the fact that we are facing like everybody and inflationary backdrop, but I'd say for us. This year most of the conversation around input costs should be going down not up on a unit basis because of all the opportunities in labor and reagents and all that so.

Those are the things that we're doing I think separate from all of that would be sort of what the pro forma company. It looks like over time, we're going to have a world class facility that is capable of over <unk> 5 million in clinical.

Clinical and just half a year, we want to take advantage of that the right way.

Nothing specific to say today that obviously for after the deal closes.

Perfect.

So I know I know, you're well capitalized with $400 million of cash on the balance sheet.

We saw last week, I think adaptive announced.

Little bit of a restructuring of their workforce I guess with this decline in multiples across the industry does that at all impact how you think about running the business either.

Inorganically as you think about additional M&A or even as you look at your own operating model.

To what extent are you examining costs and I guess with that with that how should we think about adjusted EBITDA playing out throughout the year.

Yes, good question, Mark So a couple of things.

One certainly we are very focused on ensuring that our strong position of liquidity continues and we feel like we're in a good spot there.

And we will certainly update.

The guidance that we've given around cash flow productivity over the coming months and quarters, but we.

Reiterated today, our goal of being cash flow positive by the end of 2025, and we think it's important to give investors that visibility on the horizon and that's what we're building towards I think from there.

When we think about capital deployment.

We said this before as well.

We've undertaken a transformative deal with <unk> is it <unk>.

Difficult commitment is a significant focus for us it's critically important that we close it.

On a timely basis and execute upon the integration really well so that is by far our mission one and two for US operationally this year.

As a result, M&A well I would never say never.

Really a very very high bar extremely high for us to consider doing anything else here, we really want to focus on getting <unk> right and that's really where we're putting our energy so with all that said.

And your last question had to do with the pacing for the year. So I'll, just say that our cash burn for the year will come down dramatically over the course of the year as we execute upon a lot of the things we've talked about especially improving gross margin. So I would expect there to be sort of a.

Peak cash burn for the year.

And for going forward in Q1, and it should come down significantly in Q2, Q3 and Q4. So we'll give more details on that as the year progresses, but we are very much focused on driving a clear path towards profitability and self sustaining it.

Okay, Great and maybe just one last one I think I heard you talk about a goal of having at least five systems by year end 2023.

Just checking is that a cumulative all in number and then can you just talk about maybe.

What your pipeline looks like and I know you have a high bar you have talked about quality over quantity, but anything you could add there would be helpful.

Yes, it's definitely accumulative and again the.

The strategy, we're pushing is five.

Maybe as high as 10 systems.

By over the next couple of years.

And these initial ones are very much a learning based partnerships right. That's learning how do we take all of the components. We have the components others have in wired together solutions for the system that delivers precision medicine, a standard of care that involves advanced genomic testing solution against all diseases and conditions.

<unk>, helping structure and manage information and make it accessible and useful to better characterizing patients in hospital operations as well as research so.

There's a lot there and we think.

<unk>.

So that pipeline be thinking of it as just a handful of additional systems over the next couple of years to kind of fill out.

The the range of possibilities that we're pursuing with respect to precision medicine as standard of care.

We think over the next year, so, especially with this consortium and having the systems working together and address common problems in ways to advance what's common among the system slips idiosyncratic and requires customization that thought so theres a lot of learnings.

That will happen that will enable us to then come up with a model to scale and so I think until we are.

At that model, which we think will be over the next year or so.

The plan is not to scale.

<unk>.

Two as many systems as we can grab and it's worth noting that our LLP.

We filed is really based on that five to 10 health.

Health system number and getting to the right level of uptake in partnership and driving a lot of that benefit into pharma relationships I don't know if you have anything else to.

Yes, no that's a great summary, nothing to add.

Okay. That's it for me thank you.

Thank you again, if you'd like to ask a question. Please press Star then one when your Touchstone telephone. Our next question comes from Matt Fassler Goldman Sachs. Your line is open.

Hey, guys. This is Dave on for Matt. Thanks for taking my questions any additional update you can give on progress in the biopharma business and expectations for the year.

Yeah, So we maintain.

A really aggressive degree of effort.

Around.

Discussions with a number of very large pharma.

Round more transformative deal that Leverages are the kind of information asset we built a high degree of interest in that in addition to some of the drug discovery capabilities, we've been demonstrating so I would say.

All of those discussions and interactions are going really well and we continue to think that this will be more.

More transformative year for <unk> with respect to the farmer relationships that said, we also have.

Some of the more modest moderate.

Type deals that we keep driving around real world evidence studies and clinical trial matching and continuing the relationship with Sanofi on helping identify the next generation of targets with in partnership with them for for asthma, a better characterization of asthma patients. So.

All in all we're feeling.

Feeling really confident on that.

Great and then looking forward to continued strong growth in your oncology business any additional color.

The women's health versus oncology mix, we can expect for the year.

Yes, maybe just high level I would say that youre seeing the volume growth each of the last few quarters in oncology triple digits. So while it's still relative.

The relatively small absolute values versus the women's health business you can clearly see that it is the fastest growing part of our franchise number one and number two we're growing much faster than the end markets.

That we serve in that category. So a lot of that's being enabled by the health system progress that we're making Eric touched on a lot of that so we feel really good about the opportunity for our oncology franchise going forward I should also remind you that from a reimbursement perspective, we have a bunch of irons in the fire this year to drive better payment to the dealer.

Revenue attached with our volume start to.

To catch up and if we do that that will also be important to improving our gross margin profile in the second half of the year. So lots going on in the oncology business on the internal side that's really.

Positive and in worth highlighting and as we think about the feedback that we're getting.

Again, the consortia that we held with our health system partners, they're really excited about what we're able to enable for them and their patients with the data that wraps around the tests ourselves themself.

Yeah, and maybe just wanted to add a little.

On top of that that it's on the women's health side.

One of the big plays that we're making there and that are driving.

Significant part of that growth is through the oncology can.

Connection with <unk>.

Women's health with diseases, like breast and ovarian endometrial cancer being reproductive health diseases.

Kind of offering our heritable cancer genomic testing solution in that arena.

We're getting kind of the best uptake of more traditional obgyn channels and of course.

Also the partnerships around.

The somatic tumor profiling connected that with respect to breast and ovarian so theres a lot of connectivity again driving across.

Those different channels and in particular.

With the health systems and will also serve to IDEXX point on the SaaS growth in uptake in these systems.

On the oncology solution is kind of representative there is no.

For precision oncology solution today, nobody really has that today and again the testing as part of it liquid biopsy, maybe part of it.

Data as part of that the patient engagement thats part of it but what the systems really need what the physicians really need is a way to more effectively manage engage that information make decisions over time, and it's not a onetime episodic.

Task that gets flipped.

So way more holistic wrap around solution that we're providing.

Fantastic Thanks for the extra color.

Thank you.

I'm showing no further question, Tom I'll turn the call back over to Eric <unk> for any closing remarks.

Great. Thank you. Thank you Valerie for your attention.

I wanted to thank everybody on the call for the interest in <unk> and joining us today on our fourth quarter and full year 2021.

Results, we look forward to keeping you all updated on our developments so have a nice evening.

Thank you ladies and gentlemen, this does conclude today's conference. Thank you all participating you may now disconnect have a great day.

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