Q3 2022 Sema4 Holdings Corp Earnings Call
Okay.
Welcome to the summer for third quarter 2022 earnings conference call. My name is Cheryl and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If you'd like to ask a question you can do so by pressing zero one and your.
Touchtone phone.
A reminder, this conference call is being recorded I will now turn the call over to Joel Kaufman, Sir you may begin.
Thank you Cheryl and good morning, everyone. Thank you for participating in today's conference call.
Participating for the company today will be Katherine Stewart, Chief Executive Officer, and Kevin <unk>, Chief Financial Officer.
Earlier today <unk> released financial results for the FERC third quarter ended September 32022, a copy of the press release in 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 1095.
Any statements contained in this call that relate to expectations or predictions of future events.
Ultra 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.
Generally 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 several fourth 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, 70, <unk> 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.
That I will turn the call over to Katherine.
Thanks, Joel since joining semaphore I know my top priority has been to drive long term sustainable profitable growth and to preserve cash.
As has been the case for two reasons.
One on sustainable cash burn, that's kinda forehead and card.
And two the macroeconomic pressures that shifted in virtually every company and every industry from a growth at all cost mindset to one of the profitable growth.
Since then our management team has been on Mark and a rigorous review of kind of a.
Fourth financial operations, R&D and commercial strategy for reproductive health somatic oncology health system pharma and centrella.
We've also continued to execute on our <unk> on a gene Dx credit strategy to expand the adoption and utilization of our pediatric and rare disease business driven by differentiated panels exome and genome.
What became clear is that we have an incredible opportunity steeped in the areas of distinct <unk>, we have a highly unique competitive advantage in rare disease exome and genome testing.
Including data from more than 400000 clinical exome.
Data from more than one 7 million rare disease enriched panel.
And 2 million biobank samples covering a broad spectrum of rare disease.
This is one of the world's largest rare disease dataset, but when coupled with centrella allows us to combine clinical and genomic data to doubling or better insight to patients providers pharma partners and leapfrogging other than the space to advance precision medicine simply put it's combining the best of semaphore.
And the best of <unk>.
I'll come back to Houston.
Well. It also became clear is that in order to drive the differentiated profitable growth obtain Dx and centrella.
We needed to exit the reproductive health space.
Earlier this morning, we announced to our team and our customers that we're exiting the reproductive health testing business by the end of the year and as a result parting ways with approximately 500 employees, representing a third of our workforce.
This decision was not made lightly and was informed by deep analysis deliberation and scrutiny by our management team advisors in Florida.
We considered every possible option to preserve the business, including the investment required to scale and improve margin that competitive landscape payout.
Payer dynamics, including recent shifts in coverage and reimbursement and cost associated with doing business and more commoditized market.
Contemplated moving operations from Connecticut to Gaithersburg, Maryland to improve labor efficiencies and reduced Cogs, we looked at the cost of servicing the IVF market versus obese and even contemplated a direct to consumer model.
We consider the impact of discontinuing carrier screening on our data strategy, which convinced us that our access to clinical data and our pediatric and rare disease genomic data is by far the most valuable combination.
And as you would expect we explored an outright sale of the business yet.
Yet others arrived at the same economic analysis.
The exit of reproductive health alone eliminated at least $30 million in cash burn on a quarterly basis.
And that immediately and significantly grow our gross margin profile.
And then we determined that the reproductive health testing business was unsustainable and especially so in light of capital market constraints and the macroeconomic climate.
It's not that this isn't any of us want us to make but it's necessary for the future health of our business the delivery of better health insights to patients and partners and ultimately the generation of shareholder value to those who believe in our ability to change health care for the better.
I'd like to thank the semaphore team for their hard work and dedication in helping many families gain access to critically important information to inform reproductive care.
And passion of our team help semaphore establish a leadership position in the reproductive health testing space and today is a challenging day for all.
With that decision being made when I'm unequivocally convinced of and excited about and our unique ability to lead what is a $30 billion market opportunity that centers around the clinical genomic insights that we are able to provide.
And we're able to do that given our deep legacy of genomic expertise that patients providers pharma partners in pairs all depend on day in and day out.
We'd like to spend a little bit of time diving into that $30 billion market that will generate a more complete understanding of complex diseases and how to treat them.
The business moving forward is on a path to provide annual revenue growth in excess of 20% over the next several years and adjusted and adjusted gross margin profile in excess of 50% over the next several years and I turned to sustain the company profitability in 2025.
The go forward business is driven by the expanding use of whole exome and genome diagnostic testing focused today on rare disease and centrella is data driven insights we are very optimistic about the growth and profitability prospects for this business, which delivered 43% year to date revenue growth and improved gross margins over there.
Past here when we first put our growth strategy into effect.
The main drivers of our growth are defined by four primary patient opportunity.
First leading today's pediatrics diagnostics market, we're a leader in providing services to children's hospitals, specifically in the NICU for in patient care as well as more broadly in the pediatric and rare disease outpatient settings are generating clinical and health economic state that's real or seek first study with the University of Washington.
At Illumina and we recently published data at a S. H C that showed that testing with exome and genome produces 30% fewer inconclusive results in a higher diagnostic yield compared to multi gene panel tests, what that means is exome and genome testing will obviate the need for multi gene panel.
<unk>.
The second patient population is expanding the diagnostic market. So we're focused on expanding the utilization of our services and the pediatric outpatient settings with an emphasis on autism in epilepsy in fact guidelines by a N S. D C and <unk> have provided further confirmation of the role specifically.
Exome and genome for these patients.
In the adult outpatient setting, we're seeing increased utilization in patients with stroke and neuro.
On RF diseases, we're selling in these areas today, and we expect to begin investing in studies to generate clinical and health economic data.
Third establishing newborn screening as a new standard of care that can best be described as providing holds genome sequencing for a healthy babies, which we've already started to implement with the Guardian study here in New York State.
And fourth introducing adult screening as a routine part of medicine, that's representative future market, where we're able to generate genomic insights to enable a more proactive approach to managing health care moving beyond monogenic disease and into more complex polygenic diseases, including cardiovascular neuro degenerative.
And metabolic diseases.
The genomic data generated by these patient populations becomes more powerful when combined with clinical data, which is where centrella is kind of in a.
A core part of our continued investment in making this platform actionable for more and more patients providers and partners since central it integrates digital tools and artificial intelligence and ingest longitudinal data to create unique and actionable insights for partners like pharma and health system.
Our pharma business is still in its initial stages and we have learned a tremendous amount about how we can add value for drug developers as well as other health care industry partners.
We intend to invest in and accelerate the commercial model for the centrella platform to expand utility and create a rich data pipelines to drive personalized medicine.
Ultimately, we want to take an individual's genomic profile pair that with their clinical data deliver a personalized health and wellness plan and provide treatment options and a prognosis for them based on other patients just like that.
That is the vision and that is enabled by central us as a health intelligence platform fueled by G&A access genomic services and clinical data.
To track our progress against this vision and we have set five companywide objectives. These serve to operationalize, our P&L hold us accountable to one another our customers and shareholders and to provide clarity a framework for decision, making you'll hear us refer to these over the next several quarters.
Objective, one is to sustainably capture and expand the market for data informed healthcare decisions using genomic and clinical information.
<unk> two is to build quality and longitudinal relationships with them between customers centered on their needs.
<unk> three is to become the most efficient company balancing innovation and scale.
Objective for us to strengthen our data asset to deliver better health outcomes and objected five is to create the healthiest most sustainable company.
We've made significant progress towards improving the performance of <unk>, reducing our cash burn and expanding into areas with profitable growth prospects, we have clear goals for our team as we march towards a healthier future.
All the changes we've made ensure that today, we are a stronger company.
And with that I'd like to pass the call over to Kevin. Thank you. Catherine This morning, I will start by reviewing our third quarter results. Both for the total company and towards the Gtx 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 semaphore revenue was $83 2 million compared to $43 2 million in the third quarter of 2021 the.
The increase year over year results from the inclusion of <unk>, which contributed $46 million to the top line, partially offset by declines in semaphore somatic oncology reproductive health and Covid revenues Importantly, Gtx quarterly revenue growth was approximately 50% year over year.
As a reminder, we completed the <unk> acquisition on April 29 2022.
We resulted in roughly 128000 tests this quarter, representing a 19% year over year increase on a pro forma basis versus the third quarter of 2021, excluding COVID-19.
We saw strong growth in our pediatric and rare disease testing business, namely Gtx generating over 20% volume growth in the third quarter.
Turning to gross margin I will be referring to our non-GAAP results.
Just the gross margin in the third quarter was 20% up from negative 15% in the third quarter of 2021.
The substantial turnaround and reflect reflected in gross margin results from the inclusion of <unk>, 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 semaphore 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 the hard and exciting data here.
Want to acknowledge and thank our departing colleagues for their service to semaphore and to Gtx, 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 30, we had cash and cash equivalents of $191 3 million, where the cash runway into 2024.
Now turning to guidance, we are maintaining the previously issued full year and second half 2022 reported revenue guidance of 250, $245 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 annually.
Annualized revenue, combining the gtx 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% in a very meaningful reduction in cash burn.
The takeaway from the announcements today as 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.
Thank you we will now begin the question and answer session. If you'd like to ask a question you can do so by pressing zero one on your Touchtone phone once again to ask a question. Please press zero one on your touch tone phone.
Our first question comes from Mark Massaro from <unk>. Your line is now open.
Hey, guys can you hear me.
Yes, we can hi market great.
Yes, thanks for taking the questions.
So, yes, certainly a little bit of a surprise, but on the other hand I understand the focus on lowering cash burn I guess before I get into other questions I guess.
Can you just confirm that you did a thorough analysis and market checks that there were no material interested buyers of your women's health business and then related to that.
My understanding is that a cog is.
Planning to review coverage of expanded carrier screening, which theoretically could have increased your margins and our pricing.
So maybe can you just expand on those topics as well as where you stood with commercial payers with respect to carrier screening.
You got it and those are all the right questions. So.
One with regard to the market dynamics, we continue to see our declining asps. So that that is a reality.
And the costs associated with 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 at just from.
And overall strategic and cash perspective was not.
It 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.
<unk> is where are the market opportunities, where we have a truly differentiated offering.
And markets that are not really highly commoditized and so when it becomes a decision of are you going to continue to build our products, 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 on terms of hunting dominate in 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 or a 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 an exome and genome versus trying to keep.
Hundreds of panels, rather than 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 obviating the need for panel.
For the sale process.
We ran a thorough.
Thorough process and efficient one and a thorough one and arrived.
The place where others in the space to their own economic analysis and.
Well, 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 did it 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, where we're not able to make it happen either so I'll see if Kevin has anything to add but I.
Thank you are asking the right questions, but I can confirm it was an.
An exhaustive analysis.
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 you more exome and genome, which by far is the most data enrich.
Genomic information that we can combine with the clinical data that the company has access to in order to drive the centrella and data part of our strategy moving forward.
Okay. Thank you for that and then.
Obviously, the <unk> 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.
Yes, it'll be the exome and genome products and much of what you see there is 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 in particular.
And genome on a rapid basis being ordered in an inpatient setting you should see the mix of that within our overall overall portfolio grow overtime.
We put some data in the earnings release.
In slide deck associated with that and what Youre seeing is the execution of our strategy that we put forth about 18 months ago.
Really.
Take advantage of what we believe is the best in class rapid exome offering in the inpatient setting today, particularly focused in the NICU and pediatric markets those carry with them higher.
Higher higher Asps higher.
Higher reimbursement amounts.
Over time Youll see the legacy portion of the Gtx portfolio, which is individual gene tests and panels diminished over time.
So look forward to updating you throughout the year on how that test mix shift continues to evolve.
Okay, Great and just maybe last one I know today's actions I think you lowered the annual costs 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 will look like.
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 'twenty four and on a quarterly basis expect by the second half of the year to reduce current cash burn roughly 50%.
Okay. Thanks, guys.
Thank you our next question comes from.
Max Masucci from Cowen Your line is now open.
Hi, This is Joe on for Max.
That'd be great. If you could just dive into a little bit.
The health system side in the quarter just in terms of.
Size and economics of the partnership you signed.
So the health systems I think there's two ways to think about health systems moving forward. So historically semaphore has talked about found our health systems.
Each one has had kind of a unique product approach, where youre seeing either somatic testing that we're exiting.
Or you're saying hereditary cancer screening that drives a tremendous amount of of utilization and value for the health system. So each one of them.
The founder of health systems that we've been working with have have had a unique approach.
We haven't added any bound or health systems, because we wanted to move away from having unique programs that each one and drive towards a place of how do we scale frankly, it's costly to have bespoke programs that each one of these.
And so what we're doing on a go forward basis as it pertains to health systems.
<unk> actually has.
<unk> chips with with hundreds of health systems, what we're going to be doing is selling.
Selling clinician by clinician and 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 and the pediatric setting.
Some of these health systems.
Well the target to be able to see if there is a strategic.
The opportunity to be able to procure and then Jess clinical data from them.
Help us continue to fuel centralists generate additional health economics data. So on a go forward basis, what we're intending to do is go to the gene Dx customer base, which we're at 100 children's hospitals.
More of a top down approach from a selling perspective.
See where there might be some opportunities to be able to procure data moving forward I will say, though I think the 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 dataset that is one of the goals is to continue to grow the dataset for centrella on.
On the clinical data side that genomic data that we're going to be able to procure will of course grow with our with selling our gtx 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.
Got it and I believe the previous cash burn guidance was runway into 2024.
If I heard correctly it sounds like that.
Largely unchanged can you just walk through the puts and takes with much higher margin existing business here.
Yes, so we've got to extinguish some.
Liabilities of the exiting businesses. So we'll be focused on executing an orderly strategy, an orderly transition away from reproductive health and an exit of the business and those liabilities that exist.
So.
<unk> that we have cash available into 24 at this point in time.
Got it thanks.
Thank you. Our next question comes from Teva Hostettler from Jefferies. Your line is now open.
Yeah.
Your line is now open for your question.
Oh, I'm, sorry, I was not supposed to be in the Q I think that.
I think if you by accident sorry.
Okay.
Thank you. Our next question comes from Mac Sykes from Goldman Sachs. Your line is now open.
Hey, guys. This is Dave on for Matt could you walk us through how you calculate the $30 billion opportunity in rare disease.
Yes, happy to and the $30 billion opportunity for exome and genome.
Just as a point of clarification.
Darts and rare disease, and then we expand.
Out of rare disease and into what the entire industry has been facing with is how do you have one genome bait back 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.
And those are all obviously until then 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 the entire.
Service and business that many in our space have talked about of sequence on hold.
And be able to provide information throw out an individual's lifetime. So that newborn screening market is another 10 billion above the $3 billion for NICU and outpatient an exome and genome and then we get into a broader genomic health screening market.
That is.
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 rollout whether or not there is.
There is an underlying genetic condition that needs to be treated and so as I mentioned earlier.
Some of the conditions that we're trading today in adults include stroke, neuro degenerative 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 that was true of some of the data that was presented at <unk>, we're able to provide fewer variants of unknown significance, which one you're sequencing of genomes worth of data is absolutely the key to being able to ensure that you can provide a more definitive answer.
And so that's the breakdown of the market and $3 billion.
NICU and outpatient 10 billion for newborn screening and then another $16 billion for genomic health screening.
Okay. Thanks.
And so if we could drill guidance and a newborn screen more so $10 billion.
There is.
Three 4 million pregnancies.
Births a year in the U S.
So you got a.
Couple of like 2000, and something dollars per test. We've got 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.
So this is this is a tenure arc that we're talking about and the work that we're doing right now and newborn screening.
We're doing it without charging them right. So this is an opportunity for us to generate data that really test the action ability. So well once we learn more about how the commercial model can work for that will be essentially.
Assembling a more of a subscription type model.
It's also something that we want to work more proactively with payers.
Big has being able to get into value based care. This is one area, where we know that there is an interest from payers in terms of being able to essentially pay for a positive result, so.
Yeah, I would say more to come but 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 we are in an even earlier segment so.
You know no commercial model to share yet, but one of them in the future.
And on newborn screening that were linked back to the announced launch of the Guardian study that we initiated this quarter.
Yes.
Got it thanks guys.
Yes.
And presenters at this time I show no further questions in queue I will turn the call back to Catherine for closing comments, 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 US 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. Thank you.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for your participation you may now disconnect.
Yes.