SEMA4
INVESTOR CALL AUGUST 15 2022
UNOFFICIAL TRANSCRIPT
All participants are in a listen-only mode. After the
speaker's presentation, there will be a question and answer session. To ask a
question during this session, you will need a press star one, one, on your
telephone. Please be advised that today's conference may be recorded. I would
like to hand the conference over to your speaker today, Joel Kaufman, VP of
Finance and Corporate Development. Please go ahead.
Joel Kaufman:
Thank you, Michelle. Good afternoon, everyone. Thank you
all for participating in today's conference call. Joining me from the company
today will be Katherine Stueland, Chief Executive Officer, and Kevin Feeley,
SVP of Operations and Head of GeneDx. Rich Miao, the company's interim CFO is
recovering from a medical procedure and will not be able to join the call this
afternoon.
Earlier
today, Sema4 released financial results for the second quarter ended June 30th,
2022. A copy of the press release and our second quarter earning 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, and our
expected cost savings involve a number of risks, uncertainties, and assumptions.
For a
list and description of the risks and uncertainties associated with Sema4's
business, please refer to the risk factor section of our Form 10-Q filed with
the Securities and Exchange Commission today, August 15th, 2022. 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, August 15th, 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 will turn the
call over to Katherine.
Katherine Stueland:
Thanks, Joel. Just three months ago, Sema4 closed on the
acquisition of GeneDx. And announced that we were restructuring the company to
support a new foundation for the future. One focused on profitable growth,
operating efficiency, and data driven decisions. Given the immense market
opportunity, our industry leading technology, and consideration of the market
conditions, we are well on our way to turning Sema4 into a stronger company
than it ever has been.
In the
second quarter, our teams have continued to drive meaningful revenue growth. In
fact, hitting record volumes in pediatrics, thanks to the GeneDx
acquisition, while putting the company on track to deliver our target of
approximately 50 million dollars in cost savings this year. And with the
actions we've taken since the last conference call, we can confidently debut a
target of approximately 200 million dollars of cumulative cost savings through
2023.
Our
new management team has been reviewing our business lines and is acutely
focused on assessing what's working and what's not. And as a result, we're
making changes to ensure we strengthen our foundation and financials. So, we
can continue to realize our mission of unlocking insights from data, leading to
healthier lives and in doing so, realizing value for our shareholders. What
remains the same is our vision to deliver personalized health and wellness
plans for patients based on comprehensive data.
How we
realize that vision will be very different by virtue of strategy, execution,
and how we show up in the world. We're now operating Sema4 as a commercial
business focused on profitable growth. After comprehensive reviews of our
business lines, we've decided to focus on an area where we're well-positioned
to win and can drive profitable growth. Helping families make better health
decisions with our panels, exome, and genome. Fueled by an industry leading
interpretation platform designed for a genome's worth of information. And a
data engine built to combine genomic and clinical data to deliver better
insights.
Our
business reviews led us to a clear decision to exit somatic oncology, which
represented approximately 1% of our revenue with material negative growth
margins. Given the number of companies focused on somatic oncology and
Sema4's subscale position in that market, we've decided that investing further
in the tumor testing business is not strategically or financially merited. We
plan to wind down somatic testing operations in the third quarter and cease
operations by the end of the year, at which point we'll be closing our Branford
facility.
We're
also redirecting our hereditary cancer testing from our Stamford clinical
laboratory to our Maryland laboratory to drive down cogs, as we continue to
sell that through our commercial channels. We will also be reducing our
physical footprint with plans to consolidate our headquarters into our Stamford
laboratory. We've made a difficult decision to part ways with approximately
250 people, who were notified today. In total, we've reduced a legacy
Sema4 workforce by around 30% this year.
That's
incredibly hard. And we are deeply grateful to all of those who have worked
tirelessly for the company. And a special thank you to those who will continue
to work as we wind down our efforts in Branford and transition a portion of our
lab operations to Maryland. We want to thank the employees affected by today's
announcement for their contributions and hard work during their time at Sema4.
As I
said earlier, our mission of delivering health insights from data remains
strong, albeit with an evolution of that strategy. I want to walk you through
three changes that we're making to support our new focus. One, profitable growth.
Two, scalable R&D strategy. And three, operating efficiency. First, our
focus on profitable growth. Obviously, the somatic exit falls in line with
this. And our focus will be in areas where we have a unique capability in the
market, enabling us to drive volume, have a healthy reimbursement rate in ASPs,
provide clear value to clinicians, patients, payers, and health systems, as
well as pharma partners. And importantly, areas where we have a path to true
profitability.
Our
strong growth in the pediatric segment is a clear example of this. We've driven
double-digit year-over-year revenue growth since implementing a new
commercial strategy to bring our industry leading neurodegenerative panels,
exome and genome, to the NICU and in the pediatric setting. We're
generating data from our University of Washington study, examining the
benefits of exome and genome in the NICU, and in the outpatient pediatric
setting. We're seeing payers, including State Medicaid start to cover this.
And we’ve begun to operationalize
a statewide collaboration to sequence healthy babies at birth.
It's
this same rigor of commercial business planning that we'll continue to deploy
as we formulate our plans for expanding utilization of carrier screening and
reproductive health, where we currently are one of the leading partners for IVF
centers across the country. We'll provide more insight on our commercial
plan over the coming quarters to ensure our investors and partners have the
line of sight they need to understand how we're evolving our strategy for
driving growth designed to improve the overall health of our business while
making an impact for patients.
Second,
our scalable R&D strategy. We're shifting from an academic spinoff
strategy for R&D to a scalable one. Data insights will continue to be
the way that we design our product roadmap. But we need to start by having a deliberate
and clear strategy that puts an equal premium on scale as it does
innovation.
This
is true for how we're working with health systems, as well as how we're going
to productize our pharma, offering. Our comprehensive data assets, including
longitudinal clinical data, in addition to one of the world's largest data sets
of approximately 400,000 clinical exome, the vast majority of which are
associated with rare disease, provides Sema4 an unparalleled platform for
pharma to leverage.
To
lead our R&D evolution to a new chapter of innovation and scale, we are
pleased to welcome Matt Davis, former Head of AI at Invitae, who is
joining us as Chief Technology and Product Officer. Together, with
Gustavo Stolovitzsky leading our research and data sciences effort, we will
continue to invest in the development of commercial products, utilizing the
data developed and curated on the Centrellis platform.
Third
driving operating efficiency. We're bringing a level of operational rigor to
the company in everything from our lab strategy to how we operate as a
leadership team. With our operations team supported by Kevin's leadership,
we've begun integrating the best of both Sema4 and GeneDx to drive down cogs,
improve turnaround times, and strengthen our approach to revenue cycle
management, which is critical to ensuring we also strengthen our
partnerships with payers.
With
the migration of hereditary cancer testing moving to Maryland, our evolution
has begun. With the changing needs of the business, we've also changed our
team. Dr. Eric Schadt, founder of Sema4 will be leaving. I'd like to
thank Eric for his significant contributions to Sema4 over the years. He
founded Sema4 at Mount Sinai, established it as a standalone private company,
and led our go public via a merger last year. His vision has been instrumental
in getting Sema4 to where it is today. We wish Eric well in all of his future
endeavors.
Turning
to the performance of the business in the quarter. I will provide the following
metrics on a pro forma basis as if we had owned GeneDx starting January 1st,
2021 to provide the most holistic view of combined Sema4 and GeneDx businesses.
Resulted volume of 130,000 tests was up 19% on a year-over-year basis. Revenue,
excluding COVID-19 testing and a one-time revenue adjustment that we'll discuss
in a moment, was up to 7% on a year-over-year basis. We also experienced strong
volumes in our reproductive health franchise as we continue to be a leader in
the IVF setting.
However, that strength in volume was
partially offset by continued ASP pressures and reproductive health testing.
And this relates back to the one-time revenue adjustment that Kevin will
discuss shortly. We are transforming Sema4 for the better. There's a
massive market opportunity in front of us. With the changes we've begun to
make, and with the GeneDx integration well underway, with our exome, genome,
and data insight engine, we're in the whole position to make health insights
the new standard of care for everyone. With that, I'm pleased to pass the call
over to Kevin.
Kevin Freeley:
Thank you, Katherine. And good afternoon everyone. Since
joining Sema4 upon completion of its acquisition of GeneDx, I've had the
privilege of leading a number of our operational teams across the company,
including but not limited to, laboratory operations, genetic counseling
services, supply chain management, and the revenue cycle across the combined
company.
In this
past quarter, we've been focused on integration in all areas of the company and
key initiatives to drive forward the third area of focus Katherine outlined,
which is driving operating efficiency. All operational aspects of the company
are under review to ensure proper resource management, automation, and enabling
technologies are in place to drive cost efficiency. I look forward to updating
you on our progress in future calls. Today, I'd like to focus on revenue cycle
management and adjustments we've made as we take a fully integrated approach
with our billing operations and relationships with our third party payers.
We
disclosed today in our 10-Q filing that we're currently negotiating with one of
our larger commercial payers regarding the potential recoupment of payments for
Sema4 carrier screening services rendered from 2018 to early 2022. As a result of the negotiations
to this point and an assessment of our current reimbursement landscape for
third party payers, Sema4 has reversed 30.1 million dollars of revenue this
quarter related to prior periods. We believe this reversal of revenue
accurately reflects and captures the potential risk of recoupment from our
entire portfolio of third party payers, which is a risk that is common in our
industry.
Our new
leadership team is committed to strengthening our relationships and
partnerships with the payers to improve access for our customers need and
require our services. And now I'd like to hand the call to Joel, to bring you
through our financial results and guidance.
Joel Kaufman:
Thank you, Kevin. For reference, we have provided a
detailed breakdown of historical volumes and revenue on a pro forma basis
beginning in the first quarter of 2021 in the appendix of the second quarter
earnings presentation posted on our investor relations website. During the
second quarter of 2022, total Sema4 revenue was 36 million dollars compared to
47 million dollars in the second quarter of 2021. When adjusting for the 30 million dollars of
revenue reversal related to prior periods recorded in the second
quarter, second quarter revenue would have been 66 million dollars.
[SEE PAGE 16-17 FOR MORE ON THE PAYER REVERSAL]
Regarding
volumes. We achieved a new record this quarter with approximately 118,000
resulted tests, excluding COVID-19. Pro forma resulted volumes in the quarter
were 133,000. This represents a 19% year-over-year increase versus the second
quarter of 2021 on a pro forma basis. As a reminder, we completed the
previously announced wind down of our COVID-19 business in 1Q 2022.
Turning
to gross margin. I'll be referring to non-GAAP results. I encourage you to
review the reconciliation of GAAP to non-GAAP measures, which can be found in
today's earnings release and 10-Q filed with the SEC. Adjusted gross margin
excluding the prior period revenue adjustment recognized in the second quarter
was 4% for 2Q '22. Gross margin was also negatively impacted by lower recorded
ASPs in the reproductive health business during the second quarter.
Turning
to the balance sheet. As of June 30th, we had total liquidity of approximately 410 million
dollars with cash and cash equivalence of 285 million and an undrawn revolver
of 125 million. We anticipate most of the restructuring process
Katherine reviewed will be completed by the end of the year. Combined with the
announcements earlier this year, these actions will generate approximately 50
million dollars in 2022 savings.
These
actions combined with a focus on capital controls will enable an additional 150
million in savings in 2023. The vast majority of which are recurring in nature.
Now, turning to our updated guidance. Starting with volumes. We are increasing
our previous targets and now expect greater than 50%, sorry, greater than 60%
growth on a reported basis. On a pro forma basis, this would imply 19% growth
year-over-year.
Turning
to revenue. We are
lowering our previous targets based on a combination of the revenue reversal
mentioned previously, and a more conservative ASP outlook on the legacy Sema4
business. These headwinds are partially offset by strength in the
legacy GeneDx business. We expect Sema4's reported revenue to be in the range
of 245 to 255 million dollars. Please note, reported revenue guidance excludes
approximately 48 million dollars of revenue generated from GeneDx for the first
four months of 2022 prior to the close of the acquisition.
We are lowering our full-year
adjusted gross margin guidance to 4 to 9%, primarily as a result of
the prior period revenue adjustment, which was a 700 basis point headwind to
annual gross margin. 2022 gross margins will also be impacted by a reduction in
ASPs and the reproductive health business. Given the complexity of the GeneDx
acquisition closing inter quarter and the revenue reversal recognized in the
second quarter of this year, we will also provide guidance specifically for the
second-half of the year for clarity.
We
expect revenue in the second-half in the range of 154 to 164 million dollars,
and gross margins in the range of 15 to 20%. This trajectory will put us well
on our way to our long-term target of greater than 50% gross margins. We plan
to reduce our cash spend significantly throughout 2022. And finish 2022 with at
least 165 million dollars in cash and equivalence. We expect our weighted
average basic share count for the full-year will be in the range of 335 to 340
million shares. We expect the fourth quarter 2022 basic share count to be in
the range of 380 to 385 million shares.
In
closing, as we exit this year, we anticipate Sema4 will be a company with
normalized pro forma revenue of 320 million dollars, more than 165 million
dollars of cash on the balance sheet, 125 million dollar undrawn revolver, cash
runway into 2024, and an operating model that gives us the ability to achieve
positive free cash flow by the end of 2025. We are encouraged by the progress
we have made thus far in 2022. And look forward to the improved financial
position of the company following the announcements made today. Now, I'll turn
it back to our CEO, Katherine Stueland.
Katherine Stueland:
Thanks, Joel. With our focus on profitable growth,
scalable R&D strategy, and improved operating efficiency, I'm confident
that these changes will result in better outcomes for our patients, providers,
payers, partners, team members, and importantly, the shareholders who entrust
us to realize our mission. We're grateful for the opportunity to do so. I would
now like to open the call up for questions. Operator?
Operator:
Thank you. To ask a question, you will need a press star
one, one on your telephone. Please stand by while we compile the Q&A
roster. And our first question is going to come from the line of Dave Dillahunt
with GS. Your line is open. Please go ahead.
Dave Dillahunt:
Hey, guys. Any additional color you can provide on the outlook
for signing additional health system partnerships?
Katherine Stueland:
Thanks, Dave. Yeah, absolutely. That's a fantastic place
to put some attention. So, first, what we are doing is taking a look at the
existing health systems that we're working with. I think historically, they've
been characterized as learning partnerships. And what we're doing is working
with them to figure out exactly how to ensure we can scale before we add
additional health partnerships. So, right now, each one has a unique focus. One
is focused on hereditary cancer screening.
Another
is focused more on healthy mom and healthy baby. So, and that gives us an
opportunity to be able to bring to a health system, the GeneDx suite of
products in the pediatric setting. So, we've actually hired somebody to join
the team to be able to work with our new R&D leads to really build that
roadmap to scale health systems before we continue to invest in yet another
learning system. And so, that is what our plan is. Once we have an approach to
being able to scale them, I think we'll be able to provide a better insight in
terms of how we might be able to go-to-market to bring more online.
Dave Dillahunt:
Great. And on the biopharma partnership side, any additional color you can
give us on the level of demand you're seeing in the market?
Katherine Stueland:
Yeah, absolutely.
So, first, in terms of the selling approach that we're taking with biopharma,
it really was previously a group of Sema4 folks who were coming together and
really ideating with different biopharma companies. In the same way that we're
trying to bring some commercial rigor and scale to health systems as well as
the entire business, we want to do the same with biopharma. So, I would say
with the close of the GeneDx acquisition, we've been really pleased,
particularly in the rare disease space.
The
types of partnerships that we have in the pipeline. But we have a lot of work
to do to really pull those through and realize them into partnerships that will
be gross margin positive. And again, what we'll want to do is spend some time
figuring out how to productize that. So, we can actually go to health systems
with a very clear suite of services that we can provide to them rather than
approaching each one as a unique go-to-market approach. So, more to come on
that.
Dave Dillahunt:
Great. Thank you.
Operator:
Thank you. And our next question comes from the line of
Brandon Cleared with Jefferies. Your line is open. Please go ahead.
Matt:
Thanks. This is Matt on for Brandon. Just quickly, first
on the updated guidance. Appreciate the caller on the quantifying the
adjustment for the prior period changes. On the other part of the lowering of the guidance
related to volume and pricing within the reproductive health, can
you just talk a little bit more about what changed there? And any way to
quantify what you're assuming for ASPs there now versus prior to quantify the
magnitude of the step down there? Thanks.
Katherine Stueland:
Yeah, absolutely. And glad you heard the message loud and
clear. It's really two factors. One being ASPs and the other being volume related. It was a
pretty aggressive back-half of the year. And as we have a new commercial lead
in place and a new commercial leadership team, we're just trying to be really
clear-eyed in terms of the volume that we see right ahead of us. Obviously,
Sema4's been really focused in the IVF setting. There is an entire universe of
OB volume that is also out there that we may focus on. But that also requires a
different commercial strategy. So, what I really tried to talk through in some
of my remarks was the commercial rigor that we're bringing to there.
Jen Brendel's leading that
effort. She was an advisor at Bayer and Invitae. And really has developed I
think an elegant strategy that provides all of the things that you need to
deliver on volume on strong ASPs. We have a full operational plan to
continue to drive down our cogs to deliver on stronger gross margins. So, all
of this I would say we're seeing play out very nicely in the pediatric setting.
And it's that same approach that we need to drive in terms of reproductive
health. But for the back-half of this year, I think we wanted to take the most
conservative approach in terms of what we could see by way of ASPs and by way
of volume that would accompany that.
Joel Kaufman:
Yeah. Matt, just walking through the ASP dynamic embedded
in the guidance. So, I'd point you to the updated table we provided both in the
press release and within the appendix of the investor presentation that was
posted on our website today. If you normalize for the out-of-period revenue
adjustment in the quarter,
ASPs in our complex reproductive health segment here were about 520 dollars
in the quarter. That compared to about 712 dollars in the quarter prior. I
would say we're expecting for the remainder of the year, at least double-digit
sequential declines from 2Q into 3Q for those ASPs in the
reproductive health business. And stabilization thereafter.
Dave Dillahunt:
Okay, great. That's really helpful color. And then jumping
over to the additional 150 million of annualized cost savings. You guys laid
out a number of items from somatic tumor testing, further reorganization,
moving the lab, and some commercial moves. So, I guess can you talk about maybe
the relative size and comfort with that another 150 million? And then going
forward to '23 and beyond, what do you think is the right size of the
commercial organization? Thank you.
Katherine Stueland:
Sure thing. I'll share my perspective. And then we'll hand
it over to Kevin as well. We've had a full transformation management office
that has been leading a pretty thorough effort in terms of being able to ensure
that we can deliver on the cost savings, particularly given the market that
we're all living in. And so, it's everything from revenue optimization, that's
something that Kevin is focused on, to lab and footprint optimization.
In
addition to taking a look at the last possible elimination that you want to
have to make a decision on is your people. Today, as I said on the call,
with the 250 folks that we're parting ways with, that is about 30% of the
legacy Sema4 team. So, I would say that we have made a pretty
multi-dimensional approach here in terms of being able to realize that
cumulative 200 million dollars in savings. And some of it is a matter of
timing. So, I'll let Kevin talk a bit more.
Kevin Freeley:
Yeah. Matt, and some of the confidence comes through
leveraging a blueprint that GeneDx has previously established. Running a full
suite of germline tests. So, the move down to Maryland allows us to leverage a
fair bit of automation and other laboratory techniques that have been in place
at GeneDx in that lab in Maryland for a number of years. And the shift down to
the Maryland lab really gives us the ability to run costs at a level of
efficiency that would've taken Sema4 a fair bit of time to accomplish on their
own.
And
so, really was one of the premise of the integration was to rationalize the
laboratory footprint and leverage some of the investments that GeneDx had been
making over the past decade into laboratory automation and techniques in the
laboratory. Across other operational functions, we see the implementation of
other automation and technology that should help us get more efficient in
servicing our products. So, looking at some operational groups outside the
laboratory as well, and finding meaningful cost reductions as we turn the page
into 2023.
Matt:
Super. Thank you.
Operator:
Thank you. And our next question comes from the line of
Max Masucci with Cowen. Your line is open. Please go ahead.
Max Masucci:
Hi. Thanks for taking the questions. Just a question on
the second-half guide. With the revenues being a bit below, but it also looks
like you raised the resulted test volume guidance. So, appreciate the comments
around reproductive health. Outside of that segment, would love to hear which
other products and services are driving that upward revision for the full-year
volume growth guidance?
Katherine Stueland:
Yep. That is exactly the place to zero in. So, about a
year ago, we assembled an overall business strategy for the GeneDx suite of
products, which includes neurodegenerative panels really for rare disease. But
those are rapidly being adopted into the developmental delay setting, in
addition to other places as well in the pediatric sector. So, we put together I
think a pretty elegant commercial strategy to ensure that we could drive volume
growth, that it was revenue driving volume.
And that we can make an impact
on the reimbursement landscape as well to ensure that we're opening up access, we're
getting paid for this volume. So, we're seeing now a year later,
we started making the investments in the commercial team, commercial
leadership, medical affairs team, a year later, we're seeing those investments
paying off. So, as we're continuing to evolve the reproductive health strategy,
is really the pediatric sector where we're seeing a lot of uplift as we think
about the back-half of the year.
Joel Kaufman:
Yeah. Max, just in the mechanics, in terms of the updated
guidance. The way I would think about it is you have the one-time out-of-period
revenue adjustment that was a headwind in the quarter. The legacy Sema4
business, we're taking a more conservative view on both volume and ASPs. But we
are revising our underlying assumptions at the legacy GeneDx business up based
off of the demand we're seeing for the whole suite of GeneDx's products to
date.
Max Masucci:
Okay, great. Second one related to gross margins. In the
second-half gross margin guide, just as we think through the pacing of the
gross margins in Q3 and Q4, how should we think about the timing of some of
these key milestones or factors you're solving for in terms of the lab
operations and the movement there?
And
then just more generally, if we separate the opportunity for organic gross
margin improvement that's unrelated to say reclassification of items between
optics and gross margin, just trying to get a sense for how we can best track
your progress towards the organic gross margin improvements and the pacing in
Q3 and Q4 in the context of the guide?
Joel Kaufman:
So, Max, I'll start with the pacing. So, if you think
about the mechanics of the exit of the somatic business, which will
essentially be a wind down of that product line throughout the remainder of the
year. And we're going to essentially stop accepting samples in November.
So, you're going to likely see somatic volumes decline, which will be less of a
drag on gross margins for the remainder of the year, a greater impact in 4Q
than 3Q. And then thinking about the move of hereditary cancer from Stamford
down to Gaithersburg. And again, that will not impact the third quarter. So,
that would be a benefit that we realize in the fourth quarter.
And
then on top of that, highly encouraged by the trajectory of gross margin that
we're seeing at GeneDx. Margins continue to beat our internal expectations and
are up meaningfully relative to the exit trajectory out of last year. So, if
you think about that is a part of the business that's growing let's say above
the corporate average, contributing more gross margin in the fourth quarter
than the third quarter. So, that's how I would think about the pacing. I'll
kick it over to Kevin though, who may have some more details around underlying
operations and how that will impact the gross margin.
Kevin Freeley:
Yeah. Thanks, Joel. Not much to add there, except for
beyond those identified items, we've got established now, well-established, a
transformational office. Really looking at all other additional levers that we
could pull to explore strategic options to drive down costs not just in cogs,
but operationally as well. And look forward to providing further updates as the
year progresses.
Max Masucci:
Okay, great. Final question. Just want to first wish Eric
the best in his next chapter. And then second, Matt is stepping in as chief
technology and product officer. So, could you just maybe give us a sense for
some of the initiatives or efforts that Matt spearheaded during his time at
Invitae, where he could have an immediate impact at Sema4? And then just
generally, if there are any major changes to the R&D and biopharma strategy
going forward?
Katherine Stueland:
You've got it. You're asking one of my favorite topics,
Matt Davis' contributions. And I worked with him for several years. Matt I
think he's uniquely capable in being able to think through vision in terms of
where we're going with exome, and genome, and a data strategy, while also being
able to sit in a business review, hear a problem, and think about if I had a
squad of five of my people, we could probably solve that issue, whether it's on
a revenue cycle issue or an ordering issue.
He's
able to really do both the high science and vision work that we need him to do
in partnership with Gustavo, while also being able to look at the business
problem work that we need him to do in partnership with Gustavo, while also
being able to look at the business problems, the business operation
opportunities that we have in front of us to really run the company more
efficiently. And he also brings, thanks to his time at IBM and some work that
he and I partnered on while at Invitae, was a design approach to product
development.
So,
we're really excited about the many different ways that Matt's going to be
contributing, including what we've talked about today in terms of being able to
develop a roadmap for scale for R&D. I think part of the immense excitement
about Sema4 in the early days, being a spin-out from Sinai, very academically
minded where all of the different places that you can go from a data
perspective and being able to place a lot of bets. And now, we want to move
into a new chapter from an R&D perspective where we're placing fewer bigger
bets. That have behind them a business plan, and a full product roadmap, and a
clear approach to being able to take an idea, turn it into a product or service,
and turn that into a revenue generating approach.
So,
that's really the shift that we want to see out of the team here at Sema4 in
terms of product technology, data science. How do all of those come together to
really ensure that we're able to support a commercial stage growth company that
has an incredible market opportunity in our hands? So, we're thrilled to have
Matt. Gustavo is stepping up into a fantastic role. And we're just thrilled to
be able to have them both leading us in this new chapter.
Max Masucci:
Great. Well, I appreciate the detail.
Operator:
Thank you. And again, if you have a question at this time,
please press star one, one. And our next question comes from the line of Mark
Massaro with BTIG. Your line is open. Please go ahead.
Mark Massaro:
Hey, guys. Thank you for the questions. Maybe the first
one. I don't think I heard the topic of Centrellis come up. So, maybe can you
just talk about how important the big data platform strategy is at Sema4 at
this time? I know that about a quarter ago, I think Dr. Schadt indicated that he was planning to
focus on big data, the information platform, helping with health systems and
pharma companies. So, maybe just an update on the Centrellis
strategy. How core is it? And then on a related question, can you maybe update
us on who may be stepping in for R&D? Or, is that a position that you're
looking to fill?
Katherine Stueland:
Great question. So, first, yes, Centrellis is central to
all of this. So, when I talk about the data engine and how we are combining
genomic data with longitudinal data, clinical data, that's what we're referring
to. So, Centrellis is
absolutely a key part of the data strategy moving forward. We're continuing to
build on that by working with health systems. And continuing to
ensure that we have got a strong pipeline of genomic volume coming in through
our commercial channel.
So,
yes. When I'm talking about the interpretation platform that we've built, in
that case, I'm referring to the interpretation platform that we built at
GeneDx, which is the most advanced platform in terms of being able to take an
exome or a genome's worth of data and be able to deliver it with fewer buses
with every patient that we're running through that platform. So, I think
there's those two platforms that we're talking about that I think really help
contribute to a richer data strategy moving forward.
And
that interpretation platform gives us a really important commercial competitive
advantage because we've
been running these exomes and genomes, and that platform's been getting smarter
over the past eight years. So, it's one of the reasons that our exome, nobody can compete
with it. So, yes. Absolutely central to the data strategy moving forward.
And we're excited. In terms of R&D leadership, that is Gustavo and Matt
coming in. So, all of the folks who were reporting into Eric and others on the
R&D or product teams, will be reporting into Matt and Gustavo. So, research
and development is I suppose rebranded as a technology product, data science
moving forward.
Mark Massaro:
Okay. That's a great answer. I also wanted to ask about, I think it was the 30
million dollar adjustment in the quarter. Would you be willing to provide a
little more information about what some of the changes in estimates were
related to? And then was this one payer, or was it multiple payers? And do you
think there could be any impact to either pricing of these tests, or
potentially the contract status of any of these payers?
Joel Kaufman:
Yeah. Mark, thanks for the follow-up there. First, I'm sure hopefully, you
can appreciate. We're in ongoing negotiations with a payer. So, I'll share as
much as we can at this point. But potentially, more limited than you would
like. So, in the second quarter, a large payer of ours completed an audit. That
audit spanned back three years. The results of which is a refund request on
previously paid claims. These were services provided by Sema4. So, the dispute
really comes down to a coverage decision with the payer requesting recoupment
of amounts previously paid.
We've taken reserves on our
balance sheet that based on current information to date captures what we
believe is the potential risk of recoupment from this and other third party
payers in our portfolio. To your question on contracting in the context of this
dispute, we're working to finalize an updated contract with this particular
payer on a combined company basis. I'll note that this was one payer that had
significantly higher contracted rates than standard commercial lab rates. But hopefully, you can
appreciate that discussions are ongoing. But we look forward in the days to
come to resolving not only dispute, but the go-forward contract disposition with
this payer. But believe the reserves on the balance sheet cover off on what
we'd expect is risk in the portfolio at large.
Mark Massaro:
Okay. That's helpful. So, I totally understand the closure
of the lab in Branford, Connecticut given the somatic testing business was
quite small. And it certainly makes sense to lower your cost structure and move
hereditary cancer testing elsewhere, like Maryland. Maybe can you just remind
us where the bulk of the carrier screening testing is being accessioned at this
time? And how strategic is operations in Connecticut at this time? And are you
contemplating potentially moving operations to other lower cost jurisdictions?
Joel Kaufman:
So, our expanded carrier screening or carrier screening
testing is germline in nature and run in this laboratory in Stamford. And
we're exploring all options for the rest of the reproductive women's health
line of testing, and where that should be performed, and how, frankly. With
respect to your question on Connecticut, the company's headquarters is in
Connecticut. I think we mentioned in our prepared remarks.
Our
headquarter space, which is office space, probably not unlike many other
companies. We found we have far more office space than individuals to fill it
at the moment. And a beautiful laboratory facility right down the street from the headquarter office space. And
so, we'll be looking to consolidate that space in Stamford, Connecticut over
the coming months.
Mark Massaro:
Okay. Thanks very much. Appreciate the color.
Operator:
Thank you. And I'm showing no further questions. And I'd
like to turn the conference back over to Katherine Stueland for any further
remarks.
Katherine Stueland:
Great. Well, thank you for joining us. Really important,
thank you to our team members who have been working with us. And we look
forward to catching up with you sometime in the coming weeks and months. Thank
you.
Operator:
This concludes today's conference call. Thank you for
participating. You may now disconnect.
##
Sema4 Announces
Continued Restructuring, Business Highlights, and Reports Second Quarter 2022
Financial Results
New management team implements significant
restructuring to focus on profitable growth, efficiency, and scale
19% pro forma1 volume growth
vs. 2Q 2021
Sema4 to host a conference call today at 4:30
p.m. ET
STAMFORD,
Conn., Aug. 15, 2022 (GLOBE NEWSWIRE) -- Sema4 Holdings Corp.
(Nasdaq: SMFR) (“Sema4”), a health insights company, today announced a series
of corporate realignments, business highlights, and financial results for the
second quarter ended June 30, 2022.
"We
saw strong volume growth in both our reproductive health and recently acquired
pediatrics and rare disease businesses, which delivered on record volumes. The
underlying performance of the legacy GeneDx business is meeting our internal
expectations and tracking ahead of our previously issued guidance. In order to
drive Sema4 toward profitable growth, we have made strategic decisions since
last updating the market during our first quarter 2022 conference call in May,”
said Katherine
Stueland, Chief Executive Officer of Sema4.
The
company is on track to deliver against its previously announced cost savings
target of approximately $50 million in 2022. With additional initiatives
underway, the company will be on target to achieve more than $150 million in
annualized savings and approximately $200 million in cumulative savings by the
end of 2023.
Led
by Sema4’s new Transformation Management Office, the actions taken by the
company include:
- Exiting the somatic tumor testing business, including
the planned closure of the clinical laboratory in Branford, CT, effective December 31, 2022.
This business line represents less than 1% of the company’s revenue and
approximately $35 million in annual expense.
- Eliminating approximately 250 positions, representing
approximately 13% of its workforce. Combined with the prior reductions in
force in the first half of 2022, the company has eliminated approximately
30% of roles from the legacy Sema4 business.
- Moving hereditary cancer testing operations from
Stamford, CT to Gaithersburg, MD at the end of the third quarter of 2022. The company believes this
effort will improve gross margins by leveraging superior automation
capabilities in the clinical laboratory in Gaithersburg.
- Reorganizing the commercial team to deploy a more
productive and data-driven strategy in support of profitable growth.
Moving
forward, Sema4 will focus on building the company’s health insights business by
delivering a portfolio of genomic and data solutions to guide patients through
their family health journey. With new leadership and strategy, Sema4 will also
work with its founding health system partners to develop scalable plans for
data generation and broad utilization of testing services, as well as
productize offerings for biopharma partnerships.
“Our
mission is to unlock insights from data, leading to healthier lives. To do
that, we’re making pivotal decisions to strengthen our foundation and finances.
Since May, our new management team has been assessing the overall operating
model, looking at the profitability profile of each line of business. We are
clear-eyed about the opportunities we have today to make a positive impact on
more patients by focusing on our strengths and in areas where we have
operational scale, competitive advantage, and scientific leadership,” said Ms.
Stueland. “As we look forward, Sema4 will have a dramatically improved cost
structure and a more targeted commercial effort supported by an optimized
product development strategy. This will enable us to continue to accelerate the
use of genomics and leverage clinical data to enhance the standard of care
through the more extensive use of precision medicine.”
Second Quarter & Recent Highlights
“During
the second quarter, we experienced strong underlying demand for our core
testing services, including carrier screening, non-invasive prenatal screening,
and our pediatric and rare disease franchises, with pro forma volume growth of
19%,” said Rich
Miao, Interim Chief Financial Officer of Sema4.
Highlights
include:
- Testing volumes on a pro forma basis were up 19%
in the second quarter of 2022 compared to the same period of 2021, with
132,622 tests resulted (excluding COVID-19 tests)1.
- Testing volumes on a reported basis were up 63%
in the second quarter of 2022 compared to the same period of 2021, with
117,838 tests resulted (excluding COVID-19 tests)1.
- Workforce reduced to approximately 1,600 employees
and exiting the somatic testing business to help achieve the targeted $50
million of cost savings in 2022.
- Published the first data-driven study to predict
preeclampsia events throughout the pregnancy journey with models developed
from large-scale electronic medical record data.
Second Quarter 2022 Financial Results
Total
revenue for the second quarter of 2022 was $36.2 million compared to $47.0
million in the second quarter of 2021. Excluding the $30.1 million of prior
period revenue adjustments recorded in the second quarter of 2022 due to our
change in estimates, total revenue would have been $66.3 million for the
quarter.
Pro
forma revenue in the second quarter of 2022, assuming GeneDx’s results were
included for the full applicable quarter, excluding COVID-19 related revenue
and the $30.1 million of prior period revenue adjustment would have been $78.1
million compared to $72.8 million in the second quarter of 2021.
Net loss in the second quarter of 2022 was ($85.7) million. Adjusted net loss
for the second quarter of 2022 was ($72.9) million compared to ($43.5) million
in the same period of 2021.
Total
cash and cash equivalents were $285 million as of June 30, 2022 and the
company’s $125 million revolving credit facility remains undrawn, bringing
total liquidity to $410 million. As of August 9, 2022, Sema4 had 380,641,510
outstanding shares of Class A common stock.
Fiscal Year 2022 Guidance
The
company now expects fiscal year 2022 reported revenue to be $245-255 million,
reflecting the inclusion of GeneDx’s results for the eight months of ownership
in 2022. Embedded in this revenue guidance is a $24 million reduction in
revenue due to our estimated change of Sema4’s revenue related to periods prior
to 2022 and a more conservative outlook on volumes and pricing trends within
our reproductive health product lines for the remainder of the year.
Sema4
is updating its 2022 adjusted gross margin target and now expects full year
2022 adjusted gross margin to be in the range of 4-9%, inclusive of the $24
million reduction in revenue due to our estimated change in revenue related to
periods prior to 2022. Excluding this revision would imply an adjusted gross
margin in the range of 11-16%.
The
company expects second half 2022 revenue in the range of $154-164 million, and
second half 2022 adjusted gross margin in the range of 15-20%. The company
expects to end 2022 with more than $165 million of cash and cash equivalents
and total liquidity of over $290 million.
Leadership Change
- Sema4 also announced changes to its management team
and governance:
- Founder Eric Schadt is resigning from his roles as President
and Chief Research & Development Officer, as well as his position as
a Director of the company, effective today.
- Matthew Davis, former Head of AI & Data at
Invitae Corp., is joining the company as Chief Technology & Product
Officer. Mr.
Davis will work in close partnership with Chief Science Officer Gustavo
Stolovitzky to drive scientific and product innovation to deliver on the
company’s data strategy for health systems and biopharma partners.
“We
would not be where we are today without Eric’s vision. He conceived Sema4 and
led its rapid growth from a spin out of Mount Sinai to a publicly held
company,” said Ms. Stueland. “As we move into this new phase of commercial
scale fueled by customer-centric scientific innovation, I’m excited about the
essential role that Matt and Gustavo will play in helping us shape a truly
pioneering future of healthcare.”
Webcast and Conference Call Details
Sema4
will host a conference call today, August 15, 2022, at 4:30 p.m. Eastern Time.
Investors interested in listening to the conference call are required to register
online. A live and archived webcast of the event will be available on
the “Events” section of the Sema4 investor relations website at https://ir.sema4.com/.
1 Pro forma metrics consolidate GeneDx op
GENOMEWEB RE SEMA4:
…The moves come in the aftermath of Sema4's $623 million acquisition of GeneDx
from Opko Health, which closed April 29. Former GeneDx boss Stueland took over
as Sema4 CEO when the deal closed, contrary to earlier plans to have Stueland
and Schadt serve as co-CEOs.
…Diagnostic test revenue for Q2 was $34.0 million, down 24 percent
from $44.8 million in Q2 2021. Other revenue was marginally down, to just shy
of $2.2 million.
Sema4 lowered its 2022 revenue estimate to a range of $245 million
to $255 million, mostly thanks to the revenue reversal and a more conservative
outlook on legacy Sema4 product lines, including reproductive health testing.
Revenue estimates are down from a previous forecast of $305 million to $315
million, which includes contributions from GeneDx.
The
Q2 total reflects nearly $30 million in "revenue reversal" related to
an unnamed large payor's claims that it overpaid Sema4 for previous testing
services, without which Sema4 would have
booked $66 million in sales, according to Kaufman. The firm said in a regulatory filing Monday
that it is also engaged in discussions with a payor over other alleged
overpayments.
https://ir.sema4.com/node/8561/html
As noted above, third-party payors, including government programs,
may decide to deny payment or seek to recoup payments for tests performed by
the Company that they contend were improperly billed, not medically necessary
or against their coverage determinations, or for which they believe they have
otherwise overpaid, including as a result of their own error.
As a result, the Company may be required to refund payments already
received, and the Company’s revenues may be subject to retroactive adjustment
as a result of these factors among others, including without limitation,
differing interpretations of billing and coding guidance, and changes by
government agencies and payors in interpretations, requirements, policies
and/or “conditions of participation” in various programs. The Company processes
requests for recoupment from third-party payors in the ordinary course of its
business, and it is likely that the Company will continue to do so in the
future. If a third-party payor denies payment for testing or recoups money from
the Company in a later period, reimbursement and the associated recognition of
revenue for the Company’s testing services could decline.
As an integral part of the Company’s billing compliance program,
the Company has and will periodically assess its billing and coding practices,
respond to payor audits and overpayment claims, and investigate reported
failures or suspected failures to comply with federal and state healthcare
reimbursement requirements, which may arise without fault on the part of the
Company.
From time to time, the Company may have an obligation to reimburse
Medicare, Medicaid, and third-party payors for overpayments regardless of fault.
Settlements with third-party payors for retroactive adjustments due to audits,
reviews, or investigations are considered variable consideration and are
included in the determination of the estimated transaction price for providing
services. These settlements are estimated based on the terms of the payment
agreement with the payor, correspondence from the payor, the Company’s
historical settlement activity (if any), and the Company’s assessment of the
probability a significant reversal of cumulative revenue recognized will occur
when the uncertainty is subsequently resolved. Estimated settlements are
adjusted in future periods as such adjustments become known (that is, if new
information becomes available), or as years are settled or are no longer subject
to such audits, reviews, and investigations.
The Company is currently engaged in discussions with one of the
Company’s third-party payors regarding certain overpayments the Company
allegedly received from the payor for services that the payor alleges are not
covered by, or were not otherwise properly billed to, the payor. This payor has
asserted in informal discussions that it will seek recovery or recoupment in
relation to the alleged overpayments if the matter cannot be settled. While the
Company believes it has defenses to the payor’s allegations, it is currently
engaged in discussions seeking to resolve the matter and any claim that may
arise in connection therewith in a mutually satisfactory manner.
As a result of this matter, and in connection with a review of
certain billing policies and procedures undertaken by management following the
acquisition of GeneDx, the Company considered the need to establish reserves
for potential recoupments of payments previously made by third-party payors. As
of June 30, 2022, the
Company has established liabilities of $39.2 million as a result of this matter
and other potential settlements with payors based on the current facts
and an evaluation of anticipated results that the Company believes reasonable
for all potential recoupments for all third-party payors combined. This amount
is included in Accounts payable and accrued expenses. See Note 15,
“Supplemental Financial Information”. The Company uses estimates, judgments,
and assumptions to assess whether it is probable that a significant reversal in
the amount of cumulative revenue may occur in future periods, based upon
information presently available. These estimates are subject to change. In
addition, as discussed above, the Company has made certain adjustments to its estimated variable
consideration as result of this matter and other potential settlements with
payors.
