This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk05: Good morning, everyone, and welcome to the Sophia Genetics third quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star and then one. To withdraw your questions, you may press star and two. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Jennifer Potich, Head of Investor Relations. Ma'am, please go ahead.
spk00: Good morning, and thank you for joining us on the SOFIA Genetics Q3 Fiscal 2022 Earnings Call. My name is Jennifer Potich, and I'm the Head of Investor Relations at SOFIA. Joining me today are Dr. Yergi Camblong, our co-founder and chief executive officer, Dr. Philippe Meunier, our chief medical officer, and Ross Muecken, our chief financial officer. Before we get started, I would like to remind you that management will be making statements during this call that are forward-looking within the scope of U.S. federal securities laws. These statements are based on management's current views and assumptions, which are subject to material risks and uncertainties that could cause actual results or events to differ materially from those projected. Additional information regarding these risks and uncertainties are included in the section entitled Cautionary Statement Regarding Forward-Looking Statements in Exhibit 99.2 of the report on Form 6-K filed today with the SEC. Except as required by law, SOFIA genetics disclaims any intention or obligation to update or revise any forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of its broadcast, November 8, 2022. Please note, both the replay of this call and a copy of the earnings release will be available on our website in the investor relations section. And now, I'll turn the call over to Yergi. Yergi?
spk02: Thank you, Jen, and hello, everyone. We appreciate you joining us on our call this morning. I'm pleased to share that our results for the third quarter remain strong, with accelerating organic growth and improved operating leverage, demonstrating our commitment to sustainable growth, despite the negative impact from foreign exchange rates on our reported results. Total revenue for the period grew 40% year-over-year on a constant currency basis, excluding impact from COVID-related revenue. This shows that even in an environment as challenging as the one we operate in today, Sophia is still proving to be the preferred cloud-native analytics platform, trusted by forward-thinking healthcare institutions around the globe. The combination of our differentiated technology, robust commercial traction, improving operational discipline, and a world-class global team continues to drive steady, growth and demonstrates that we are well positioned to thrive under the economic scenarios that may lay ahead. We firmly believe we are in a great spot to grow as a leader in securing and supporting the precision medicine software market. I will start off today's call by reviewing our progress of the quarter as it relates to new customer adoption and platform consumption trends. Next, you will hear from our Chief Medical Officer, Dr. Philippe Meunier, who will discuss updates regarding our money expansion strategy. After which, I will finish off the Q3 Business Highlights by discussing our increased traction in the biopharma market and updates with some of our strategic partnerships. And finally, Ross Muckan, our Chief Financial Officer, will go through our financial results and full year outlook in more detail. But before I go on, I would like to thank those of you who joined us in person and virtually At our first investor day, we hosted a little over a month ago in New York. It was a fantastic event, and it was so great to see so many of you there. I would highly encourage those of you who couldn't make it to watch the replay posted on our investor relation site, as it is a good resource to better understand who we are, how we sell, how we innovate, and how we grow sustainably. Now, let's get back to the Q3 highlights. Starting off with a new customer adoption. As a high-level overview of the reporting period and with one more quarter to go in 2022, momentum in our business continues to be robust on a global basis. Much like last quarter, customer growth proves to be resilient. We're spending our time focused on advancing Sofia's growth strategy by building long-lasting relationships with customers to further increase and diversify the platform's network. To that end, we added 17 new logos in Q3. Steady momentum of onboarding new customers demonstrates our consistent execution and the universal nature of our competing offering. A fact which was very much validated during my recent travels with our sales team, spending important face-to-face time with our customers. It bears reiterating that while global growth is a priority, we remain highly focused on accelerating our penetration of North America. This region represents our largest potential clinical market at an estimated $8 billion, where we continue to see positive developments. I am pleased with our progress of materially inflecting sales activity with respect to new clinical customers in this region. The growing demand remains balanced between academic medical centers and large centralized labs. Beyond North America and Europe, I am also pleased to highlight the momentum we experience in Asia-Pacific, and Latin America, which validates our vision of advancing the practice of data-driven medicine globally. Among the new deals won in the third quarter, several of them are important to highlight as they are the first clinical institutions in their respective countries to adopt SOFIA's HRD solution, which is incredibly exciting. These deals include Unipass and MedGenome, which are two of the largest clinical labs in India, the Prince of Wales Hospital, one of Hong Kong's premier institutions, and also the National Institute of Genomic Medicine, a leading research laboratory in Mexico. We are thrilled to get our foot in the door with each of these countries through their initial utilization of SOFIA's HRD solution. Later on the call, you will also hear from Philippe, who will talk about a significant milestone with new clinical results we presented two weeks ago at the annual conference of the European Society of Gynecological Oncology that validates the power of Sophia's HRD solution. We're highly encouraged by this result and view it as another compelling proof point that will help further adoption of our platform. Broadening and deepening our existing customer relationship is crucial to our growth strategy as we employ a land and expand sales model, typically of many software companies. Our approach has always been about ensuring that new and existing customers recognize the full range of applications that the Sophia DDM platform can provide. As customers continue to benefit from the value of Sophia DDM, their utilization increases. Total recurring platform customers grew to 383 in the third quarter of this year, up from 375 customers in the third quarter of 2021. The total number of platform analysis was approximately 62,000 in the third quarter, representing flat growth compared to the prior year period. This result stems from growth in our core platform analysis volume being offset by continuous slowdown of COVID-19 related analysis volume. However, excluding COVID-related volumes, platform analysis grew approximately 11% in the period. Our oncology portfolio performed well during the third quarter, and its strength was driven by triple-digit growth in HRD analysis volume and continued momentum in solid tumors. Geographically, we saw balanced growth from low RAM and notably strong contribution from LATAM and APAC, while EMEA underperformed mainly due to continued challenges in Turkey. Furthermore, I am happy to report Platform Analysis Volume has started the first quarter on a very strong note and underline our business model's resilience in a challenging macroeconomic environment. In conjunction with landing new customers and expanding their cross-application utilization, we remain competitive by also focusing on expanding and enhancing our menu of offerings, which Philippe will take you through in more detail now. Philippe?
spk03: Thank you, Yogi. and good morning to all of you. My name is Philippe Manu. I am the Chief Medical Officer at Sophia Genetics. On today's call, I will be discussing our menu expansion efforts and the progress we saw in this area in the third quarter. At Sophia, our teams are laser-focused on driving innovation across our menu of offerings by providing users with frequent updates, incorporating new features, new applications, new data modalities, and new services. We feel great excitement around the pace of our product development as we accelerate toward the future generation of our solutions and technology. There are three specific efforts that I would like to highlight today with respect to our recent progress on the expansion of our menu of offerings. First, Sophia's HRD solution, which you heard Yurgi speak about earlier on the call. Second, our groundbreaking new collaboration with Memorial Sloan Kettering Cancer Center And third, SOFIA CarePath, our latest module deployed on the SOFIA DDM platform. Let's start with SOFIA's HRD solution. Two weeks ago, we presented the first dataset on the clinical validation of our CIEVD HRD solution at the European Society of Gynecological Oncology Congress. We shared robust data demonstrating that our decentralized solution is highly concordant with the centralized reference method also highlighting the high reproducibility of results generated by our technology in a decentralized setting. In addition, clinical validation on nearly 200 samples from the PAULA-1 confirmatory clinical trial of Olaparib in advanced ovarian cancer is very much in line on the progression-free survival validation metric. This update provides clinical guidance for practitioners in Europe by demonstrating the ability to identify HRD-positive ovarian cancer patients that could potentially benefit from first-line maintenance treatment with bar millimeters. These results are validating the high performance of our assay and further demonstrate our algorithmic capabilities to pick the signal from the noise, even when applied to a complex biomarker such as HRD and in a decentralized setting. As Ruggie mentioned earlier, we are very pleased with our HRD market traction to date. We can see a long runway ahead of us. Beyond ovarian cancer, we also see potential for HRD to be relevant going forward in other tumor types, such as breast cancer, prostate cancer, or pancreatic cancer, as well as in other areas of synthetic lethality at large. We view HRD's total addressable market to be approximately $800 million. Shifting to the next effort. At Sofia, we don't work alone. We partner with other like-minded, mission-driven institutions with a shared objective to advance the practice of data-driven medicine to improve patient outcomes. As announced at our investor day, we are incredibly excited to be working in a strategic collaboration with Memorial Sloan Kettering, which is among the most prestigious cancer centers in the United States and across the world. Our collaboration will initially focus on two main areas. One, work with MSK to bring their proprietary NGS assays to the world, by decentralizing assays such as MSK Impact for comprehensive genomic profiling and potentially other similar technologies for liquid biopsy testing. Second, collaborate on MSK's longitudinal clinical genomic database to generate novel insights and potentially fuel new applications on the SOFIA Care Path module. We see this partnership with MSK as highly synergistic, whereby we can leverage our technological infrastructure global decentralized network of healthcare institutions, and algorithmic capabilities, together with MSK's deep clinical expertise in oncology and proprietary assays and data sets. Our shared vision with MSK is to expand access to world-class data, including to our current network, and further expand the collective intelligence of our SOFIA DDM platform. As mentioned, the collaboration also intends to combine MSK's rich precision oncology data from their extensive database of over 65,000 patient profiles with our SOFIA CARE TAS module, which we intend to jointly leverage to support R&D efforts in the biopharma space. Yergi will further expand upon this later on the call. Overall, we are thrilled to work with MSK and believe it will help drive further penetration in the clinical and biopharma end markets. This is a new type of partnership for SOFIA and we intend to replicate similar collaborations with other leading academic medical centers across the world. This type of relationship enables open innovation, where we leverage on the content already developed by the academic medical centers to add applications and further innovate our platform without reinventing the wheel. In this context, we are very excited about the opportunity to continue partnering with organizations leading the data transformation of healthcare as we leverage our combined capabilities to spark innovation. The third effort I would like to highlight is SOFIA Care Path, which is a new module on the SOFIA DDM platform that enables the analysis of multimodal health care data. You have heard us speak about this new module on past earnings goals, and more recently at our Investor Day, where I performed a demo of its core capabilities. As a reminder, Oncophia Care Path offers advanced capabilities around data visualization, cohorting, and eventually prediction through a single comprehensive lens across an oncology patient journey. We anticipate that this module will be of high interest to the biopharma community as it helps life sciences customers generate new insights leveraging on our real-world data sets and next generation patient stratification strategies. We feel great excitement about this new module and believe it will uniquely position SOFIA as a tech player in the healthcare space. SOFIA Care Path is currently in beta testing in select healthcare institutions in the U.S. and in Europe. This initial deployment of SOFIA Care Path is taking place in the context of our ongoing international Diplom IV initiative, which aims to predict response to immunotherapy at the individual patient level in the context of metastatic non-small cell lung cancer. We are very pleased with the continued strong traction and enthusiasm around DeepLock4. We continue onboarding top tier sites, such as Mayo Clinic, who recently joined the initiative, and we are proud to announce today that we have just reached 1,000 patients enrolled, which is a fantastic milestone in our journey. Coming back to Sofia Akiarpa, our recent efforts have been focused on getting this new module into the hands of users to actively collect feedback before its official launch, expected in 2023. In this context, we were very happy to have UMass Memorial Medical Center recently become the first such users in the U.S. To date, we have had great response from both clinical and biopharma stakeholders. They see Sophia Archiarpath as one of the key missing technological links to bring precision medicine to scale. We believe that we are only scratching the surface here, and we see this opportunity extending well beyond lung cancer into other cancer types in the near future. On that note, it is important to note that there have been recent updates in the US regulatory environment, which we view as a positive for Sofia Care Path over the long term. Indeed, last month, the FDA issued new guidance concerning clinical decision support software that will impact your space. We welcome the increase in regulatory requirements, which we see as a net positive, because we believe that higher quality standards may contribute to increased adoption once on the market. Taking a step back, we want to remind you that continuously expanding our menu of offerings is one of our core strategic pillars at SOFIA. The three highlighted examples of the HRD solution, the collaboration with NSK, as well as progress on our SOFIA Care Path module, all demonstrate our steadfast commitment to constantly invest in this effort. We look forward to adding you more on this front in the future. And with that, I will now pass it back over to Jurgi to continue on with the rest of the Q3 business highlights. Thank you.
spk02: Thanks, Philippe. Now I'm going to dive into our advancing biopharma strategy. This represents a sizable and underprivileged market opportunity for us. We're making excellent strides in enhancing our business within this important customer base and believe there is still significant market share that remains to be captured. Our focus continues to be on promoting our growing menu of offerings, which we believe uniquely positions us. At Investor Day, our chief biopharma officer, Peter Casasanto, introduced SOFIA's three Ds, data, development, and deployment, which signify our framework for growth in terms of our offerings to the biopharma market. Starting off with the first D, data, Our ability to capture real-world multimodal data in clinical routine in real time presents a unique value proposition to our BioPharma customer base. When paired with the rich data sets coming from partners like MSK, as well as BioPharma's own clinical trial data, we can really help our customers to better understand the differences between a controlled environment, such as in a randomized clinical trial, versus a real-world setting. Layering in our own proprietary AI technologies and algorithms allows us to take it a step further and begin to derive meaningful insights from all of this multimodal data, which can empower our customers to design better trials and stratify the right patient populations, even provide early signals of which patients are likely to respond or relax when given a certain therapy. The second D, development, refers to our ability to partner alongside BioPharma to develop new genomic solutions and or predictive algorithms to select the right patients for the right drugs at the right time. This is the essence of precision medicine. At our investor day, we announced an exciting new partnership with Boundless Bio, a US-based biotech company, which develops innovative therapies targeting extra-chromosomal DNA across a range of solid tumors. To select the right patients, Boundless Bio developed a prototype algorithm to look at eC-DNA signatures, and our shared vision with them is to leverage on our knowledge base to further enhance this algorithm and apply it across multiple NGS technologies on the SOFIA DDM platform in a decentralized manner to ultimately support their clinical trials and increase the access to patients worldwide. As of the third D, deployment, We can help accelerate the identification of patients globally that might benefit from targeted drug therapy by deploying proprietary and commercial solutions on our platform. This is exactly what we are doing with our novel HRD solution. We are currently partnered with AstraZeneca to expand access to in-house HRD testing across laboratories and institutions around the world. And so far, HRD has been deployed in over 30 institutions across 10 countries, which is great. Overall, the 3Ds are fueling our conversations with key stakeholders in the biopharma industry, and it is clear that our value proposition continues to grow with the expanding scale of our multimodal data and continuously improving predictive algorithms. And speaking of AstraZeneca, our partnership with them continues to progress nicely, as we have a shared vision of the importance of decentralization to promote patient access. I am excited to say that we are expanding our scope of work with them beyond HRD and in a more multimodal capacity across the 3Ds. We'll have more to update you on this front in the coming months. Furthermore, tomorrow we are hosting an exciting panel discussion with representatives from AstraZeneca, MSK, Hôpital Tonon in Paris, and Philippe, with Peter Casasanto, our Chief Biopharma Officer, as the moderator. The event will take place in Switzerland at BioData World Congress, which is Europe's largest congress covering big data topics in pharmaceutical development and healthcare. The panel will discuss topics such as the importance of multimodal data integration to advance precision medicine, the role of AI and technology, as well as how best to leverage the combination of these two in clinical practice. Following the event, we will host a webinar with the main takeaways. Please stay tuned. Turning back to updates with other strategic partnerships, I am excited to announce that we are deepening and materially expanding our longstanding partnership with Microsoft to improve healthcare workflows globally. Microsoft's investment in the advancement of next-generation healthcare architecture will help us lead the way in improving multimodal data creation, development, and deployment through Care Pass to elevate the standard of care for patients. Microsoft will also help us scale so that we are able to match the expected ramp-up in next-generation sequencing volumes with competition driving down costs of sequencing and informatics becoming increasingly important. We are very excited about our expanding partnership with them and look forward to continuing to work closely together. To close out the Q3 highlights section, I would also like to mention that I am very happy with how SOFIA are responding to the market's call for moderating operating loss in the near term, and I'm very proud of the progress evident this quarter on OPEX despite the ongoing market challenges. As Ross will discuss in his section shortly, we're continuing to actively monitor market conditions and remain focused with our capital to excel operationally as a company. And with that, I will now hand the call over to Ross to get it to the financials. Ross?
spk06: Thank you, Yorgi. I will begin my remarks by going through the financial results in more detail before turning to guidance. We delivered steady results across the board in the third quarter. Total revenue grew approximately 12% year-over-year for $11.6 million in 2022 from $10.4 million in 2021, despite significant FX headwinds, which negatively impacted our growth by approximately 2,100 basis points. due to continued material depreciation of the Euro, Swiss franc, British pound, and Turkish lira against the U.S. dollar in the period. Excluding the impact from COVID-related revenues, constant currency revenue growth was approximately 40% for the quarter. With respect to the sequential acceleration in core growth, biopharma revenue continued to ramp up impressively in the period, and as Juergen mentioned, we remain very encouraged by underlying trends exhibited in this very strategic customer set. Our net dollar retention rate decreased to 109% in Q3 from 138% in the third quarter of 2021. As mentioned earlier, the decrease was primarily driven by the foreign exchange movement's revenue generating in key transactional currencies other than the U.S. dollar. With respect to the annualized revenue churn rate, it remained slightly elevated at 6%, albeit I would note this is still within the range of what we would consider standard in the software industry. The total number of platform analyses remained flat at 62,000 in the third quarter. However, excluding COVID-related volumes, platform analyses grew approximately 11% in the period. Our somatic oncology portfolio, highlighted by triple-digit growth in HRDs, and strong momentum in solid tumors outperformed our inherited and rare disease portfolio. Geographically, we saw balanced growth from NORAM and notably strong contributions from LADAM and APAC, while EMEA underperformed mainly due to continued challenges in Turkey. Average revenue per platform customer increased to approximately $91,000 compared to approximately $89,000 for the prior year period. Gross profit in the third quarter of 2022 was $7.3 million, an increase of approximately 11% compared to gross profit of $6.5 million in the third quarter of 2021. Gross margin was 63% in the third quarter of 2022, flat compared to the prior year period. Adjusted gross margin remains strong at over 65% for the third quarter of 2022, up approximately 60 basis points relative to the prior year. As Yurki previously mentioned, I'm also incredibly excited about our expanded strategic partnership with Microsoft. While our joint vision will yield numerous benefits for our clients and patients, I am also happy to share it will yield financial and operational efficiencies in the cloud. further enabling Sophia to grow sustainably in 2023 and beyond. Total operating expenses for the third quarter of 2022 were $30.9 million, compared to $27 million in the third quarter of 2021 on an IFRS basis. R&D expenses for the third quarter of 2022 were $10.1 million, an increase from $7.7 million in the third quarter of 2021. The primary drivers of the year-over-year increase were a modest increase in employee-related expenses, including share-based compensation, as well as professional expenses, including those related to our DeepLung4 non-small-cell lung cancer study efforts. Sales and marketing expenses for the third quarter were $7.9 million compared to $7.7 million in the third quarter of 2021. This moderate increase is primarily related to a continued step up in travel and conference related costs. As we shared in our recent investor day, we remain confident with our recent targeted commercial investment and continue to believe our field force is at the right scale to enable us to efficiently achieve our medium term operating plan. General and administrative expenses for the third quarter were $12.8 million compared to $11.7 million in the third quarter of 2021. The increase was primarily driven by modestly higher employee related expenses, including share based compensation, as well as an increase in insurance related expenses. Operating loss in the third quarter of 2022 was $23.6 million compared to $20.5 million in the third quarter of 2021. adjusted operating loss in the third quarter of 2022 with $19.3 million compared to $17 million in the third quarter of 2021. With respect to our operating discipline, I am encouraged to highlight that this is the second straight quarter in which we have recorded an improvement in our operating losses. Despite the continued quarter-over-quarter improvement in constant currency revenue growth ex-COVID, We remain focused on our efforts to continue moderating our operating expense growth as we exit 2022. Net loss for the third quarter was $23.3 million for a loss of 36 cents per share compared to $21.2 million or a loss of 35 cents per share in the third quarter of 2021. Adjusted net loss in the third quarter of 2022 was $19 million, or a loss of 30 cents per share, compared to $18 million, or a loss of 30 cents per share in the third quarter of 2021. Cash and cash equivalents were approximately $189.2 million as of September 30, 2022. Turning to our full-year outlook, we are reaffirming our previously provided guidance of constant currency revenue growth in the range of 30 to 35% for the full year 2022. Based on our latest view of the impact of movements in the foreign exchange rates between the U.S. dollar and our key transactional currencies, including the euro, the Swiss franc, the British pound, and the Turkish lira, we now expect full year 2022 reported revenue to be at the low end of our previously provided range of $47 million to $49.5 million. Of note, based on the latest FX trends and forecasts, we now contemplate a total FX-related headwind for 2022 in excess of $6 million, up by more than $2 million from our prior estimate. Overall, Q3 was another successful quarter as we continue to execute our sustainable growth strategy balancing the path towards profitability with building the foundations for our bright, data-driven future. This completes my section, and I will now turn the call back over to Yurgi for closing remarks.
spk02: Thanks, Ross. In closing off today's call, the important takeaway is that our business has great momentum. We are growing and steadily expanding our current space of business across the world. Our Sofia DDM platform is unmatched in the market as we are pioneers in this unique category of software, which has clearly resonated deeply with the healthcare industry at large. We continue to see growing demand for our offerings, both in the clinical and biopharm markets, as we remain focused on delivering value to the organizations who continue to put their trust in us. To that end, I would like to take a moment to thank the Sophians for building, innovating, and selling the offerings that have allowed us to be where we are today. We couldn't achieve our results without the collaborative effort and support of the entire Sophia family. Thank you again for joining us on our call today, and I look forward to seeing some of you in Arizona at the Credit Suisse Technology Conference later in the month. And with that, both Philippe and I are happy to take your questions and we will now turn into back over the operator. Operator, please open the line for questions.
spk05: And ladies and gentlemen, at this time, we will begin the question and answer session. To ask a question, you may press star and then one on your touch tone phones. If you are using a speaker phone, we do ask you please pick up your handset prior to pressing the keys to ensure the best sound quality. To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. We'll pause momentarily to assemble the roster. And our first question comes from Tejas Savant from Morgan Stanley. Please go ahead with your question.
spk01: Hi, this is Neil Long for Tejas. So, to start, you mentioned the updated FDA guidance on clinical decision support software. Any implications as to the regulatory cost burden for CarePath as you look to enter the clinical market? And how should we be thinking about R&D spending trends in that context?
spk02: Yes, thank you for the question, Neil. So, indeed, right, as you may have seen, the FDA has come with a new guidance when it comes to CDS and software as medical device. And so today there is no impact in our plan for care path, which I remind you is a clinical research tool, right? That we have primarily using the context of the deep lung for effort and now deployed actually over the last month in two centers. So Hospital Civil de Lyon as well as the other one being UMass Massachusetts. and plan to basically have this used and deployed by end of the year in the 30 sites that are using, that are being onboarded in our deep lung effort. So nothing for us in terms of changing our plans. but as we highlighted in the presentation of our results we welcome in general more regulation in our space because we believe that that can make the market a bit bigger and the adoption of this type of digital technologies easier in particular beyond academic centers one day in community hospitals
spk06: And in terms of the budget, obviously you saw a bit of a step up this quarter, at least year on year in R&D, and that was a mix of some of the engineering capabilities we brought online as well as our deep lung related costs. Ultimately, you know, we've made already significant investments on the regulatory side. And as you think about the plan on a longer-term basis that we shared with you at the Analyst Day, that had contemplated, obviously, a number of these elements. And so I would not expect, from a pure financial standpoint, at least at this point, there to be any material shift in our investment needs related to at least that piece of legislation. Albeit, again, over time, obviously, as we move to the clinical market, there may be other elements we may need to consider with respect to care path.
spk01: Understood. That's very helpful. And then I had a few quick questions on the multi-year partnership with Microsoft. So as it relates to your cloud and data management costs, To frame the operational benefit, how should we think about the margin contribution year over year in 23 from this agreement? And will you still be utilizing other vendors for cloud services?
spk02: Thank you, Neil. So, indeed, as you understood, right, this partnership enables us to some extent as well to improve our overall cloud cost. But it goes beyond that. And I think that's important to understand. So our platform runs in Azure, right? And so the more adoption of Sophia DDM, the better for Microsoft as well. So this partnership really goes beyond what you are in mind in terms of operating costs. So we have plans where we are working together on the commercial side so that we can jointly if like promote the offering of Azure and Sophia DDM in Azure. So primarily in the academic centers. We are as well plans to work with Microsoft and Azure on modernizing our architecture, and in particular in the context of anything we're doing in the multimodal space. And last, we may as well work together on leveraging on some of their capabilities when it comes to natural language processing to be able to gather data at scale and present them to our users in the academic centers when they are using Kerpass for clinical research. So, beyond that, Ross, maybe you want to give some color as well on the operational expenses side?
spk06: Right. So, in terms of our cloud and compute costs, which are one of our largest buckets of cost overall, this obviously gives us pretty good leverage, frankly, both on the COGS and on the operating line. Because as you remember, a number of our R&D efforts as well are happening in the cloud. And so there are as well expenses there. And so this will give us some degrees of freedom on both of those points. But I would say more importantly, if you think about particularly some of the developments happening in the sequencing space, and the anticipated uptick in volumes and the shift to larger panels like CGP or movement space like liquid biopsy or eventually even whole genome sequencing. This really puts us on a path given the importance of bioinformatics in most of those or all of those new and emerging applications. It puts us on a path to really be able to serve the global community effectively both from a cost and execution perspective, as these new types of applications really start to inflect and as the market continues to shift to where the amount of data production is going to be materially higher going forward. In terms of using multiple clouds, obviously Microsoft is a tremendous partner for us. Azure is a market leader, right, particularly in the clinical space. And so, you know, we think the partnership of us and them is incredibly powerful. You know, there are always certain countries or specific use cases where you may need to use another vendor. But as we see it, at least over the next number of years, with what we can do together with Microsoft, there's an incredible amount we can help the customer base with and transform healthcare data finally into the cloud.
spk01: Got it. Appreciate the helpful color. Thank you.
spk05: And once again, if you would like to ask a question, please press star and 1. Our next question comes from Julia Quinn from JP Morgan. Please go ahead with your question.
spk08: Hi. Thanks for taking the question. So starting the HRD triple-digit strands you highlighted in the personal remarks, if you could share a little bit more color. In the past, I believe you've said that the clinical part of the business is a surprise to the upside. How did the trend go this quarter in terms of the clinical versus biopharmamics?
spk02: Yes, thank you for the question, Julie. I will start and then I will leave Philippe as well to give more color given we have presented some data at ESGO, so the European Conference of Gynecological Oncology. So indeed, so taking a step right, right, we have started basically developing our HRD capabilities about 18 months ago, as you have heard about it in our investor day. And it took us less than 18 months from developing these capabilities in our platform with deep learning algorithms to having these capabilities deployed today in over 30 centers around the world, including 10 countries, right? And we've announced today as well a few of those adopting this HRD technology beyond Northern America and the U.S. So really, I think, demonstrating that this solution can scale strongly around the world. And so along those lines, we've been focusing primarily on ovarian cancer so far, but we do see a benefit of, you know, potentially going beyond. And I will leave now Philippe explain you, you know, what's happening in the space and how this market of HRD testing could grow probably beyond what we are doing today in ovarian cancer and how the data that we presented at ESGO make us really confident on our unique capabilities.
spk03: Thank you, Yurgi, and thank you, Julia, for the question. I think if we take a step back on HRD, we remain incredibly excited with the quality and the performance of the assay. As Yurgi mentioned and we discussed earlier in the call, we presented very strong data at ESGO a couple of weeks ago that showed very good concordance with the reference method. Also, the fact that we can sustain that performance in a decentralized setting, which, as you know, is also a complexity that we can solve through our technology and our footprint. And then we were also showing that the clinical validation aspect on the progression-free survival metric was very much in line as well. So I think all of that is great. Having a decentralized solution really helps us position the market. We're very pleased with the market traction we've seen to date. Lots of interest both from the clinical and the biopharma segment on HRD. And I think looking forward, we see very clear growth opportunities along three axes. One, capturing further market share in ovarian cancer. Number two, going beyond ovarian cancer in tumors such as pancreatic, prostate, and others. And then three, even bigger pool to be explored with synthetic lethality at large, where because our solution looks at a lot of the causes and all of the consequences with the low-passhole genome, we feel we're incredibly well-positioned to support also biotech, more discovery-type initiatives there. So that's it. Thank you.
spk02: So along those lines, indeed, Judy, as you heard from Philippe, beyond the clinical research market, we indeed see now as well different ways of leverage on this technology with the biotech and biopharma prospects and customers.
spk08: That's great. And then in terms of the ASP, I know you have the Astra and the Embry projects ramping in the second half of this year. Just curious if those ramps are progressing in line with your expectations and whether the AFP accretion is, you know, enough to offset the FX headwind that you guys are seeing.
spk02: So, yes, so we're seeing great traction. So with Astra, we've worked mainly on the deployment, right, of the solution in Europe. But we have seen as well great adoption, again, of this HRD solution across the world with 30 centers and countries. And indeed, you're right in the fact that, you know, the ASP for HRD is, I would say, higher than our standard ASP. And so, as you could expect, this would be for us a mean as well to increase our ASP over time. Although I would say, in the meantime, as you know, right, in the market, we see as well some contraction now on, for example, sequencing price. So while this obviously will create a bigger market for us, we don't really know how the ASP will play like. So today our position is that probably with what's happening with sequencing costs going lower and data analytics becoming more and more important, like in the context of HRD, volume should go up. And our expectation is that ASP should eventually stabilize. So, at least in our models, we're not predicting ASP to go significantly up. I don't know, Ross, if you want to add some more color.
spk06: Yeah. So, in general, right, we're obviously seeing – well, first, let me step back. There's two elements. There's price, right, which is sort of same-store ASP, and then there's mix, right, which – you know, I would say is the bigger determinant here. You know, we saw pretty good ASP in the quarter despite a significant headwind right on the FX side, right? So, obviously, FX gets reflected on that ASP line. The mixed shift to higher price, higher ASP, more complex, more data robust, applications continues, and that's what's driving much of that mix, right? Pure price remains still captured probably in the low single digits, right? So it's really a function of where the market's going. And to Yurgi's point, on a medium to long-term basis, as volume growth, I would say, is likely to continue to accelerate given what's happening with sequencing costs. On the same store basis, you probably won't see very much price expansion. In certain markets, you may actually see prices come down slightly, but the mix shift is going to higher and higher-priced applications, right? So, if you think about HRD or CGP or whole genome, liquid biopsy, et cetera, parts of our solid tumor application portfolio, that's where, you know, many of those applications are sizably above what our average ASP is today. And so, as the growth of those continues to drive the overall mix shift of the business, you will see ASP trend favorably on a reported basis, albeit same store may be, you know, a bit less of a positive story depending on how things play out with, you know, the overall reimbursement schema for NGS. Great.
spk08: Thanks, Michael. Thank you.
spk05: Thank you. Once again, if you would like to ask a question, please press star and 1 using a touch-tone telephone. Our next question comes from Kyle Bosch from Callen. Please go ahead with your question.
spk04: Hey, good morning, guys. It's Kyle on for Dan. Thanks for taking the questions. So if we think about 23 revenue growth at this juncture, is the 30% to 35% constant currency growth really sustainable into 23%? You know, what are the factors that might take growth above this level? And as it stands right now, do you have any thoughts on FX for 23?
spk06: So, obviously, we're not in a position in the third quarter to yet guide for 2023. Obviously, though, we did provide at the analyst day, right, our medium-term look at revenue growth being in the range of 30 to 35 percent, similar to what we've seen this year. Obviously, we've also talked to you about a number of other positive factors that have benefited us, including our momentum on the pharma side. But I would say, in general, our business and the momentum we see in the business is quite good, right? So, you should think of certainly that longer-term range being what we see over the period. Obviously, there'll be some years where it'd be at the lower end of that range and some years above or at the upper end. And so, ultimately, that's where we're expecting or modeling the business to land. And obviously, we're also doing that, being mindful on investments. But Overall, utilization is quite good. You know, we noted a very strong October, so no change in terms of the macro's impact on the trajectory. And you can see the positive mix shift on ASPs, and we also called out in the script pharma being quite good, and that's just starting to ramp, right? So, we've got quite a lot buttressing us for next year in terms of continuing top-line momentum. And obviously, as I've also spoken to in the past, our existing backlog gives us a pretty good picture on forward revenue. And so our visibility into next year, I would say, overall is quite good. Now, FX can move around at the moment. I would say there's probably a slight headwind to 23 just based on where currencies are as of 9.30. But but again uh with the unprecedented movements we're seeing in the market that could be quite different when we when we next update you and so that's not one place where we're going to be able to to nail it down in the current environment unfortunately got it and then so in north america i think by our map you know growth slowed to maybe about nine percent in 3q and maybe we don't know the exact comp there but could you just provide an update on north america traction and
spk04: You know, is there any range of growth that we should be expecting in the region, you know, moving forward?
spk02: So thank you, Kyle. So the traction in North America, actually, it's very, very good. And I've been spending quite some time myself as well doing customer visits lately here. And I was as well at the AMP conference last week in Phoenix. so we're very encouraged with what we see so just taking a step back right we have announced this great partnership with msk that will enable us to leverage on some of their data to collectively create an intelligent system to better serve other academic centers in the us and around the world we have been having great traction with mayo clinic as well and we've announced as well the fact that they are now part of the diploma for study And we're overall seeing as well great traction with the centralized labs, especially when you consider the current macroeconomical constraints and the importance of, you know, being more sound when it comes to operational efficiency. And in that context, the importance of leveraging on industrialized platforms such as the one of SOFIA, rather than reinventing the wheel, investing on their side with data scientists and tools which are suboptimal, right? So really encouraged with what we see in Northern America, and we should expect, indeed, North America to continue to grow along the line of what we had showed in the past. Got it. Thank you.
spk05: And Once again, if you would like to ask a question, please press star and 1. Our next question comes from Mark Macero from BTIG. Please go ahead with your question.
spk07: Hey, guys. This is Vivian on for Mark. Thanks for taking the question. So at a high level, could you discuss how the competitive landscape is evolving, maybe as a result of the increase in regulatory requirements I know you mentioned that your analyst data using directly sourced data is a key differentiator. So, just curious if you've run into any competitive dynamics in terms of price per analysis. Thanks.
spk02: Yes. Good morning, Viviane, and thank you for your question. So, definitively, we see a lot of positive trends, right? So, one being in the, I would say, competitive landscape, the fact that you have now many more companies which are rolling out sequencers to target the clinical market, and the fact that the sequencing cost is going lower, right? So, with that, we expect definitively volumes to go up in the clinical market. And we expect as well that academic centers and central labs will need industrialized partner to compute their growing volumes in genomics. Beyond genomics, and I think probably this is what you refer to, right? You refer to what we have been doing as well with MSK in terms of data. So we understand that, you know, there is more and more eagerness from some academic centers indeed to pull data for research purposes. but as well to pull this data so that we can better serve our clients across the globe when it comes to decision-making, leveraging on this intelligence, and basically making sure that the knowledge that has been gathered somewhere serves other patients indirectly in other centers.
spk07: Okay, perfect. Thank you. Maybe just a quick housekeeping question. Could you just comment on cash runway areas of the business you're prioritizing and remind us where your headcount stands? I know you also talked about long-term revenue targets out of your analyst day. So just any thoughts you have on a path to profitability given the expanded Microsoft partnership? Thanks.
spk02: Sure. So, we've been speaking, indeed, on the Investor Day about our plans when it comes to passive profitability and cash flow runway. Maybe, Ross, you want to reiterate what we said?
spk06: Yeah. So, on the topic, obviously, we're happy to, despite accelerating organic growth, show a second quarter in a row of sequential decline in adjusted operating loss. So, We're obviously very focused on balancing our ability to deliver on our top-line commitments, which I highlighted before, as well as moving toward profitability. You know, I think the most important metric that I provided at the analyst day with respect to this discussion is really around incremental margins, right? And so I think there you can look at what we highlighted in terms of the drop down on future revenue and some of that also ties back to us being not particularly aggressive on the capitalization side versus most software businesses. And so as new revenue comes in, that drop down will be quite significant and that will buy down the overall loss as it converts to profit ultimately over time. And so we think that Again, if you sort of map it out, you can get a pretty good sense of when that crossover will occur. On the headcount side, and again, we've talked about that being a predominance of our spend, headcount remains roughly flattish at around 500. A lot of the work we're doing is aimed on the cost side and efficiency with our labor base and making sure we're very focused on what we're working on, making sure we're controlling a lot of our discretionary spend, And also, I would say on the R&D side, ensuring we've got the highest, you know, ROIC-type projects that we're pushing forward. Additionally, what we're doing on the partner side also helps us with respect to leverage, right, whether that's through selling channels, whether that's through R&D and getting sponsorship for different investments or programs, et cetera. And so, I would say we're very focused on, again, that sort of theme of growing sustainably, and I feel quite confident in our ability to deliver what we discussed with the analysts today.
spk07: Great. Thanks so much for taking the questions.
spk02: Thank you, Vijay.
spk05: And, ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to management for any closing remarks.
spk02: Yes, thank you all. So it was a great pleasure being with you today. And we're very much looking forward to update you in the future as we will be disclosing additional partnerships and contracts in the next months. And for the one that will be at the Credices Conference in Arizona at the end of the month, we will be very much looking forward to see you there. Have a good day.
spk05: And, ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.
Disclaimer