SOPHiA GENETICS SA

Thank you and good morning everyone.

Welcome to the Sophia Genetics second quarter 2024 earnings conference call. Joining me today to discuss the results are Dr. Yergi Kambon, our co-founder and chief executive officer, and Ross Mukin, our chief financial and chief operating officer. I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated, and you should not place undue reliance on forward-looking statements. Additional information regarding these risks, uncertainties, and factors that could cause results to differ appears in the press release Sophia Genetics issued today and in the documents and reports filed by Sophia Genetics from time to time with the Securities and Exchange Commission. During this call, we will present both IFRS and non-IFRS financial measures. A reconciliation of IFRS and non-IFRS measures is included in today's earnings press release, which is available on our website. With that, I'll now turn the call over to Jurgis.

Thanks, Kellen, and good morning, everyone. In Q2, we delivered another quarter of strong forward-looking indicators and continued bottom-line improvements, despite facing macro challenges which have temporarily softened revenue growth. I will start the call by discussing the challenges we faced and a few of the growth initiatives we accelerated to offset these headwinds. Next, I will highlight how this initiative has positioned us well to re-accelerate growth by later this year. Last, I will provide a brief update on our path to adjusted operating profitability, which remains on track as we manage costs well and improve our bottom line. I will then turn the call over to Ross, who will give you a closer look at our Q2 financials, our updated outlook for 2024, and additional details regarding our path to profitability. In Q2, revenue came in below expectations. The two major drivers were challenges related to biopharma and EMEA. Both of these challenges, which we highlighted in our Q1 earnings call, ended up being more pronounced than originally anticipated, but we are confident that they are temporary in nature. I will now take a moment to discuss each challenge. and a few of the actions we have taken to offset these headwinds and reaccelerate growth. Starting with BioPharma, we continue to face a macro environment in which budget constraints have made the signing of large contracts difficult and caused safe cycles to elongate. In order to offset these challenges, we have accelerated a few of our planned growth initiatives. First, we restructured the bioforma business by separating data and diagnostics offerings. Our data offering leverages on the large amounts of molecular data generated by our genomic business and the multimodal data computed by our platform to provide AI-powered insights to life science companies in the areas of drug discovery and development. Our diagnostics offerings leverages our broad network and real-time feeds to help biopharma companies with clinical trial matching and market access. By separating this biopharma data and diagnostic offerings and appointing new leaders to each business, we are now better aligned to the needs of our customers and are confident that we will be able to go to market more effectively. The second action we took was to refocus biopharma sales efforts to target smaller, more repeatable business as opposed to hunting large contracts. This approach caters to our buyers and allows us to avoid the lengthy approval and procurement processes required by larger deals. In the past, we've had success with this approach on projects like Bandas Bio, and more recently with the breast cancer study sponsored by AstraZeneca. I'm happy to say that these actions are driving more interest than ever, as our current pipeline for biopharma remains robust and is increasingly diversified. Our leaders for data and diagnostics are laser-focused on closing the deals in the pipeline and returning our biopharma business to the high growth levels we saw in 2023. The second challenge we faced in Q2 was an expected softness in EMEA, especially in France, Italy, and Spain. In the first half of 2024, two unexpected things happened in this market. First, we saw a slight moderation in the overall growth of patients being tested. From recessions with customers and strong bookings indicates that the trend is temporary and will correct itself in the medium term. Beyond the moderation in testing, we also experienced some unexpected churn and price pressure in France, Spain and Italy. These challenges specifically relate to establish applications like hereditary cancer and rare inherited disorders and not our newer applications. To offset these challenges, we took two immediate actions. First, we are bringing a more strategic approach to managing key high-volume accounts. Our sales reps are now working more closely with large customers to understand their long-term growth objectives and to map out the full picture of precision medicine needs across the institution. By leveraging our large menu of applications, the scale of our platform, and the volume-based pricing, we can be more successful with larger enterprises. In H2, we will invest in certain strategic accounts in EMEA in order to displace competition and win market share. Market share is critical to our thesis as we believe whoever has the largest network will win. The second action we took was reallocating resources towards our high-growth markets, such as the U.S., the U.K., Germany, the Middle East, and Asia-Pacific broadly. These decisions have already paid off as we signed major new customers in each of these regions this year. This quarter alone, we signed major new customers, such as Detroit Medical Center in the U.S., who is adopting Sophia Diem for E-Monk. the NHS North Bristol Trust in the UK, who is adopting Sophia DDM for HRD and MSK access, and Abu Dhabi's National Reference Lab in the UAE, who is one of the first customers to adopt MSK Impact powered with Sophia DDM. In addition to these immediate actions, I will also highlight that we are currently coming out of a heavy R&D cycle and are excited to launch a suite of new applications in the second half of 2024, as well as a major upgrade of our platform overall. Initial customer feedback and early pipeline data suggest that these investments are generating significant demand and have further differentiated our offering across the portfolio. I'm excited to update you more on these launches in a moment. Before I do so, I want to emphasize that despite moderating revenue growth in Q2, forward-looking indicators for our clinical business remain strong. In Q2, we delivered the third consecutive quarter of strong bookings with 20 new Sofia DDM customers signed. New business growth was driven by solid tumor application and the new liquid biopsy application, MSK Access. I'm proud of the success we have achieved so far with MSK Access, an application that has quickly drawn significant demand with pipeline in the double digit mediums. From a regional perspective, 11 of the 20 new customers signed during the quarter came from Yemye. This indicates that our strategy of refocusing land efforts to high growth markets such as the UK, Germany and the Middle East is working. Further, it gives us conviction that macro trends and moderation in growth in Yemye is temporary and will correct over the medium term. Despite our recent success with new business wins, I want to take a moment to remind everyone about the cadence in which new signings become revenue in our business. When a new customer signs for Sophia DDM, it typically takes them about nine months to begin generating revenue. This is because all institutions have to complete proficiency testing and receive accreditation before they can serve patients in routine. As highlighted during past learning call, the nine months sometimes becomes longer if the application they are adopting is more sophisticated. like MSK access. After completing implementation, it can take another three to six months for the account to ramp up to full volume and revenue. This means that new business one in Q2, Q1, and even some of the signings from Q4 2023 will not enter routine usage until late in Q4 or early 2025. As we approach the second half of the year, we remain laser-focused on getting new customers into Routine as quickly as possible. Our newly launched MaxCur team is dedicated to expanding customers from signature to revenue. In Q2, they moved 17 new customers to Routine, which is a nice step up from the 13 customers added into Routine in the same period a year ago. One key to landing new customers and expanding within them over time is to continue offering a comprehensive and compelling menu of offerings. On that note, I would like to highlight a few recent product launches and give a brief update on what's to come for the rest of 2024. I'm excited to announce that in Q2, we launched a new application in the InMong space, which measures minimal residual disease, or MRD, for acute myeloid leukemia. This is an important application for both biopharma and clinical customers. During the quarter, we also announced a collaboration with Microsoft and NVIDIA to develop a scalable wall genome sequencing application on SOFIA DDM by the end of the year. In the past, NVIDIA has named us one of the leading companies using AI to drive transformative changes in healthcare. We're excited to continue our work with these partners to accelerate adoption of data-driven medicine globally. Looking ahead to the rest of 2024, we're also excited to launch MSK Impact, powered with Sophia DDM, the decentralized solid tumor profiling counterpart to Memorial Sun Kettering's liquid biopsy application, MSK Access. I'm proud to announce today that we have already signed two customers to MSK Impact pre-launch, including Sophia Vagenomics in Taiwan and Abu Dhabi's National Reference Lab in the UAE. Looking ahead to the second half of the year and into 2025, MSK Impact will be a key growth driver as we pair it with MSK Access in order to win both liquid biopsy and solutumor testing business at institutions across the globe. Beyond expanding our menu of applications, I'm also proud to announce today that we are launching a full modernization of Sophia DDM later this year. We'll be moving the platform from Java to web technology and microservices. This upgrade not only creates better experience for customers, but it also enables us to compute data more efficiently and launch new applications more quickly. As we come out of this cycle of heavy R&D investment, we are confident that these efforts will continue to differentiate our platform in new and established markets and enable us to better serve our clients in both clinical and biopharmacology. In founding SOFIA 13 years ago, I'm exceptionally proud of the impact we've made. Since the beginning, we envisioned a future in which a cloud-based analytics platform would break data silos and enable healthcare institutions to compute and analyze multimodal data. We also believe that developing proprietary AI algorithms to provide insights on this data would power the future of patient care. Further, we never compromise on our conviction that a decentralized model is the most sustainable approach to achieve this mission. Now, patients in over 70 countries across the globe benefit from our decentralized analytics platform, SophiaDVM. Our customers are able to produce highly accurate insights from multimodal data within the walls of their own institution with faster turnaround times and lower costs and while maintaining control over the data they produce. In this way, I am proud that Sophia Genetics has pioneered the data-driven medicine movement globally, and I am especially proud of the nearly 1.8 million genomic patient profiles that we have analyzed since inception. I am also proud of the commitment we have made to achieve our mission in a sustainable way. Our commitment to reach adjusted operating profitability within the next two years not only unlocks value for our shoulders, but it also ensures that we will be able to help patients for generations to come. Our ability to continue to improve our bottom line, including in a quarter as challenging as the current one, demonstrates our commitment to this objective. With that, I will now turn the call over to Ross. who will provide a closer look at our Q2 financials and 2024 outlook.

Thank you, Yurgi, and good morning, everyone.

Results in the second quarter did not meet our expectation from a revenue standpoint due to the aforementioned challenging budget conditions at Biopharma, as well as temporal macro challenges in our EMEA customer base. I am confident We have taken the necessary actions to respond to these unexpected market changes and have also adapted our cost structure accordingly. Overall, I am pleased with the new business environment, which supports our view that the moderation in growth is transient, and in turn, we remain committed to our path to sustainable growth. And with that, I'll move to an update on the quarter. As Yergi highlighted, Q2 revenue was below expectation, and we have taken actions to return business to expected growth levels over the next several quarters. Total revenue for the second quarter of 2024 was $15.8 million compared to $15.1 million for the second quarter of 2023, representing year-over-year growth of 5%. Constant currency revenue growth, excluding COVID, was 7%. Platform analysis volume was approximately 87,000 for the second quarter of 2024, compared to approximately 77,000 for the second quarter of 2023. Year-over-year growth in analysis volume was 12%, or 14% when excluding COVID-related volume. From an application standpoint, oncology outperformed rare and inherited disorders during the quarter, driven by strength and hemat testing. EMEA experienced the softest growth in Q2, in addition to weak performance in Latin America. This was partially offset by notable strength in North America and Asia Pacific, which growth grew at over 40%. I am especially proud of the strong growth delivered in the U.S. The U.S. market has grown from its nascent stages just a few years ago to now approaching our largest market in terms of revenue contribution. Beyond the challenges in EMEA, Yuri Di also highlighted that we experienced material delays in our biopharma business, as we continue to face a challenging macro environment in which budget constraints have made the signing of large contracts difficult and caused sales cycles to elongate. Specifically, we had one major high-value contract slip to later in the year and potentially into 2025. Despite the weak revenue performance, clinical bookings, which don't show up in revenue until nine to 12 months post signing, were strong in the first half of 2024. New customer wins were also strong, as we signed 20 new logos during the quarter. We are laser-focused on getting these 20 customers, as well as the influx of new customers signed during Q1 and Q4 2023, into routine usage as quickly as possible. Beyond bookings and new customer wins, we also continue to see positive momentum in our pipeline for both clinical and biopharma business. The pipelines for our clinical and biopharma businesses are both at all-time highs, cumulatively exceeding $200 million in total value. Strong new business momentum along with growing pipelines indicate that our end markets remain healthy despite the consumption challenges in the quarter. Moving on to an update on other key business metrics. Core genomic customers were 457 as of June 30, 2024, up from 434 in the prior year period, and down sequentially by six customers relative to Q1 2024, as we experienced higher than expected customer churn during the quarter, attributable to smaller accounts that were unable to scale and saw their volumes consolidate to larger related hospitals and laboratories. Annualized revenue churn rate was around 4% for Q2 2024, which is in line with our historical averages. Net dollar retention for Q2, which is net of revenue churn for the year, was 114%, in line with Q2 2023 levels. Constant currency net dollar retention, excluding COVID-related revenue, was 113%, as compared to 121% in Q2 2023. This decrease is primarily attributable to some of the aforementioned challenges in our established markets, as patient demand and pricing pressure moderated some of our continued growth momentum. Gross profit for the second quarter of 2024 was $10.8 million compared to gross profit of $10 million in the second quarter of 2023, representing year-over-year growth of 7%. Gross margin was 68.2% for the second quarter of 2024, compared with 66.7% for the second quarter of 2023. Adjusted gross profit was $11.6 million, an improvement of 10% compared to adjusted gross profit of $10.5 million in the second quarter of 2023. Adjusted gross margin was 73.2% for the second quarter of 2024, compared to 70% for the second quarter of 2023. We remain proud of our ability to manage costs, scale compute, and continue to expand gross margins by over 300 basis points despite soft revenue performance. Total operating expenses for the second quarter of 2024 were $25.8 million compared to $30.1 million for the second quarter of 2023. Across the functions, we continued to benefit from lower headcount on a year-over-year basis. R&D expenses decreased during the quarter as we increasingly focused on high ROI projects. Additionally, I remain pleased with our progress on the G&A side, where we also continue to benefit from targeted process improvements, system investments, and the optimization of our public company costs. Sales and marketing expense was up a touch, primarily due to select investments oriented at accelerating penetration of several key markets, as well as marketing initiatives to support our robust new product momentum. Operating loss for the second quarter of 2024 was $15 million. compared to $20 million in the second quarter of 2023, an improvement of 25%. Adjusted operating loss for the second quarter of 2024 was $9.9 million, compared to $14.6 million for the second quarter of 2023, an improvement of 32%. We continue to be pleased with our trajectory toward profitability. The additional headcount actions we took in the second half of 2023 and incremental discretionary expense controls implemented were necessary to sustain the positive momentum across the balance of 2024. In Q2, I was also proud to see us maintain strong bottom line performance despite the revenue challenges, a proof point of strong operating leverage in our business and the discipline of our team. Lastly, total cash burn for the second quarter was $12.3 million, exclusive of the $15 million in debt and associated borrowing costs that we took down as part of the financing deal with Perceptive. which we announced last quarter. The $12.3 million in cash burn represents an improvement of 7% compared to the $13.3 million in cash burn in the prior year quarter. We remain happy with our cash utilization trend and are on track with respect to our medium-term liquidity trajectory. Cash and cash equivalents were approximately $105.4 million as of June 30, 2024. Turning to our 2024 outlook. Given the more challenging macroeconomic environment we are seeing in biopharma and in our established markets in EMEA, we now expect full-year revenue to be between $65 million and $67 million, representing growth of 4% to 7% compared to FY 2023. Roughly 60% of the reduction is related to lower expectations for biopharma-related business as we continue to face budgetary constraints and longer-than-anticipated sales cycles. FX is also weakened modestly from our original expectation, creating an incremental headwind of a few hundred basis points. The remainder can be attributed to a softer than expected start to the year in our clinical business due to macro-related headwinds in EMEA. While we believe the challenges to be temporary, we do expect them to persist in Q3 and through the end of the year. I will note that despite headwinds in EMEA, clinical revenue grew low double digits in H1 2024, compared to H1 last year. While below expectations, the underlying core growth of the business does remain solid. With respect to seasonality, we now expect Q4 to be stronger than Q3 as new business comes online and revenue from biopharma-related awards signed during H1 are recognized, albeit later than originally expected and with some moving into 2025. We are also updating our adjusted gross margin guidance to be between 72% and 72.5% compared to 72.2% in FY 2023. Despite the strong performance in the period, we anticipate a slight mixed impact in 2H relative to new product launches, as well as investments we have decided to make in EMEA to secure certain renewals that were strategic in nature. Following our strong cost performance in Q2, We are reaffirming adjusted operating loss guidance between $45 million and $50 million and further reiterate that we remain confident in our path to adjusted operating profitability within the next two years. Our current cash and existing capital resources are expected to be sufficient to reach this milestone. This has been made possible by taking necessary cost actions and continuing to be obsessed with capital efficiency. In 2024, we will continue to revisit our discretionary expenditures and execute an identified savings via targeted process improvements, scale-focused system automation efforts, as well as continued reduction in certain public company costs. With that, I would like to turn the call back over to Yurgi for the closing remarks before we take your questions.

Thank you, Ross. I'm proud of what our team achieved this quarter. particularly our continued ability to expand gross margins, reduce operating loss, and improve our bottom line. I also remain excited about our future. Bookings momentum is strong and end markets continue to grow. Cancer rates are increasing worldwide. Better therapies are being developed each day. And data is becoming more and more useful in diagnosis, therapy selection, drug development, and drug deployment. Given our business sits at the heart of these innovations, accelerating and enabling the adoption of each, we remain confident in our long-term growth. In closing, thank you to our SOFIA colleagues, partners, customers, and investors for joining us in our journey to transform patient care with data-driven medicine. Please note we are presenting at the Morgan Stanley Healthcare Conference next month in New York City. I look forward to continuing to update you on Sophia's future success of democratizing data-driven medicine. Operator, you may now open the line for questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the start button followed by the number one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the start button followed by the number two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question. Your first question comes from the line of Dan Brennan of TD Cohen. Please go ahead.

Great, thank you. Thanks for the questions, guys. Maybe first one just on pharma since that seems to be the weak spot here or one of the key weak spots in the quarter. I know in the past, Ross and Yogi, you've kind of sized it at maybe just under 10% of revenues last year, but that is pure R&D. I think with translational, it could be bigger. So can you just help think us through how big that business is today, what you were expecting, and kind of given this is a big part of the cut, can you just kind of walk us through what expectations were for pharma and what they are now? And then kind of related to that, So basically, in the back half of the year, it's the pharma cut, and then it's basically the clinical cut. Those are the two factors. Was there anything else? Because the back half of the year, you know, is definitely coming down, just trying to figure out kind of what's in that.

Yes. Good morning, and thank you, Dan. Let me start with the biopharma. So on the biopharma side, indeed, this explains 60% of the delta versus the revenue we were expecting this quarter. And to try to address that mid-long term, we have taken some actions, right? So as a reminder, on the pharma side, we work both with the DX teams. So when it comes to decentralized testing or when it comes to development of potential companion diagnostics, and we work with the data teams. And the data teams are focused as being primarily on the market access needs or on the potential definition of patient recruitment for instance to improve or speed up clinical trials so what we have observed on the pharma side is that between 23 and 24 there are being some pressure on the on the budget and signing deals of certain amount of dollars became a bit challenging And hence, the refocus on first splitting the diagnostics and the data business on our site or teams that are really focused on that because these are different people we sell to in the pharma. And second, on going for deals which are at lower value, but more of those so that we can, the risk, I would say as well, the execution of the bookings as well as the execution of the delivery of those deals. This has really been the learning and the shift for us. Now, I would like to highlight, Dan, that the pipeline remains strong for the biopharma business on our side, and that we believe that while this quarter and this year, given the bookings we had end of last year and beginning of this year, The number is not the one we want in terms of revenue. This is something we should be able to correct for 2025 on. Ross, do you want to give more details on the numbers?

Thanks, Jorge. So, Dan, you know, last year we talked about, you know, disclosing pharma if and when it got above 10% of revenue. So, you can assume it was slightly below that level on a 23 basis. That business was up triple digits last year, and so, What's essentially implied in 24 is that business will now be down. So we'd originally obviously assumed continued growth. We had a number, I would say, of contracts, verbal awards that we had received late in 23 that frankly still are sitting in procurement or have yet to be actualized. We're confident in sort of them ultimately getting recognized, but certainly they have not come through in the time frame that we had expected. I would also say that outside of sort of the direct pharma business, kind of to your implication, there are products like HRD where pharma sponsorship in market is crucial. So while our customer may remain a clinical customer, it is pharma that is obviously subsidizing to some degree that clinical testing, you know, in order to allow for improved market access for their product. We've also seen in some key markets, particularly in Europe, where that, you know, I would say reimbursement support has been pulled back or less certain. And so that is as well caused, I would say, some utilization or usage differences from our original forecast. So while obviously, you know, we're disappointed in sort of the decline in the direct to pharma business, we're confident ultimately in that improving. Other piece we're already starting to see some of that unwind is, I believe, part of the reason why pharma pulled back their reimbursement support was due to governments putting forth some reimbursement coverage. And so that'll start to get picked up at the country level. But in the end, it obviously led to a delta versus original forecast. And if I think about what's implied now is essentially what we have contracted and already executed and is already underway. So it's a much more modest expectation for this year, clearly, in the second half.

Got it. And then if I can just one other, you know, MSK, you cited throughout the prepared remarks about some traction that you're getting there with some new business wins. And then you also cited the NVIDIA whole genome kind of product rollout. Maybe could you just speak a little bit to like, would you be willing to quantify the MSK business today? Any pipeline requirements? Impact is how are we thinking about how critical or not that business is towards your growth? Is it nice to have? Is it central? And the whole genome product you're looking to roll out with the help of NVIDIA, kind of how do we think about that product as well from a contributing basis as we go beyond 24? Thank you.

Yes, thank you, Dan. Indeed, so our core business has been in hereditary cancer, IMHONG, rhinitis disorders, and to some extent, solitary tumor testing. And with the MSK Access application, we're expanding our offering in the space of liquid biopsy, which we expect to be significant as the clinical utility of liquid biopsy is now being clearly demonstrated. And in that sense, to give you some numbers, we signed 10 customers in MSK Access, 16 in total on the liquid biopsy because we support other applications. And today, our clinical pipeline for MSK access is above $10 million, and on the biopharma, it's even more significant. And maybe, Ross, you want to give some color and remind what we did with AstraZeneca sponsored testing of MSK access and how this is now being expanded.

Yeah, so Dan, obviously, we're really excited about the early adoption of the liquid biopsy product. And obviously, that'll be as well accelerated via our partnership with AstraZeneca, as Jurgi mentioned. I think overall, this is obviously going to be a much bigger impact to 25 revenue growth. You know, these kind of initial lands we are seeing are much larger than our typical ACV or contract value. So we're excited about that momentum. Obviously, we've talked about in the past This product takes a bit longer to bring into routine testing, and so that is why you're not seeing a ton of impact in 24. So that's kind of progressing as expected, but certainly we think the potential of this product can be quite significant. In terms of whole genome, you know, there I would say as well, I've been frankly a bit surprised as to the level of, you know, the sort of commercial interest. Certainly, we're seeing it in the U.S., and you've seen some of the large central labs talk about demand there, but we're seeing it at XUS as well. I don't know if, Jurgi, if there's anything else you want to add on the whole genome side.

Yes, look, on the whole genome, definitely, with bigger sequencers in the clinical market, we do see that there are more and more applications, in particular for very neurotic disorders, but eventually as well for new applications in the future, like minimal residual disease. And this, I would say, makes our opportunity bigger, right? Because more data means more data compute, more identification of complex signatures, and more need of AI-driven, sophisticated algorithms. So in that one, indeed, we're pretty proud of the work we've been doing with NVIDIA and with Microsoft, which definitely enable us to scale, to be even more competitive than what we are today versus competition. And by doing so, not only to increase our market share, but in the meantime, as well, protect the strong gross margins. Beyond the whole genome sequencing, As I mentioned briefly, MRD, so today we don't have MRD capabilities out there in the market for solid tumor testing, but we're very excited about a new application we launch in the market for IMHONC capabilities, so acute myeloid leukemia, which we believe will be an application that will be quite distinguished from the others, both for the clinical needs and the bioform needs in a decentralized way. And last, if we speak about new applications where we believe the market is going to still grow strongly. We're very proud as well of soon launching the MSK Impact CGP application, which is a counterpart of the liquid biopsy of MSK, MSK Access, where we already signed, as we mentioned today, two new customers. And we are going to hold in September an event in New York with a high number of U.S. potential customers and are going to show first results on MSK impact and how this can be combined as well to follow patients longitudinally with MSK access. So in a nutshell, Dan, despite we're not where we want on the revenue side, I would say that we haven't been too bad on managing costs. And while we have been managing costs appropriately, we're still being able to expand our R&D offering so that we can grow and increase our revenue. Again, we accelerated strong double digits by beginning of 2025 later.

Your next question comes from the line of Sue Bunambi of Guggenheim.

Please go ahead.

Hey, guys. Thank you for taking my question. In an election year where there are heightened geopolitical tensions and now FX volatility, I'm curious if the new guide, you are making any assumptions on how you set guidance just to be a bit more cautious given the environment?

Yes, good morning, Subbu. Thanks for the question. Indeed, the environment, it's a bit of a challenging one, not necessarily easy to predict everything. I will let Ross guide you on how we are treating FX for our new guide.

So in general, Subbu, I would say, you know, we have historically prided ourselves right on the visibility of the business. So obviously the result in the quarter, we're not pleased with where we came out. You know, we wanted to, as we sort of revisited, we did a deep dive into the customer base and spent a lot of time as well looking at some of the usage patterns and made assumptions obviously relative to whether some of the softness we saw in Q2 would persist for the remainder of the year. And then, obviously, we have new business coming online, and so those tend to be the biggest, I would say, factors, right, that ultimately drive, you know, outcomes. Now, we also spoke about biopharma, and so there, I would say, we cut it quite hard, and there's not much, I would say, in the second half in terms of any assumed reacceleration. But I would say, overall, you know, we tended to, after this, be quite conservative with respect to uh the cadence and and some of the elements and and you know we know uh we need to now uh focus on that re-acceleration and ultimately prove out uh that this business you know should be growing strong double digits going forward but but clearly in the in the interim given some of what we've seen and what you mentioned you know we wanted to be prudently conservative to make sure we don't we don't have another experience like q2

Got it. And then, this has been another quarter since the LDD final rule. Customers have had more time to understand what this means for them. Do you expect there to be for your customers that would slow volume for this long-term? Would this ever be an issue? And then, similarly, IVDR and EU, as this progresses, is it a barrier? Thank you for that.

Yes. Thank you for the question, Subbu. So to your point, indeed, the legislation in the U.S. around LDT, as I would say, delayed some of the decisions first half of the year. And we've experienced that with a number of prospects that we intend to sign in H2. But despite that, what we hear from other players in the field, which are the significant contributors to molecular genomics, is that probably the LDT legislation will make actually the decentralized version, so the production of data in-house, bigger than what it is today. And just as a reminder, most of our customers in the US are large academic centers or large private labs. So we believe that those ones are going to benefit from the LDT legislation and going to see volume increase. And as a reminder, actually, this is something we're pretty proud of, US is where we've been growing the fastest this quarter in terms of volume of usage year-on-year with overall 40% growth year-on-year on utilization in both US and Canada. When it comes to Europe, IVDR is still not quite there. We are making some efforts to be fully compatible for many of the applications we cover with IVDR. In some countries, it's going to be more important than in others. There are some countries where it's going to be more like the LDP-like. In other countries, it's going to be more around the IVDR. But we have a very good understanding of what the market needs are and a very strong plan according to the specificities of each country.

Super helpful. Thank you, guys. Thank you, Subbu.

Your next question comes from the line of Connor McNamara of RBC Capital Markets. Please go ahead.

Hey, good morning, guys, and thanks for the time. Just can you comment on the sustainability of the accelerating growth you saw in North America? Is that a function of a market acceleration due to lower cost sequencing that we're seeing out there or the market share gains or a combination of both?

Yes, good morning, Conor, and thanks for the question. So, definitely the acceleration comes as well, not only from, I would say, the fact that for us it was a newer market and we can cover many of the applications, but beyond that, indeed, there is a trend. The fact that strong private labs, large private labs and academic centers are expanding their sequencing capabilities with sequencers which are more powerful. increases as well the market itself, right? And again, for us, more sequencing, more volume, better given we are being paid on usage. But beyond that, I would say as well that we do see more and more demand for enterprise-like platform to do data analytics. Often, large academic centers as well as large private labs are now looking for one key provider who can cover all their needs from IM-ONC, hereditary cancer, brain-related disorders, solid tumor, liquid biopsy. And this enabled us to enter into, I would say, large enterprise discussions with a number of potential targets. Given that there are not many or any companies at the scale of SOFIA who are computing over 30,000 or close to 30,000 genomics profile a month. These credentials are extremely important so that one can work with large academic centers or large labs, which are seeing volumes increase. Ross, in terms of other type of dynamics in the U.S., I don't know if you want to give more color.

Thanks, Yurgi. So I would say, you know, obviously there's been some disruption in the U.S. market related to hereditary cancer and rare disease. I think Some of that has played into an insourcing thesis where we've seen a number of institutions bring in some of that volume, which has obviously benefited us. I also think in general it's caused them and some of the larger institutions to rethink sort of the mix of send-out and in-house. And so overall, I would expect volume growth in North America to remain quite robust. Additionally, I would say that, you know, probably the U.S. is quicker to adopt some of the newer platforms and systems and some of the chemistry upgrades. And certainly there, again, you're seeing probably more robust volume growth, both in terms of just sheer number of analyses, but also complexity or size of analyses. And so we expect that as well to play out in other parts of the world over the next 12 to 24 months. certainly a favorable backdrop for us in North America. And if I look at, you know, sort of the pipeline as well as kind of our booking trajectory there, it will support continued outside growth in the region.

Great. Thanks for that, Culler. And then on the biopharma weakness and the decision by you guys to focus more on some of the small, you know, focus on the smaller biopharma customers, is Is that a function of, you know, is there increased competition from other AI platforms or is it just more of an overall market that is taking longer to develop than you guys have anticipated?

Yes, thank you, Conor. So just to make sure we didn't misguide the one listening to us today, on the biopharma side, we're focusing on the top four monies, the top 24 monies and some biotech. but indeed we're focusing within this account on deals which are lower in terms of the budgets and the dollars. And this is due to our experience of having indeed significant discussions and delays in signing large deals. When it comes to the current need or demand, we see clear demand in anything regarding market access, so which can be sponsored testing, eventually follow on DX, which is as well access to data for market access needs. We see a bit more delayed decisions on anything which is pre-launch of a drug, which would be leveraging on the data to, for example, design the clinical trails in a certain way or CDX development plans. Beyond that, I don't know, Ross, if you want to add anything else.

Yeah, I think just broadly, Conor, and I'm sure you've heard this from peers or other companies, I mean, certainly the budget environment at Pharma this year has been more challenging, right? Whether that means you're spending more time in procurement or the decision-making is elongated, it's very clear that sort of the threshold for which multiple approvals are required is lower, and thus it's more challenging even when you've been awarded to essentially move to contracting and then execution. So for us to combat that, as Yurgi mentioned, we're obviously trying to aim for smaller ACV type business. And so far, I think that's gone fine. But certainly, you know, even if we think of, you know, the portion of revenue I mentioned earlier that we had assumed would impact the forecast this year that was verbally awarded, that still is sitting in and procurement and contracting, that's a seven-figure-plus deal. And so there, it's been certainly quite a journey trying to get some things actually realized. So we've adapted, and I would say it's much less around the competitive environment frankly, for much of what we offer, there's not a lot of comparative companies or similar offerings, and so our capabilities, I would say, in many senses are unique, and it's quite a new market, and so there as well, obviously trying to carve out new pockets of budget in an environment where things are more challenged is not easy, but the value we bring and the continued proof points right through those smaller pilot studies and or building of other examples, I think we'll continue to unlock these accounts for us increasingly over time, and we can already see some of that momentum, as Yurgi mentioned.

Great. Thanks for that, Kylo, Ross, and Yurgi, thanks for the clarification. Appreciate that. Thanks, guys.

Thank you, Kunar.

Your next question comes from the line of Teja Savant of Morgan Stanley. Please go ahead.

Thanks for the time. So, Yogi or Ross, perhaps, I want to begin a little bit on the pharma weakness here again. You know, helpful color on, you know, deal value thresholds and market access and CDX work versus the rest. But as you think about your pharma revenue mix today, how much would you say falls into that discretionary spending bucket today? and how much falls into core R&D spending. Because if it's the latter, the weakness is, I guess, a little bit surprising to me because trends seem to be generally okay, at least year-to-date financings and so on and so forth. Even commentary from peers seems to be holding up. So anything you can do to just parse out those two dynamics within the pharma weakness would be terrific. Thank you.

Yes, thank you. And good morning to Jess. So Our budgets don't hold on the core R&D as you define it. So there are more of the discretionary ones, although I would say probably the easiest one to act on as well because they are mainly related to drugs that are finding their best way in the market, right? So most of them are really related to market access on the data side and on full-on CDX or on sponsored testing on the clinical side. And we're having some discussions as well when it comes to pre-launch on the CDX side, but nothing along the line of drug discovery.

Got it. That's helpful. And then on the EMEA weakness, Jurgi, can you share a little bit more color on what drove that sort of patient volume moderation And as you think about that strategic account focus you talked about, help us think through how you envision that helping you with some of the pricing pressures you called out for some of the core hereditary testing side of things.

Yes, sure, Tejas. So I will start and then leave it to Ross. I would just like to highlight that we believe this is temporary. So we've seen indeed in... the EMA market, but in particular in three countries, which are important for us, where we had an important traction. So Italy, France, and Spain. Some challenges around uncertainty of some reimbursement, for example, in France for solitum testing, which now is resolved, and so ENTS volumes are up again. And some pressure from competitors, who often come with lower ESPs for ESPs. an offering which is inferior, but we believe that with the actions we are taking on the account level and the selling at the account level, this should be something we resolve. And beside that, I want as well to insist that they just on the fact that the R&D developments we've been working on make our offer more competitive. Ross, given you're leading directly sales, do you want to go through the concept of the enterprise sales at the account level and the importance of that for the French, Italian, and Spanish market in particular.

So, thanks, Jurgis. So, first off, Tejas, I would say as we spoke to the customers, particularly those where we saw a deviation in usage trend, honestly, most of the feedback was generally constructive and that they expected trends to resume. and that ultimately they saw this pause in some of the demand as temporal. So it's hard for us in some sense to gauge if there's a change in utilization or a change in testing pattern, et cetera. But I guess in our work, and we obviously have deep customer relationships inherently, we did not detect anything that would lead to a more sustained change. Now, as we think about some of the competitive dynamics or what you cited on pricing, I think we've seen very specific competitors, smaller competitors come in, you know, with aggressive pricing on a specific product, right? Because typically their menu is quite limited and their capabilities are much more narrow. And so ultimately what we've done increasingly is gone back with sort of an enterprise presentation whereby we can obviously bundle quite a number of applications together. as well as work with automation or chemistry partners to come up with a holistic solution for the lab that essentially can help them lower the total cost of operation and become more efficient and scale their volumes and achieve improved pricing, but for us, grow materially our wallet share at the customer. And so I would say we've used that strategy now in our more established market successfully of notes, We talked about historically, maybe two and a half applications per customer. We're seeing some customers where we can get to five, six, seven, eight bundled applications on the platform. And really, essentially, it proves out our thesis. And it's also a way for us to obviously defend some of the more selective i would say aggressive pricing we've seen from some of the smaller uh entities and so we feel quite good that uh this will continue to benefit us uh and again you know i'll insist on sort of the new business environment which for me is much more of a forward-looking indicator uh for us which continues to be i would say quite strong even in the markets that, you know, we cited in terms of Italy, France, and Spain. And so, overall, we really see this sort of dip in usage as temporal.

Got it. Appreciate the color, guys. Thank you. Thank you, Tejas.

Your last question comes from the line of Mark Massaro of BTIG. Please go ahead.

Hey, guys. This is Vivian for Mark. Thanks for taking the questions. So just when do you think we could start to see the impacts of the biopharma reshuffling of sales resources across geographies? Does that just represent upside to the lower guide? And could you discuss when that was completed and if there's any good trends to call out here in July and early this month? Thanks.

Yes, thank you. And good morning, Vivian. So we'll start with... First, reassuring that we do see market growing, right, overall, both in the pharma, both in the clinical side. And on the biopharma side, despite we being, I would say, refocusing our activities and defining teams that are dedicated to DX as well as to the data and focusing on overall deals which are lower ACV, our pipeline continues to grow. And on the clinical side, I think that was your second question regarding the macro events that made that the volume of analysis was a bit lower than what we had thought or what we had anticipated. There as well, the first numbers that we see of July are reassuring and demonstrating that, you know, this will reaccelerate. And our booking numbers suggest that this will actually reaccelerate. from Q1 next year. And just maybe as an aside, to be clear, on the clinical market this quarter, year on year, we still grew 14%, and actually what has been more penalizing us has been the bioforma-related activity. Now, that said, just to make sure that we made that point clearly as well, Viviane, despite revenue growth was not as possible or as large as what we had anticipated and is more modest, We're being able in the meantime to protect our margins with gross margins that were above 73% on an adjusted basis and huge improvements as well on the adjusting operating loss versus last year where we improved by 32%. Gotcha.

And if I could just squeeze in one more, just on the guide, I guess you guys were pretty clear in calling out Biopharma and the EMEA headwinds. Just what's facing to the guide as far as the competitive pricing pressure that you mentioned?

Yes, so I will leave it to Ross to answer you and give you some more color.

Yeah, so what we're seeing in terms of pricing is on the same store basis, uh capture has been uh around one percent now obviously there is some mix shift uh happening in the business and and obviously some of that you see through the pharma weakness but ultimately we we essentially forecast that much of what you saw in the second quarter will continue throughout the year we do have a slight benefit in the fourth quarter as some liquid biopsy related business starts to come online late in the quarter but ultimately I would say the trend that we saw in Q2 is what we're assuming happens throughout the remainder of 2024. And so, you know, we will see obviously how that certainly plays out. But we wanted to be conservative with respect to our assumptions, just given the magnitude of the delta versus our original forecast. So again, I feel we've taken the steps and we're confident that it will improve, but we've not baked that into the back half.

Understood. Thanks for taking the question.

Thank you, Viviane.

There are no further questions at this time. I'd now like to turn the call back over to Yogi for final closing remarks. Please go ahead.

Just thank you all for following us today and very much looking forward to reconnect early September at the Morgan Stanley event in New York.

Have a good day.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.