Tempus AI, Inc.

Q2 2024 Earnings Conference Call

8/6/2024

spk00: Thank you for standing by. I am Augusto and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2024 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you will withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Ms. Liz Kripalow, Vice Investor Relations. Please go ahead.
spk04: Thank you. Good afternoon and welcome to Tempest's second quarter 2024 conference call. This afternoon, Tempest released results. The quarter ended June 30, 2020. Joining me today from Tempest are Eric Laskowski, founder and CEO of Tempest, and Jim Rogers, CFO. Before we begin, I would like to remind you that during this call, management may make forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For a discussion of these risks, please visit our 10Q for the quarter ended June 30, 2024, filed on August 6, 2024, as well as any future reports that we file with the SEC. During the call, we will discuss non-GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures, are included in our second quarter earnings release, which has been furnished to the SEC and is available on our website at investors.texas.com. I would now like to turn the call over to Eric.
spk02: First, welcome, everybody. to our first earnings call as a public company. We're excited to be here and happy to answer questions. I'll just maybe for 30 seconds give some color. Q2 is a strong quarter. As we provided some additional insight in our overview letter, our core businesses remain on track. Everything is how you want to see it up and to the right. And we're executing as we had intended both We began the process a few months ago going public and then certainly carrying to the quarter.
spk10: So I would say that we feel like we're in good shape and happy to answer the questions people have. Operator, we can open the line for questions, please.
spk00: At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile our Q&A roster. For our first question, Tejas Sabah with Morgan Stanley. Please go ahead.
spk08: Hey, guys. Good evening and congrats on a good start out of the gate post-IPO. Eric, maybe you or Jim can chime in on this. You know, nice progress on ASPs here on the genomic side in the quarter. Can you just walk us through how you're thinking about potentially ASP upside in the back half of the year? You've got the ADLT rate on XT coming through as well, but any color on how much of that is baked in versus progress on the commercial payer front would be great. Thank you.
spk02: I'll start by covering just the core genomics business volumes that Jim can talk a little bit about. On the reimbursement side, I think in terms of the overall strength of our units and the unit growth, as we covered in our overview letter, we feel like we're completely on track. We delivered roughly 4,000 more tests in the quarter in Q2 over Q1. We expect that trend to continue. And, you know, there's obviously some kind of percentage seasonality of growth rate in that you could have, you know, fewer days in the corridor or ASCO, depending on when it falls, could have some impact. But we feel like our core genomics business is performing as we expected. We feel like we can be in that 25 to 30 percent growth range in terms of units. And given our size and scale, at this point, it's certainly one of the largest therapy selection sequencers that are out there. We feel like that's a really healthy place to be. And in terms of ASP and the reimbursement offer, Jim.
spk13: Yeah. Thanks, Tejas, for the question. So our average reimbursement in Q2 was about $1,500, an increase of about $50 over where it was at in Q1 of 2024. The biggest drivers in kind of that uplift were a slight makeshift to more Medicare and Medicare Advantage patients, which typically get reimbursed at a higher rate than we get from commercial payers. As a reminder, we're primarily an auto network provider with commercial payers, so average reimbursement is significantly lower than what we've received from Medicare. This presents an opportunity for us going forward as we negotiate with those payers to cover kind of the various tests that we have in market. You also mentioned kind of the ADLT status for our XT-CDX assay, which is our FDA-approved version of XT. The initial price there was set at $4,500, but that pricing process will play out over the back half of this year. So there won't be a meaningful impact to ASPs in 2024 as it relates to the FDA-approved version. But as we start to migrate volume to that version of the assay in early 2025, we should see some additional fail-ins.
spk08: Got it. That's helpful. And then, guys, just want to dig in a little bit on the MRD launcher and Any anecdotal, you know, early customer feedback you can share? Any sort of like differences you'd like to call out in the reception for, you know, the tumor naive version versus next personal at this stage? And how are you thinking about volume contributions from MRD in the back half of the year? And then is reimbursement essentially a back half 2025 dynamic or could it happen sooner than that?
spk02: Yeah, again, I'll cover the overall launch. Maybe Jim can cover some thoughts on reimbursement. So we launched, for those who don't know, we launched basically our entire MRD platform at ASCO with a tumor-naive assay in colorectal cancer. And then in partnership with Personalis, we brought a breast, lung, and IO to market as well with a tumor-informed assay. I think the response has been quite positive, even though we're both metering out volume. at this point, because if we kind of opened up the floodgates, you would likely have an enormous amount of volume that's at the present moment not reimbursed. So given that it takes some time to get reimbursement, we're metering out accounts that we offer the assay to and ramping up slowly so that we can kind of manage the expense side of getting the tested markets. That said, everything we hear anecdotally is super positive. I think, you know, as I mentioned to a bunch of folks historically, tumor naive has a place in the market given that logistically and administratively it's just easier than tumor informed for many accounts that can't do an additional biopsy or don't have enough tissue to basically run you know, a second set of sequencing consumes a lot of tissue every time you sequence a patient. So if you've done therapy selection once, now you could do MRD for, you know, an informed assay. It can be logistically problematic. So I think Naive has a place. And then the next assay that personnel has brought to market, which we're obviously their partner in, is really ultra-sensitive. And so there's a place for that as well, where people are really looking for that ultra sensitivity and specificity and really low limits of protection. And so I think we feel like we've got a really nice MRD bag in market where we have a really good logistical product and a really ultra sensitive product. And we think we can meet the needs of the market across that spectrum. But we won't dial up those units or that volume until reimbursements in sight and maybe Jim can comment on that.
spk13: Yeah, and in terms of reimbursement for our internal Tuber Naive panel, we're packaging that up to submit it to Holdax right now. And then that process will play out. So, you know, you mentioned kind of back half of 0.5 Tejas. I think that's a typical time frame.
spk10: But we'll certainly provide more color as that process unfolds.
spk00: Our next question comes from Rachel Battendahl with JP Bargain. Please go ahead.
spk01: Perfect. Good afternoon, and thanks for taking the questions, you guys. So first up, on the genomics performance in the quarter, that grew 22% year-on-year. You mentioned all tests performed well in the quarter, but I was wondering if you could unpack that for us a bit more. Walk us through, even if it's from a high-level caller standpoint, how each test performed in 2Q, and then were there any notable shifts in terms of volume contribution by each test as well?
spk02: Yeah, there was, I mean, there was nothing material in terms of like a systemic shift of how the orders came in. You know, we have a platform that's in, we're in inherited cancer risk, we're in solid tumor profiling and liquid biopsies. So we kind of cover all three pretty broadly. And I would say all are, you know, kind of performing in terms of both unit and revenue growth as they historically have. There's been no, there was no like very large cyclical shift as if like all of a sudden our solid tumor went one way or liquid went another. They're all kind of moving in the same direction they were moving in. Obviously, or not obviously, but liquid for us was a newer product than solid. Solid was the first assay we launched and liquid came later. And so the growth rates of that product historically have been higher. But at the end of the day, you know, as these products now get to scale and we are at scale now, in terms of, you know, ctDNA assays, we're at scale in terms of solid-term profiling, and we're, you know, approaching scale at inherited cancer risk, I would suspect that the growth rates will start to normalize where you won't see very large differentials between the three as we keep getting bigger. And I think we've also historically said that liquid was about a quarter of our volume, and it remains as such. There's been no systemic shift there.
spk01: Perfect. Okay, that's helpful. Then maybe just for my follow-up, can you break down for us the data revenues into insight trials and AI applications in 2Q? And then if I look at guidance, you pointed us towards that $700 million mark on revenues for the year. How should we think about that mix between data versus the genomics business? And then is there any seasonality that we should be aware of across 3Q and 4Q for each of those segments as well?
spk02: I'll cover the first part. Jim can take the second part. which seems to be a theme today. So in terms of the data business, which obviously had some accelerating growth, we provided some color that Insights led the way. We had a really strong Insights quarter, which is our data licensing business. The trials business grew, but didn't grow as fast as our data licensing product Insights. Insights also has a much higher margin. So to the extent we want some part of our data and services business growing, we want the insights portion growing. It has the highest margin, and it's the one that we spend a lot of time focused on. Our trials business is really made up of a few components. It's made up of our just-in-time network, which we call Time. It's made up of this small little studies component. And it's also made up of our CRO business that we call Compass. And we are not investing as heavily in growing our CRO It's not a core part of our growth strategy. It's an important component of what we do, but it isn't something that we focus on growing as much as we do, for example, our insights business. And so I would suspect that, you know, over time, if we continue to deliver, insights will continue to outpace our trials business. And so I would suspect that'll be a trend we see going forward as well.
spk13: Yeah, just adding a little bit of color that breaks down. So the Insight business represents about 75% of the data and services revenues, and to Eric's point, also growing the most quickly amongst those components. In terms of the seven, about approximately $700 million in total revenue for full year 2024, you know, historically, it's been kind of a two-third, one-third split, two-thirds genomics, one-third data and services. Obviously, the data and services side of things growing more quickly than the genomics business, and so we would slightly kind of towards the data and other business over genomics, you know, for the remainder of the year.
spk00: Michael Reiskin with Bank of America. Please go ahead.
spk09: Hello, afternoon. This is John Kim on for Mike. Any update on the garden lawsuit? I know it's going to take a few years to play out, but yeah, I wanted to see if you guys have any updates.
spk02: No, there's no updates. And there likely won't be a material update unless something happens like, you know, for years. These things take a long time to get resolved, as we've said historically. We don't feel like it's material. We feel like we've got appropriate defenses. And it's not something that we're overly concerned with. And I suspect it will take years to play out. Unfortunately, in our space, you know, litigation has been a pervasive component of a lot of activity. And I would suspect that will continue just by nature. But we're, you know, we're focused on doing what's right for patients. We're focused on making sure that our tests are the best in market and people have access and That's what we continue to keep our eye on more.
spk09: Gotcha. And then in terms of the cost, they came in as expected, but looking ahead, you guys also gave us the EBITDA guide there. Any thoughts on when, any change in your thoughts on when you're going to hit the adjusted EBITDA profitability?
spk02: At a high level, we made, I think, really strong progress in the quarter. I mean, we were 12.7 million in improvement quarter over quarter. So I think, as we told people, we felt like the leverage was showing up in the business, and that was demonstrated, I think, in Q2, and we would suspect additional leverage will continue as we keep growing, and so we feel like we're right on track.
spk10: Daniel Brennan with TD Corwin.
spk00: Please go ahead.
spk06: Great. Thanks. Thanks for the questions. Congrats on the quarter here in the IPO. A lot of detail in the prepared remarks or in the script that's on the website regarding the insights business and some of the new contract signings. Maybe can you just expand a little bit there? Maybe starting with Novartis, you discussed there you're going to deliver this throughout 2024. Can you help kind of us think through kind of the size of that contract or any details around it? And then the new five-year agreement with Decata. You discussed that as a significant expansion in size and scope. Maybe can you provide some color on that contract and how we might think about sizing it?
spk02: Yeah, I mean, we obviously didn't include numbers for a variety of reasons, not the least of which, you know, we're sensitive to that we've got partners and those things. There are times that there are appropriate times that there are not. These are all good-sized deals for us. I think what we represented in the quarter is that We had multiple large pharma companies, and we didn't list all the smaller biotechs, but we also signed various agreements with, but we had, you know, kind of four larger pharma companies that all did significant deals in the quarter. And for us, it was just a sign of both in terms of the revenue we delivered in our insights business and the bookings we delivered. Q2 was a really strong data licensing quarter. And, you know, that was good to see. We expected to see it, but it was good to see. And we expect that momentum to continue at least in the foreseeable future. But we don't really comment on the size of these deals unless they get so big that we, you know, kind of have effectively no choice. And these deals were really good-sized deals, but they weren't, you know, $300 million deals where we would be, you know, talking about a greater deal.
spk13: TAB, Dan I would also add that you know the total remaining contract value is still north of $900 million so again there point out, we delivered a lot of revenue, but obviously you know at bookings that kind of refilled that total remaining contract value. TAB, In the other metric which we present on annually is that revenue retention for these are getting the highlighting ones that we had. TAB, agreements in place and we're able to expand those in subsequent years so we're excited about all the agreements that were mentioned.
spk02: Yeah, it's really another, you know, just to jump on Jim's comment, it's one of the most exciting things about the Estella syndicated arrangements in addition to the Vardis's. These are people that had multi-year agreements and, you know, re-upped for larger agreements or re-upped for larger periods of time. And so that's what you want to see, you know, our temp is only eight years old, right? We've only been licensing data for five or six years. So what you want, and which means that most of these, most of our clients have only been clients for two or three years on the data side. So, seeing big renewals occur over and over again is a really good sign that we're adding a ton of value, and that value is resonating with our clients.
spk10: Dan Ayers from Stiefel. Please go ahead.
spk00: Afternoon, guys. Thanks.
spk12: Eric, maybe to your point there on data contracts, one of the questions that we got during the process was on the $900 million-plus in revenues that are already contracted, but which contains this $300 million from customers that haven't formally renewed. Can you just talk to confidence in re-upping those two accounts and then maybe remind us when it is that those contracts actually come up again for renewal?
spk02: Yeah, I mean, they've actually, both contracts have actually already been extended in terms of timing. So I think in one of the amendments, we had another year, I think, to AstraZeneca, something like that. And we have a longer duration now going out with GSK as well. So we've got, I don't know the exact dates, but I'll say roughly 2027, 28, somewhere 27, 28. So these contracts go kind of years in the future. So there's no immediate eclipse coming up. And we feel good about all of our larger deals in terms of the value that we're delivering. And we would suspect that the vast majority of all our big deals renew and hopefully expand.
spk12: Yep, okay. And then just as a follow-up on the XF asset, do you think you end up submitting that this quarter or is it best to think about it as by the end of the year?
spk10: Sorry, David, I didn't catch that one. XF what?
spk12: The submittal of the assay to the FDA, I was under the impression that that was, you know, that's a process that's ongoing now. I'm just curious whether you think you get over the hump on that, you know, in the next couple of months, or is it more like a December?
spk02: I don't have the exact timing, but, you know, those teams are working on a submittal that's, you know, fairly imminent. And so I think the bigger issue for us is both in terms of RNA and our liquid biopsy, we've got efforts in place for both to submit
spk10: And, you know, whether it's one quarter away or two quarters away, it's, you know, these things are all kind of imminently coming. Andrew Brockman with William. Blair, please go ahead. Andrew Brockman, your line is on mute.
spk07: Yep. Hey, guys. Sorry about that. Good afternoon. Thanks for taking the questions. Maybe on the rep side of things, I know you added a few or I think it was somewhere around 30 in the first part of the year. So can you just give us an update on the productivity of that new cohort as well as just sort of working through any Salesforce changes or disruptions that may occur as a result of that? Thanks.
spk02: Yeah, I mean, you know, productivity is not where we want it to be. That's the nicest way for me to say that. I mean, we added, I think it was probably closer to 60, not 30 in terms of total heads that got added in a fairly short duration across the entire sales infrastructure. So we added a lot of folks in the first half of this year. We made a lot of territory changes. We introduced a new assay. And the combination of adding a lot of people, changing a lot of territories, and adding a new assay means that the efficiency of our sales force in Q2 is not where we want it to be. We continue to see improvement. confident I'll get back to where it was in Q3 or shortly thereafter. But at the end of the day, when you're growing as quick as we are and you're adding a bunch of new assays, from time to time, you have these step functions and territorial change, and you've got to manage it really well. And we're a young company, and we're always going to have some amount of bumps to get over. OK, thanks for that. As you can see in the numbers, We managed through all that and still grew our genomics business to 22%, so we feel good about it.
spk07: Perfect. Thanks for that, Keller. And then maybe just on the purist algo, first, can you just remind us the importance of that test for your portfolio and how it can be a differentiator? But then also, you received a PLA code last month, so how are you thinking about obtaining potential reimbursement there to be sort of a first in the process to obtain reimbursement for these AI tests? Thanks.
spk02: It was very exciting to be the first company to ever kind of have one of these algorithms get a code and get to this point. It's very cool. But I think the way I think about this business and our apps business in general is, you know, we're fortunate that we have a genomics business that's healthy and growing with high margin. We have a data business that's healthy and growing with high margin. And so... In the near term, we don't have to rely on our apps business to generate lots of revenue, which is a very good thing because we as a country and as a healthcare system haven't figured out how to pay for AI. We haven't figured out when it should be ordered. We haven't figured out how it should be delivered. We haven't figured out how it should be paid for. It's just too new of a space. And so even though we're excited that a lot of these codes are getting issued and physicians want these kind of algorithmic diagnostics, we still have a ways to go before we can figure out how to get it into guidelines, how to get into routine practice, and how to ultimately get reimbursed for these kind of tests. And I would suspect that's kind of a multi-year journey. We also had our cardiac algorithm to predict atrial fibrillation was also approved by the FDA, which is amazing. But again, there's not currently a reimbursement pathway for that test. So we need to work on demonstrating. We've obviously already demonstrated analytical validity. Now we've got to demonstrate clinical validity and ultimately convince payers that it's in their best interest to pay for these kind of tests. So that's a multi-year journey. I would suspect that we'll continue to bring many algorithms to market. And our hope is to build a very broad portfolio of lots of algorithmic diagnostics that are part of our applications business. And to begin this journey of getting reimbursed, and to the extent we're successful, this could be a very big business one day. As we've said historically, it could dwarf the other businesses. But it is a long journey, and I can't tell you that we're six months or a year away from seeing light at the end of the tunnel.
spk10: It's just too new. So as we know, we'll let you guys know.
spk00: Mark Sheppel with Loop Capital Market. Please go ahead.
spk11: Hi. Thank you for taking my question, and congrats on the quarter and the IPO. Eric, kind of building on the earlier question, I was just wondering if you could just talk about the uptake of your emerging AI applications business. I know it's still early days, but maybe just talk about what you saw in the quarter up front, and then Maybe just talk a little bit more about your efforts and initiatives to kind of get those solutions into the healthcare ecosystem, if you would.
spk02: Yeah, it's a really promising story, but it's super tiny in terms of revenue. So the growth rate of our applications business is really high. But it's also relatively small because, again, this stuff, we as a healthcare system haven't figured out how to pay for a lot of these applications. So the core components of our apps business today or applications business today, two of the biggest are, you know, Next, where we're, you know, basically closing care gaps in real time. And then we have a series of algorithms, whether it's, you know, across digital pathology or cardiology that are also available. algorithmically based. But if you look, for example, at Next, just take that one product, it's an amazing product in that we're able to scan real-time clinical data, relatively real-time clinical data, and see essentially errors or mistakes occurring in real time where there are guidelines established and there's routine practice, and yet for some reason, some patient has fallen through a care gap. And it happens in healthcare. It's just part of the system. No one's perfect. Using AI and technology to spot those and try to correct them is really powerful in terms of the benefit it provides patients and physicians. How you get paid for that, though, is a bit harder. And so again, we're experiencing, I would say, really positive, strong signs of adoption. People want these kind of applications. They're excited to deploy them. We're making a ton of progress. But there's still a significant amount of work we have to do as a system, not just Tempest, but anyone who's in AI in healthcare to get these things paid for at scale. And so that's what takes us from being a high growth but small business to a high growth and big business.
spk10: Thank you. Ryan McDonald with Needham. Please go ahead.
spk03: Thanks for taking my questions and congrats on the successful quarter in IPO. Eric, I'm kind of curious, from our healthcare IT side of things, we've actually seen the data space as one that's been really challenged in terms of the level of investment or spend that a lot of large pharmas and biotechs are willing to allocate this year from other vendors. Can you just talk about why you've been able to see so much success on the data side of the business and how you're differentiating there and then maybe within the quarter sort of with a mix of expansions versus net new logos you brought on in the data business? Thanks.
spk02: Yeah, I mean, we're experiencing really positive momentum and really strong growth in our data business, I think, in a very tough background. And I think you highlighted that. I mean, the macro conditions are not great. You have biotechs, especially smaller biotechs, that have had a really hard time raising capital for the past several years. And Big Pharma has been really conscientious about its R&D budgets. And so we're growing really quickly and continuing to sign big deals, despite what I think of as a tough environment. So I think I'm hopeful that the next year or two, when the environment changes, and I believe it will change, I think biotechs will eventually be able to go public again and raise capital. I think we're going to have some really nice tailwind to that business. But at the end of the day, the reason that I think we're growing is it's a very simple equation. If you deliver something of value that people want, that's helping them improve their efforts in early stage discovery, improve their ability to design clinical trials, improve their ability to develop assets more efficiently and bring them to market, get clinical trials closed quicker. Like these things are all a big deal and companies are willing to pay money, but you got to demonstrate that value. So in tougher markets, there's kind of like nice to have and need to have. And Tempest, at least at the present moment, is kind of need to have data for a lot of people. And I think you're right. They're probably cutting back on budgets for nice to have things.
spk10: Really helpful, Collar.
spk03: Thanks. Maybe as a follow-up, on the genomic side, given all the positive news that you continue to receive in terms of reimbursement for assays from CMS, Can you talk about how you're sort of going about using this in discussions with the commercial payers to potentially improve reimbursement? And, you know, what sort of stage are we at in sort of the progression of those discussions? Thanks.
spk13: Yeah, so I think on the commercial payer side, we're certainly on the same journey that kind of all sequencers have kind of followed. Getting CMS coverage is great. That unlocks an FDA approval somewhere. That unlocks kind of the ability to have the discussions with commercial payers. We have gone in-network with Cigna, Humana, and Aetna. And so we have started to make some progress, still plenty of work to be done. And, you know, we're having those discussions, but they just take a long time to play out.
spk10: So, you know, over the next few quarters, we'll certainly share in progress in the mid. ladies and gentlemen that concludes today's call thank you all for joining you may now disconnect
Disclaimer

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