Tempus AI Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 4, 2024

Key Takeaways

  • Positive Sentiment: Tempus delivered 33% revenue growth in Q3 to $180.9 million and improved adjusted EBITDA by $14.4 million year-over-year to a negative $21.8 million.
  • Positive Sentiment: Genomics unit growth accelerated to 23.9% and data & services revenue rose 64.4% year-over-year, led by an 86.6% increase in data licensing.
  • Positive Sentiment: Tempus signed an agreement to acquire Ambry Genetics for $600 million at ~1.9× revenue and 15× EBITDA, expecting the combined entity to be adjusted EBITDA and cash flow positive on an annualized basis.
  • Positive Sentiment: Data licensing backlog remains above $900 million, with significant renewals and expansions from Merck, Takeda and BioNTech, underpinning multi-year revenue visibility.
  • Positive Sentiment: Tempus secured new in-network agreements with major payers (e.g., Blue Cross Blue Shield Illinois and California, Avalon) and targets ADLT pricing for its XT CDx assay in Q1 2025.
AI Generated. May Contain Errors.
Earnings Conference Call
Tempus AI Q3 2024
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Operator

Thank you for standing by. My name is Brianna, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Tempus AI third quarter 2024 financial results conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. I'll now turn the conference over to Liz Krutoholow. Please go ahead.

Liz Krutoholow
Liz Krutoholow
VP of Investor Relations and Competitive Intelligence at Tempus AI

Thank you, Brianna. Good afternoon, and welcome to Tempus' third quarter 2024 conference call. This afternoon, Tempus released results for the quarter ending September 30, 2024. Joining me today from Tempus are Eric Lefkofsky, founder and CEO of Tempus, 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 discussion of these risks, please visit our 10-Q for the quarter ended September 30, 2024, filed on November 4, 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.

Liz Krutoholow
Liz Krutoholow
VP of Investor Relations and Competitive Intelligence at Tempus AI

Definitions of these non-GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures, are included in our third quarter earnings release, which has been furnished to the SEC and is available on our website at investors.tempus.com. I would now like to turn the call over to Eric.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Hi all. Just before we start the Q&A session, I thought I would just briefly run through some of the highlights for the quarter. Q3 was a solid quarter for Tempus. We delivered a revenue growth of 33%, hitting $180.9 million. We had genomics unit growth that accelerated from last quarter to 23.9%, which was a meaningful acceleration in terms of unit growth. The overall business was about 20% growth based upon some ASP drops from last year, but we were excited to see the unit growth pick up. Our data and services revenue accelerated to 64.4% year-over-year growth, notably led by our Insights or data licensing business, which came in at 86.6%, which was a meaningful acceleration from last year, I mean, last quarter. We also delivered Adjusted EBITDA of -$21.8 million, which was a $14.4 million year-over-year improvement and also a significant improvement quarter over quarter.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So we're well on track improving our EBITDA. Quarter over quarter, as we march toward cash flow and Adjusted EBITDA break-even. On top of that, the big news, obviously, for the quarter is we announced the acquisition or that we have signed an agreement to acquire Ambry Genetics, who's a leader in hereditary screening and whose business we've come to know well over the past few years. They're actually our largest reference lab for the hereditary screening we do. And we spend significant time with the team and understanding the business, and are just super excited to have them join our world. The business is synergistic across all of our products, from sequencing to, we've over time, our data business and our AI applications business.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

They also accelerate our path to cash flow and Adjusted EBITDA break-even, given that the business today is growing at north of 25%, which is meaningful growth, but even more fantastic is that they generate significant EBITDA. So they've achieved one of the rare things in our space where you actually have a genomics business that has significant growth and a proprietary business model, but is also making money. And we're excited that the combination of the two of us on an annualized basis will also be now Adjusted EBITDA and cash flow positive. We're paying $600 million for the business, $375 million in cash and $225 million in equity, $125 million, which we'll vest at closing, which should occur in early Q1, and the other $100 million, which is locked up for a year.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

And in terms of the multiples we're paying, it's about 1.9 times current revenue and roughly 15 times EBITDA. So we feel like we are buying the business at an attractive price, and we're able to finance the business largely with additional debt from Ares. And so the transaction is not materially dilutive at all to our equity. So overall, fantastic quarter. And on that note, we're happy to take any questions, folks, out.

Operator

Thank you. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one again. If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. We kindly ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Tejas Savant with Morgan Stanley. Please go ahead.

Tejas Savant
Tejas Savant
Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley

Hey, guys. Good evening, and thanks for taking the questions here. Eric, maybe I'll start with the Ambry news. First of all, congrats on the announcement. Can you just walk us through the rationale of expanding into hereditary cancer testing? One of the questions which I'm sure we get is the sustainability of that 25% growth you cited for the Ambry asset in light of some of the uneven growth trends that some of the peers have faced in that market. And then second, can you comment on just the organizational readiness, if you will, to continue making progress on the somatic side of the portfolio, including your MRD push, while also expanding into these new verticals and integrating the transaction? Or is the plan here that you'll essentially operate at arm's length? It was a well-run asset.

Tejas Savant
Tejas Savant
Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley

You talked about the EBITDA generation there and essentially sort of think about integrating it further down the road.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. So I'm happy to jump in. So first of all, Ambry fits squarely within our current strategic platform for genomics in that we currently offer hereditary testing today. We have an assay called xG. It's one of our main product categories. And it's critical to us because we want to capture patients early. We want to be there for them when they're being treated. We want to be there monitoring their disease over time. And we believe in what's been central to our thesis, which we've talked about historically, is that we believe it's going to be very much, if you kind of look at the analogy of Amazon and e-commerce, more and more physicians and care teams and oncologists are going to want to work with those labs that can help them treat their patients from beginning to end and not work with five different labs.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

They're going to want to work with one lab if that lab can offer comprehensive profiling, and so we have always felt it's important to be in hereditary screening. It's important to be in somatic and liquid testing for therapy selection. It's important to be in MRD and monitoring, so this fits kind of squarely within our strategic plans and current activities. Beyond that, the business has actually been accelerating their growth rate, and if you look at the landscape, we believe the hereditary market is quite stable. More and more insights are relevant to inherited cancer risk understanding, and so there are certainly growth in that space. Ambry, in particular, seems to be taking market share from others. We don't see any signs that that's going to slow down.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

And even though the law of big numbers does tend to bring down growth rates, which is true for us and will be true for them, we think it'll be a meaningful grower for some period of time. And there's nothing that we saw in the past year where we really dug into the business deeply that led us to think there was some kind of systemic slowdown. So we think the business will perform well. It will grow. It'll make more money. And it fits squarely within our footprint. In terms of the other end of the spectrum, which is, okay, instead of catching patients earlier before they develop cancer or right when they do, thinking about monitoring them post-therapy for minimal residual disease detection as well as monitoring, we have talked about historically, we have kind of two different platforms there.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

One is our tumor-naive assay, where in colorectal cancer, we're doing our own. We have our own liquid assay, and the other is a tumor-informed product that is in partnership with Personalis in lung and breast and immune response. We believe that our portfolio in MRD is expansive. We think it's the right portfolio to capture share. The demand for our products has been quite strong. We're obviously gated by reimbursement, and until both we and Personalis achieve reimbursement, it's hard to really unshackle those products. So I would suspect it'll be a much more meaningful story in the coming years as we get reimbursement and as we really start to ramp that portfolio up.

Tejas Savant
Tejas Savant
Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley

Got it. That's helpful. And then maybe switching gears to the data side of things here, guys. I think you talked about the MolDX contract renewal. You got intra-quarter, you got the expansion of the Takeda collaboration and another one with BioNTech as well. Can you just clarify whether the TCV grew a little bit sequentially? I know you kind of reiterated that it was north of $900 million again, but it'd be helpful to just reassure investors that it's moving in the right direction. And then, Jim, one for you in terms of the near-term dynamics here. One of the questions we get is there's a $25 million sort of quarter-over-quarter step-up that's embedded in street models into the fourth quarter for the data and services business.

Tejas Savant
Tejas Savant
Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley

Just your visibility there in light of some of the mixed commentary we've gotten from the CROs and some of the other players on biopharma funding weakness would be helpful.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

I'll start with the overall business, and then Jim can talk a little bit about the financial metric. The data business continues to be strong. We're fortunate that a lot of the pressure that other people have been experiencing, we're not immune to it. Certainly, there was historically some additional tailwind when biotechs were going public and R&D budgets were larger, and so we certainly have seen some of that tailwind subside, but the overall business remains really strong, and in fact, the growth rate, when you look at our data licensing business of almost 87%, we don't expect to sustain that, so we expect the growth rates to come down, and so we've got some good cushion in terms of building a durable, meaningful, fast-growing, large data business given where we sit, and so overall, I would say everything's moving in the right direction.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

One thing really quickly on Merck. It's really nice when a large client that has a big three-year data license and it comes up for renewal, and then you re-sign up, you expand these relationships. It's really, I think, a testament to the data's adding value, our products are adding value. And what most people don't understand when they look at our data business is it's not just that we have lots of data, which we obviously do, but we've built a whole series of tools and data products that make that data usable by biotechs and pharmaceutical companies. And that's really the main differentiation. And in terms of the overall metric of $900 million, I'll let Jim weigh in.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. So as we noted at the end of Q2, it was north of $900 million, still north of $900 million at the end of Q3. We obviously recognized a lot of revenue in Q3 from the number that was there at Q2. So again, we continue to refill the bucket. And we think that at that level of north of $900 million, obviously gives us very good forward-looking visibility into the next several years of data licensing revenue. In terms of the step-up in Q4, Q4 is historically our largest quarter from a data perspective. Oftentimes, we have projects that kind of follow pharma cycling budgets or budgeting cycles. And so this is not atypical for us to have a step-up in Q4 on the data and licensing side.

Tejas Savant
Tejas Savant
Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley

Got it. That's helpful. Appreciate the time, guys.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Thanks.

Operator

Our next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead.

Rachel Vatnsdal
Rachel Vatnsdal
Executive Director of Equity Research at JPMorgan

Hi. Good afternoon. Thanks for taking the questions. So first up on the core genomics business, Eric, I believe you mentioned that unit growth accelerated this quarter. So can you break down for us what did volumes grow sequentially? And then can you break that down even further? Which tests did you see faster uptake out of the portfolio there?

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. So total volume was about 66,500 in Q2, just about 69,000 tests in Q3. We should note that both of those numbers exclude any MRD testing. So the growth that we're seeing quarter over quarter coming from our core assays, so xT, xR, xF, and then xG growing more quickly, but it's a smaller base. So most of it coming from xT, xR, and xF.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. And I think we had kind of foreshadowed last quarter that we did expect to see some additional unit lift in the quarter, and we saw what we expected. So always nice to see.

Rachel Vatnsdal
Rachel Vatnsdal
Executive Director of Equity Research at JPMorgan

Great, and then just for my follow-up, last quarter, you guys mentioned just around hiring some of the sales force. I believe you added roughly 60 new sales reps in the quarter. And that initially had just led to lower productivity during the ramp-up period and some of the territory adjustments, so can you provide an update in terms of current productivity levels of your sales force at this point, and how should we see that trending in terms of the ramp into Q4 and then into next year as well?

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah, I can start. So I mean, the sales force is getting certainly more productive every month as they get trained and get up to speed. We have seen historically that it can take six to nine months to get reps in our world really up to speed. We've got a broad testing compendium, so it takes a little time. And we suspect they'll continue to get more efficient. It isn't meaningful for us in the way it might be meaningful for others in that we're metering our investments now. If you look at the business, let's say three quarters ago, we were generating -$40 million-plus of EBITDA. Then last quarter, -$30 million-plus. Now it's just over a little over $21 million of negative EBITDA.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So we're on a consistent monthly trend on our own of getting to Adjusted EBITDA positive in the next short period here, let alone the accelerant from Ambry that obviously just pulls that forward a bit. But we're not making such large investments in our sales force that their lack of productivity is kind of causing any financial chaos. It's not at all. It just might mean that in a given quarter, we might sell 1,000 less reps than we thought or 2,000. And so the growth rate might go from 23%-25% or 22%-24%. So we can explain some of the fluctuations relative to what we had forecast by looking at that productivity. But it isn't really meaningful because this isn't a massive investment for us that's like we've got to get through to be financially healthy. We're already on a good path to be healthy.

Operator

Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Great. Thanks for taking the question, guys. Appreciate the color on Ambry earlier and congrats on that deal. It seems like the financials are pretty compelling. I want to expand a little bit on your existing relationship though. As you've touched on in the past, you've got a relationship with them. They're your primary reference lab. I just want to get a sense of that $300 million in revenue they generated or they expect to generate this year. How much is sort of going to be incremental, right? I mean, what I'm trying to get at is how much of their current business is their relationship with you versus how much is external? Just how should we think about this impact of the model next year?

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. So I mean, obviously, the vast majority is not overlapping. That said, we haven't provided exact numbers of the breakdown between our tests. In large part, I mean, it wouldn't be that exciting, but it would just create more questions every these things move around a bit. We've got a pretty broad testing portfolio. We don't want to be in the habit of every single quarter discussing every single nuance of every single assay. Our inherited cancer risk hereditary screening was a newer offering for us. As Jim mentioned a second ago, it's still relatively small in terms of its overall piece of our larger genomics business. The vast majority of Ambry's business is not over.

Jim Rogers
Jim Rogers
CFO at Tempus AI

I would also add that their primary call point is genetic counselors where our testing volume is coming through oncologists. So it's very complementary of what we're doing.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

Okay. All right. Thanks. And then on just going to the genomics business, 69,000 tests, I think you called out $1,530 ASP, some nice sequential improvement over 2Q and 1Q. Any particular trends to call out on the reimbursement side of things? Any particular payer that came on board or was just sort of brought up with and how to think about that line item going forward? Is this sort of the pace of improvement we should continue to expect?

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. So from a reimbursement standpoint, we made some progress with commercial payers over the last couple of months: Blue Cross and Blue Shield of Illinois, Blue Shield of California, Avalon, kind of all in-network contracts covering all of our therapy selection and inherited cancer panels. So xT, xR, xF, xG, xG+. And so that led to a little bit of incremental kind of quarter-over-quarter improvement. I would say no significant step-up in Q4. ADLT status, that pricing process still underway. Just as a reminder, we're targeting $4,500 a test there for the xT CDx. We'll start migrating volume to that version of the assay in Q1 of 2025. And so that would be kind of the next kind of meaningful accelerant from a reimbursement standpoint as we move to that version of the assay.

Michael Ryskin
Michael Ryskin
Managing Director at Bank of America

All right. Thanks so much.

Operator

Our next question comes from the line of Daniel Brennan with TD Cowen. Please go ahead.

Daniel Brennan
Daniel Brennan
Senior Equity Research Analyst and Managing Director at TD Cowen

Great. Thanks. Thanks for the questions. Maybe just on Ambry, presumably given your partnership, the deal was not competitive. Just wanted to clarify that or just kind of learn about that in terms of the deal process. And then anything you can say about what kind of top-line growth you guys are plugging in or we can think about going forward? And are there any synergies associated with this deal?

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. So I'll cover the first couple. So in terms of a competitive process, Ambry did run a competitive process. They hired banks and looked at their options. You'd have to kind of dig in. They're a public company, so you can kind of dig into some of their historic comments. And I'm not an expert on Konica Minolta, but I know at one point they had Ambry plus another business that were bolted together. I think for a period of time, they were looking to sell both and then decided to split it out. So it was a process, but it was a process with twists and turns. We were fortunate that we knew the business well. We were watching it closely. We were interacting with them as a partner.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

We were able to kind of watch their performance over long horizons of time to really get comfortable that this business was durable, that the economics were improving, and that we thought this was going to be a highly synergistic asset for us to acquire under the right terms and in a way that it accelerates our business, both in terms of the products we take to market and our journey to get to EBITDA and cash flow positive, which we now are. In terms of the top-line growth, we've got some slides in the investor deck you can take a look at. The combined business, if we were one company today, it'd be about $1 billion in revenue. We give a little bit of color, even though we haven't fully built our models for 2025 yet.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

We expect the combined business to grow in the kind of 23%-25% range. And obviously, the combined business will be Adjusted EBITDA and cash flow positive. So we're in a good, healthy spot. We're at size and growing and continuing on our mission to bring AI to diagnostics. In terms of synergies?

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. In terms of synergies, we plan on it's a well-run business, so we plan on having it operate kind of independently for the near term. But there certainly are some synergies. For example, they don't have a large data business. We have a large data business that we can kind of incorporate Ambry into. Additionally, they're largely an in-network provider. So about 95% of their volume is in-network. So they've got very good relationships with payers that hopefully we're able to leverage at Tempus AI. So while not kind of immediate synergies kind of baked into what we're anticipating, over time, we think that it's a very synergistic asset.

Daniel Brennan
Daniel Brennan
Senior Equity Research Analyst and Managing Director at TD Cowen

Got it. Thank you. And then maybe just as a follow-up, just on the kind of outlook for the remainder of the year, I think in the press release or maybe in the prepared remarks, you cited the genomics business. You expect to kind of stay in that 25%-30% range. And you kind of reiterated the $700 million guide for the year. So is the conclusion that we should be thinking about 25%-30% on genomics in 4Q, and then we can just solve for what the remaining data business should be growing at? Or are you guys thinking about something differently by segment for 4Q?

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

That's probably a question for Liz to take up after this call because I don't think we have a by-segment quick snapshot of how it would break down. But certainly, we do expect genomics to be in that 25%-30% range. So you can kind of back your way into it.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. We wouldn't anticipate any significant shift in Q4 of kind of where the businesses have been growing independently.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. Although I will say, and we said this, I think, in our letter, you shouldn't expect the data business to be growing at 87%.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Right.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

I mean, the business is performing super well. But again, we are far more focused on long-term growth in that 25% range as opposed to short-term accelerants that when we lap, make the business highly volatile. We want long-term growth, given how big the space is and given the unique position we hold in the space as really one of the leading companies bringing AI to healthcare and bringing particular diagnostics.

Daniel Brennan
Daniel Brennan
Senior Equity Research Analyst and Managing Director at TD Cowen

Great. Thank you.

Operator

Our next question comes from the line of Ryan MacDonald with Needham & Company. Please go ahead.

Ryan MacDonald
Ryan MacDonald
Managing Director and Senior Equity Research Analyst at Needham & Company

Hi. Congrats on a great quarter. And thanks for taking my questions. Maybe just to start on the data purchasing environment right now. Obviously, some nice notable deals in the quarter. But can you just talk about sort of if you're seeing any changes in sort of how, let's call it, newer customers on the data side might be purchasing or making that initial purchase? And if you're seeing maybe growth or larger initial lands relative to maybe the last six to 12 months, which have been a bit of a harder data buying environment? Thanks.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. No, I mean, I don't think we're certainly seeing continued strong interest in our data products. We've had really big wins this year, lots of good momentum, added lots of big clients to the portfolio. We've talked about some in the last few quarters, but certainly like BioNTech's a great new win. Things like that are great new wins for us. But as I mentioned, there's no question that the overall marketplace doesn't have the same tailwinds that it had a few years ago when capital was flowing more freely. A few years ago, there were just a plethora of biotechs that were flush with capital having just gone public or raised a round that were looking to buy data. And now when you talk to biotechs, they're looking to preserve capital because the market just is different.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So the fact that we're still growing and have this really big backlog, I think, just bodes well for the value that our data products offer the market. And I would suspect as the landscape shifts a bit, we will get some of that tailwind in maybe 2025 or 2026 as capital becomes a bit more free. But we haven't seen any fundamental shift in patterns. People still in our world tend to buy a little bit of data and then more and then an even bigger deal. And then our goal eventually is to get them into some kind of strategic relationship.

Ryan MacDonald
Ryan MacDonald
Managing Director and Senior Equity Research Analyst at Needham & Company

Really helpful, Eric. Thanks. Maybe as a follow-up, I recognize it's a small portion of the business today, but within the Apps arena, you had recently announced a collaboration with Northwestern Medicine on cardiology. And I think they're utilizing the ECG-AF algo. Can you just talk a little bit more about that collaboration? And then is this starting to form a pathway of how you think sort of the Apps segment can start to sort of build the monetization pathway here over time? Thanks.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. I think that's exactly right. I think more and more large medical systems are trying to figure out how to take advantage of this new onslaught of generative AI and large language model capabilities. They recognize that these tools are catalytic for their ability to treat patients, to generate better outcomes. And so they're trying to figure out how to bring that into their practice. And there's very few companies at our scale with our size that have products in that arena. And so we are fortunate to have really deep relationships with some of the best medical centers in the world, Northwestern being one. And we're all trying to figure out the best way to get these models deployed.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

What's interesting, and I think I've said this now a few quarters in a row, I would suspect that these models will be first of all, in our world, they already are deployed at scale. But I would suspect over the coming years, they'll be deployed at really tremendous scale. And you'll have an enormous number of people actually availing sums of these algorithmic diagnostics. That said, it may not be a lot of revenue. You could have millions of people that are benefiting in some way from these things without it generating lots of revenue because we still haven't figured out, at least in the U.S., how to appropriately pay for the benefit of these purely algorithmic diagnostics.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So one of the things we spend a lot of time thinking about is how do we eventually demonstrate to Medicare and Medicaid and other commercial payers that these things add value, they save money, they improve outcomes, they improve longevity, and they should be reimbursed. And I think the big watershed moment for the business side of our applications is going to be when they do get reimbursed.

Operator

Our next question comes from the line of Andrew Brackmann with William Blair. Please go ahead.

Andrew Brackmann
Andrew Brackmann
Equity Research Analyst at William Blair

Hi. Hi. Good afternoon. Thanks for taking the question. Maybe just to start on Ambry, in the deck, you sort of call out the health system relationships that this can further along for you guys. So maybe just at a high level, can you just sort of talk about how this acquisition can maybe accelerate or grow some of those partnerships? Just essentially, how does this better help you become sort of the provider, the go-to provider for those groups? Thanks.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. So I think in terms of the relationship that Ambry has on the payer side, they obviously are primarily an in-network lab. We're primarily an out-of-network lab. So facilitating some of those discussions, they've got a lot of history in dealing with the commercial payers. And then on the health system side, as I mentioned before, their primary call point is genetic counselors, or we're primarily dealing with oncologists. So again, just deepening those relationships across kind of the entire ecosystem on the provider side, we believe will kind of strengthen our position with the hospitals.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. I mean, a good example, I was at two very large academic medical centers, NCI Cancer Centers this morning. And both centers, we're with their precision medicine departments, and they're a cancer center, head of cancer center. And both groups are responsible for hereditary screening of their cancer patients, therapy selection, comprehensive genetic profiling of those patients, and now obviously MRD and monitoring. So it's not like they have different groups, right, where it's like, "Oh, you want to do hereditary screening, it goes over there." It's the same group of people that are trying to figure out how to bring precision medicine to their cancer patients that think about Ambry and that think about Tempus. And so we're both highly, I think, synergistic in that regard. And all the folks that we talk to typically are looking for vendors that can help them in a more comprehensive manner.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

The general trend is, "Can I work with fewer people that can help me in a more integrated manner, end-to-end comprehensively," as opposed to having lots and lots and lots of very small sequencing providers. And so we think this just strengthens our overall platform.

Andrew Brackmann
Andrew Brackmann
Equity Research Analyst at William Blair

Great. And then I want to go back to one of your answers to a question earlier on sort of profitability. So how should we sort of be thinking about you balancing investments with this march towards profitability going forward? Does this acquisition sort of change any of that philosophy, or should we still sort of expect continued march forward? Thanks.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Yeah. I mean, so look, we told when we went public, which was just five months ago, we told folks that we were on a disciplined path to get to EBITDA positive. That we wouldn't, that we were looking to basically take the gross profit dollar growth we were generating and produce some leverage so that our losses were declining instead of what some other folks in our space have done, which is either kind of just maintain high loss levels or actually go the other way and invest more. We felt that was prudent given that we're going to turn a 10 next year. And we just thought, given our size and scale, being sustainable and not burning money was an important milestone. We haven't yet determined how we want to harvest profits.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So I think what I can safely say is, especially with this acquisition, we've crossed that hurdle. We've kind of checked that box. We're now on an annualized basis, an EBITDA positive, cash flow positive, sustainable business. But we need to think a little bit about how we want to harvest the EBITDA we're going to generate relative to invest in the future. And I think we're more focused in the next several years on making sure we can sustain our growth rate, not trying to generate an extra $50 million of EBITDA in a given year. So I think you'll see us make those trade-offs. But we're still disciplined, and we want to run a good business. And so I think hopefully we'll find the right balance.

Operator

Our next question comes from the line of David Westenberg with Piper Sandler. Please go ahead.

Operator

Hi. Thanks for taking the question. This is John on for Dave. First of all, I just wanted to ask, there's been some issues between Myriad Genetics and UnitedHealthcare recently on getting reimbursement for GeneSight. Do you have any thoughts on how the industry might see reimbursement playing out in the psychiatric conditions and pharmacogenomics going forward?

Jim Rogers
Jim Rogers
CFO at Tempus AI

Yeah. More than I would say that one. So our neuropsych business is relatively small. And so any kind of disruption in reimbursement there has a very insignificant impact on our overall kind of growth rate. As far as kind of where it plays out longer term, obviously this news came out last week. So it remains to be seen kind of how other payers will react to it and all that, but very minimal impact on our business.

Jim Rogers
Jim Rogers
CFO at Tempus AI

Got it. Thank you. And just secondly, there's also been a lot of talk about billing for transcriptomics and for genomics. So I just want to ask this question in kind of a different way. Can you just talk about how your CGP test provides some different value relative to competitors? And is your billing out of whack with the value that you think it provides?

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

I mean, okay. First of all, no, we don't think our billing's out of whack. We don't set the billing rates. The billing rates are set by, in the case of Medicare and Medicaid, by CMS and by our local MAC as part of their process. And so we avail ourselves of billing rates both in MolDX and NGS. We're actually in two MACs. So our blended rate of $1,530 for all of our tests has some tests paid at X amount and some tests paid at Y amount. And at the end of the day, we follow AMA codes. We follow the reimbursement pathways that are set by our MACs. And then we follow whatever the payers are locally paying.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

So for example, in the case of Jim mentioned that we just signed Blue Cross and Blue Shield in Illinois and California, those folks are paying some slightly discounted rate to Medicare for both our DNA tests, same thing for our RNA tests, and same thing for our liquid tests. So now, I mean, many, many, many times, many, many, many, many independent times, we've had independent MACs and commercial payers look at our DNA tests, our RNA tests, our liquid tests, and establish rates. And those rates have all kind of coalesced around the same place. So we don't suspect anything will change with that. We think that's pretty well established. We do expect that our rates on our DNA test will go up a bit with our ADLT status. We don't know what that's going to be.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

And we have long taken the approach of not committing to or forecasting ASP gains until they arrive. So if you look at this year, we kind of said, "Hey, we're around $1,400, and that's what we can see." And now we're at $1,530. But we don't say we're at $1,530 and we can see $1,700. We just kind of look at it and say, "Hey, we're fortunate that we've got a high margin and a profitable business at this juncture." And if there's ASP lift, that's great. But we don't control it. And it all has to be independently ascertained. And so I think time and time again, it has been.

Eric Lefkofsky
Eric Lefkofsky
Founder and CEO at Tempus AI

Got it. Thank you.

Operator

We have no further questions at this time. With that, we will conclude today's conference call. Thank you all for your participation. You may now disconnect.

Executives
    • Eric Lefkofsky
      Eric Lefkofsky
      Founder and CEO
    • Liz Krutoholow
      Liz Krutoholow
      VP of Investor Relations and Competitive Intelligence
    • Jim Rogers
      Jim Rogers
      CFO
Analysts
    • Michael Ryskin
      Managing Director at Bank of America
    • Rachel Vatnsdal
      Executive Director of Equity Research at JPMorgan
    • Ryan MacDonald
      Managing Director and Senior Equity Research Analyst at Needham & Company
    • Andrew Brackmann
      Equity Research Analyst at William Blair
    • Analyst at Piper Sandler
    • Daniel Brennan
      Senior Equity Research Analyst and Managing Director at TD Cowen
    • Tejas Savant
      Executive Director and Senior Healthcare Equity Analyst at Morgan Stanley
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