SOPHiA GENETICS Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 5, 2024

There are 8 speakers on the call.

Operator

Good morning. My name is Drew, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sofia Genetics 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen only mode. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Kellen Sanger, Sofia Genetics' Head of Strategy and Investor Relations. You may begin.

Speaker 1

Thank you, and good morning, everyone. Welcome to the Sofia Genetics 4th quarter and full year 2023 earnings conference call. Joining me today to discuss our results are Doctor. Georgi Camblanc, our Co Founder and Chief Executive Officer and Ross Muken, our Chief Financial Officer 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.

Speaker 1

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 Sofia Genetics issued today and in the documents and reports filed by Sofia 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 to non IFRS measures is included in today's earnings press release, which is available on our website. With that, I will now turn the call over to Yerke.

Speaker 2

Thanks, Kelyn, and good morning, everyone. During today's call, I will start with an overview of our progress in 2023, followed by a quick look at our performance in Q4. Next, I will highlight our key priorities for 2024. Then, Roast will provide a more detailed look at our financial results, business trends and guidance for the upcoming year. Before I get started, I want to take a momentum to reflect on some of the trends we saw in Healthcare in 2023 and also more broadly across industries.

Speaker 2

In many ways, 2023 was the year of AI. It was the first time that the general public gained access to powerful AI models and learn what they can do. As the co founder and leader of an AI driven precision medicine company who has been working on building AI in health care since Opioid Genetics' inception in 2011, this moment has been a fulfilling experience for me. I will take this opportunity to highlight that since inception 13 years ago, we have invested over $400,000,000 to build some of the most advanced AI capabilities in the healthcare sector. We have recruited a team of more than 200 of the top data scientists and engineers in the world who contribute to building and developing our platform, SofiaDDM.

Speaker 2

SofiaDDM today is widely recognized by healthcare professionals for its world class analytical performance and by some of our partners as the leading AI platform in health care. However, at Topia Genetics, innovation is not the development of new technology, but rather the adoption of those technologies in the market. And in that spirit, let's turn to 2023 and the progress we made driving adoption of Sofia DBM. 2023 was a tremendous year for Sofia Genetys. We grew revenue 31% year over year to €62,400,000 by continuing to drive widespread adoption of our platform.

Speaker 2

In 2023, SofiaDDM was used by 450 core genomic customers across the globe to perform over 317,000 analysis. This record number of analysis represents a remarkable 27% year over year growth when excluding COVID related volume. At the beginning of 2023, we laid out 3 primary drivers to achieve our ambitious growth objective. 1st, we highlighted the large market potential for Sofia dBm solid tumor application. Especially, we expressed excitement over HRD, which was exhibiting workplace analytical performance due to an innovative deep learning algorithm we developed called Ginger.

Speaker 2

2nd, we highlighted high potential for growth in the U. S. Market. And 3rd, we explained that the genomic and multimodal data computed every day on our platform in addition to our advanced AI algorithms being trained on these datasets would create meaningful value for our biopharma partners. I'm proud to say that we delivered in each of these three areas.

Speaker 2

With respect to SofiaDD and solid tumors applications and in particular HRD, we saw impressive growth. Solid tumor revenue grew above company average in 2023 and HRD was a major driver with over 150% revenue growth during the period. We're pleased to see both existing and new customers adopt Sofia DDM for solid tumor applications. We signed an impressive 36 new logos for solid tumor applications in 2023. And by the end of Q4, we were proud to have a total of 129 core genomics customers using solid tumors applications.

Speaker 2

This group includes nearly 50 customers using SofiaDDM for HRD, all of which were attracted by the application's world class analytical performance. Moving on to our second growth driver for 2023, €1,000,000 in 2022. We signed 9 new core genomic customers in the U. S. In 2023 and we're proud to welcome some of the top U.

Speaker 2

S. Cancer centers and labs to the Sofia DDM network. Apart from customers' relationships, we also had a landmark year with our partners in the U. S. Namely, we continue to build our strategic partnership with Memory and St.

Speaker 2

Catherine. During 2023, we entered into a partnership with MSK to help them to decentralize their liquid biopsy test, MSK Access and their solid tumor test, MSK Impact, and to make these tests available to healthcare institutions across the globe. We officially launched MSK Access powered with Sofia DDM in December and have been pleased to see strong demand for this application in the market. In the U. S, we announced a number of new signings for MSK Access powered with Sofia DDM and are looking forward to capitalizing on this momentum going into 2024.

Speaker 2

The 3rd growth driver we focused on in 2023 was delivering value to our biopharma customers. The first way we accomplished this was by a number of deals with biopharma partners where they sponsored the deployment of SofiaDDM. Biopharma customers are motivated to do this because they are mutually interested in expanding access to cancer testing. Our partnership with AstraZeneca has been a major proof point in this area. Last month, we announced that EZ sponsored the deployment of Sofia DTM's HRD application across Spain in 2023 with resounding success.

Speaker 2

While the deployment of our genomics offering continues to be a key focus for us and our biopharma partners, we have always intended to complement our genomics computing capabilities with multimodal analytics. Multimodal data and multimodal algorithms analyzing that data provides significant value to biopharma companies. 2023 was a landmark year for us in building our multimodal capabilities. We launched Sofia ClearPath, a model of Sofia DDM, which enables customers to perform longitudinal analysis of multimodal patient data. This includes multimodal models designed to predict treatment effects of different therapy decisions.

Speaker 2

As you can imagine, these capabilities provide differentiated value to our biopharma customers who are willing to pay for the access to the multimodal patient data and to multimodal algorithms, which analyze system. Towards the end of 2023, we completed a momentous project with 1 of our key biopharma partners, where Sofia Klerpath identified a signature in subpopulations of lung cancer patients, which could indicate different treatment effects for a specific drug. We continue to remain excited about these use cases for our multimodal offering and the value these capabilities bring to our biopharma customers. In 2024, we plan to expand the footprint of Sofia Kelpaz Biogen Cancer to breast, prostate and kidney cancer. We recently announced 2 data partnerships, which will accelerate our progress in this mission.

Speaker 2

1st, with MSK second, with Exactis Innovation, a network of 13 hospitals across Canada dedicated to improving cancer survivorship. These partners will help us gain access to valuable multimodal datasets, which will be ingested into Sofia ClearPath for our biopharma customers to use and access. Now that I have provided a brief overview of 2023 as well, I would like to spend a minute discussing Q4 2023 performance in more detail. In Q4, we grew revenue 27% year over year to $17,000,000 We performed approximately 85,000 analyses, up 20% year over year, including COVID related analyses, or 24% year over year growth, excluding COVID related analysis. As of December 31, we had 450 core genomics customers who are using our platform regularly to analyze patients for cancer and rare diseases, up from 434 in the prior year and up 19% sequentially from Q3.

Speaker 2

Q4 was a great quarter in terms of landing new logos. In the Q4, we landed a resounding 35 new core Genomics customers. These customers will add to our total number of core Genomics customers over the course of 2024 as they are onboarded onto Sofia DDM. As mentioned previously, it typically takes customers 6 to 9 months to enter routine usage. After landing a new logo, our expand strategy continues to be effective as existing customers adopt more and more applications.

Speaker 2

As of the end of Q4, 56% of customers were using 2 or more applications, up from 49% a year ago. 31% of customers were using 3 or more applications, up from 28% a year ago and 21% were using 4 or more applications, up from 17% a year ago. Moreover, our net dollar retention was 130% in Q4 2023, up 2,800 basis points from 102% at the end of 2022. The continued proof of our ability to expand within existing customers exemplifies the importance of landing customers across the globe. On that note, I will take a quick moment to highlight our progress in a key growth market for us, India, where the usage of our platform grew 70% from 2022 to 2023.

Speaker 2

I recently returned from a heartwarming trip across India, visiting our fantastic partners there such as Tata Memorial Hospital in Mumbai and the Institute Rotary Cancer Hospital in New Delhi. I also spent time with our newest partner Carcinos Healthcare, an oncology platform boldly addressing the over 2,000,000 estimated cancer cases in India each year. Together, we will work with Karkinos to provide genomic testing applications to the population of India in addition to a range of other strategic objectives. I am especially inspired by the shared vision between Sofia Genetics and Karkinos, and I am excited for what this means for the broad deployment of Sofia DDM across India. Beyond India, I would like to announce today a few additional major signings and expansions.

Speaker 2

In the U. S, we recently signed Life Spam Health System, a network of award winning hospitals in Rhode Island with dozens of locations across state. LifeSpam adopted multiple SofiaDDM inbound applications due to their top analytical performance and our platform's ability to seamlessly integrate into the workflow. In Spain, we recently expanded our relationship with the Val de Bruyne Institute of Oncology, one of the top comprehensive cancer centers in Europe, with adopting SofiaDDM solid tumor application for HRD. Pal de Bruyn joins other top European cancer centers using Sofia DT and for HRD testing, including the top 2, namely Gustave Roussy and the Royal Marathon.

Speaker 2

I'm also excited to announce that in LATAM, we expanded our relationship with DASA, the largest clinical diagnostic company in Latin America. DASA is adopting MSK access powered with Sofia DDM for liquid biopsy testing. This will be the DASA 6 Sofia DDM application. We're excited to see these customers in addition to the 35 new logos we landed in Q4 2023, begin ramping up usage of Sofia DDM during 2024. Speaking of 2020 4, let's move on to our priorities and outlook for the upcoming year.

Speaker 2

Similar to last year, I will highlight 3 primary growth drivers. I will then touch on how these growth drivers, along with continued fiscal discipline, will allow us to achieve profitability in the next 2 plus years. 1st, we are excited to capitalize on the launch of our new liquid biopsy offering, including MSK access powered with Sofia BDM. We are pleased with the strong demand we are seeing in the market for this application and are excited by our sales pipeline for it, which is approaching double digit millions. As an additional catalyst for the growth of our liquid biopsy applications, we recently announced a collaboration with AstraZeneca in which they will sponsor the deployment of MSK access on Sofia DBM to customers across the globe during 2024.

Speaker 2

Our second growth driver for 2024 is the significant opportunity we continue see in solid tumors. A major tailwind for us in the solid tumor space has been the increasing complexity of signatures. As signature detection becomes more complex, more sophisticated algorithms are needed. One example is our proprietary algorithm, Ginger, was recently published in Cell Reports Medicine for its unique ability to detect the HRD signature. Beyond HRD, we are also using other algorithms to help customers like VanDesk Bio detect additional complex signatures such as extra chromosomal DNA, which are present in about 20% of cancer cases.

Speaker 2

Not only are we well equipped to address this growing demand in solid tumors, but we also have a strong portfolio of comprehensive genomic profiling applications to meet our customers' needs. This includes the upcoming launch of MSK Impact powered with Sofia DTM. Similar to our work with MSK Access, we will decentralize MSK's CGP test, MSK Impact, and deploy it to customers worldwide. AstraZeneca joins us in the mission and will also contribute to the deployment of the application to customers across the globe. The 3rd key priority for us in 2024 is continuing the trend of strong growth in the U.

Speaker 2

S. As mentioned earlier, we picked up significant momentum in the U. S. In 2023. In 2024, we're looking forward to capitalizing on this momentum and leveraging marketing aims to attract other U.

Speaker 2

S. Customers to our network. Apart from the 3 growth drivers mentioned today, we're also delivering a series of targeted high impact platform and application launches in 2024. We plan to launch new capabilities in IMHANK with an application to measure minimal residual disease for acute myeloid leukemia. We also plan to launch new features in rare and inherited disorders to serve our customers' needs on world genome sequencing and pharmacogenomics.

Speaker 2

From a platform perspective, we are launching a full modernization of Sofia DDM as we move to web technology and microservices. We will also continue making upgrades to Sofia ClearPath and its multimodal capability in order to create even more value for our biopharma customers. Based on our current commercial pipeline, we're confident that these new launches will deliver long term value to our business. In summary, 2024 is an exciting year. From our liquid biopsy capabilities to our world class solid tumor applications to the momentum we are building in the U.

Speaker 2

S, we are well equipped for 2024 and as we continue on our past profitability in the next 2 plus years. So with that, I will now turn it over to Ross, who will provide a more detailed look at our financial results, business trends and guidance for the 2024 year.

Speaker 3

Thank you, Yergi, and good morning, everyone. I'm pleased to share that despite the challenging macro environment, Sofia Genetics delivered strong performance in the 4th quarter, continuing our commitment to sustainable growth. Total revenue for the Q4 of 2023 was $17,000,000 compared to $13,400,000 for the Q4 of 2022, representing year over year growth of 27%. Constant currency revenue growth was 26% and constant currency revenue growth, excluding Covin related revenue, was also 27%. Of note, clinical revenue fell in line within our internal revenue shift from the Q4 to the first half of twenty twenty four.

Speaker 3

As I've stated previously, our biopharma revenue is still in its nascent stages, and thus you should continue to expect small timing related recognition impacts over the near to medium term. Platform analysis volume was approximately 85,000 for the Q4 of 2023 compared to 71,000 for the Q4 of 2022. The 20% year over year growth was attributable to the strength of our core platform analysis volume, offset by continued expected decline COVID related analysis volume. Excluding COVID related volume, platform analysis grew a healthy 24% year over year in the period. Strength in North America and Asia Pacific highlighted geographic outperformance in the quarter, offsetting a slight moderation in Latin America, which had an overall strong 20 23.

Speaker 3

From an application standpoint, rare and inherited disease applications outperformed oncology applications in the period, given broad demand for exomes despite strong contributions from solid tumor, liquid biopsy and hemonc applications. Gross profit for the Q4 of 2023 was $11,900,000 compared to gross profit of $9,600,000 in the 4th quarter of 2022, representing year over year growth of 24%. Gross margin was 70% for the Q4 of 2023 compared with 72% for the Q4 of 2022. Adjusted gross profit was $12,500,000 an increase of 25% compared to adjusted gross profit of $10,000,000 in the Q4 of 2022. Adjusted gross margin was 73% for the Q4 of 2023 compared to 75% for the Q4 of 2022.

Speaker 3

We continued to benefit in the period from economies of scale related to cloud based compute and storage costs as well as favorable price capture, partially offset by a challenging prior year comparable related to sizable Microsoft Azure cloud credits, offsetting our computational and storage related costs. Excluding this one time benefit, gross margins would have increased 600 basis points year on year. Total operating expenses for the Q4 of 2023 were $30,800,000 compared to $24,700,000 for the Q4 of 2022. Across the functions, we continued to benefit from lower headcount, both on a year over year as well as quarter on quarter basis. FX was a notable headwind in the period, particularly impacting R and D expenditures.

Speaker 3

On a reported basis, share based compensation was also a notable headwind broadly. Lastly, I am also proud of our hard work on the G and A side, where we continue to benefit from lower professional service fees and optimization of our public company costs. Operating loss for the Q4 of 2023 was $18,900,000 compared to $15,100,000 in the Q4 of 2022. Adjusted operating loss for the Q4 of 2023 was $13,300,000 compared to $12,100,000 for the 4th quarter of 2022. We continue to be pleased with our trajectory toward profitability and believe the additional headcount actions we took in the second half of twenty twenty three were necessary to sustain the trend into the first half of twenty twenty four.

Speaker 3

Of note, below the line this quarter, we did have a significant charge related to foreign exchange losses. This is due to the material appreciation of the Swiss franc and euro in the period. As this is primarily related to intercompany receivables, you will see an immaterial impact on our cash utilization overall. Lastly, total cash burn for the Q4 of 2023 was $9,500,000 compared to $10,600,000 in the prior year quarter. This represents an 11% year over year improvement even when factoring in a credit to computational and storage related expenses related to our strategic agreement with Microsoft in Q4 2022.

Speaker 3

We remain happy overall with our cash and utilization trends and are on track with respect to our medium term liquidity trajectory. Now turning to full year 2023 financials. Total revenue for the full year 2023 was $62,400,000 compared to $47,600,000 in 2022, representing year over year growth of 31%. Constant currency revenue growth was 30% and constant currency revenue growth excluding COVID related revenue was 32%. This outcome was generally in line with our initial forecast and speaks to the level of revenue visibility we continue to have in the business despite ongoing macro and industry specific headwinds.

Speaker 3

Platform analysis volume was 317,000 for the full year 2023 compared to 264,000 in 2022, represented 20% year over year growth. Excluding COVID related volume, platform analysis grew at a strong 27% year over year in the period. For the full year, oncology application growth outperformed rare and inherited disease applications, led by strength in solid tumors and liquid biopsy. Regional growth was generally balanced with APAC representing the exception delivering greater than 50% growth. Core original MY customers were 450 as of December 31, 2023, up from 4 34 in the prior year period and up sequentially by 19 customers relative to Q3 2023.

Speaker 3

Annualized revenue churn rate was 4% in 2023, in line with our expectations. Retention for the year improved to 130%, up 2,800 basis points from 102% in 2022. Constant currency net dollar retention, excluding COVID related revenue, was 130% as compared to 123% in 2022. Strong NDR and a healthy level of backlog continued to provide us with a high level of revenue visibility going forward. Gross profit for the full year 2023 was $42,900,000 compared to gross profit of 30 $1,300,000 in 2022, representing year over year growth of 37%.

Speaker 3

Gross margin was 69% for the full year 2023 compared with 66% for 2022. Adjusted gross profit was $45,000,000 an increase of 39% compared to adjusted gross profit of $32,400,000 in the full year 2022. Adjusted gross margin was 72% for the full year 2023 compared to 68% for 2022. I am incredibly proud of this outcome as we have now outperformed our medium term guidance for an entire year. I remain encouraged with respect to continued expansion opportunities moving forward.

Speaker 3

Total operating expenses for the full year 2023 were $117,700,000 compared to $119,100,000 in 2022. R and D expenses for the full year were $37,000,000 compared to $35,400,000 in 2022. Sales and marketing expenses for the full year 2023 were $28,400,000 compared to $28,300,000 in 2022. General and administrative expenses for the full year 2023 were $53,300,000 compared to $55,800,000 in 2022. Operating loss for the full year 2023 was $74,800,000 compared to $87,800,000 in 20 22.

Speaker 3

Adjusted operating loss for the full year 2023 was $55,900,000 compared to $72,000,000 in 2022. Lastly, total cash burn for the full year 2023 was $55,400,000 compared to 86,700,000 dollars in the prior year, down 36%. We are quite proud of this achievement and remain committed to sustainable growth moving forward. Cash and cash equivalents were approximately $123,300,000 as of December 31, 2023. Now turning to our 2024 outlook.

Speaker 3

Sofia Genetics expects full year reported revenue to be between $78,000,000 $81,000,000 representing 25% to 30% growth on a reported basis. Let me provide a few key underlying assumptions relative to our reported revenue forecast for 2024. 1, we currently contemplate that exchange rates will remain highly volatile and as such, we are anticipating a moderate negative impact to reported results in 2024. 2, we also expect a very modest headwind to 2024 reported revenues related to a ceasing of COVID related contribution. The combined impact of these assumptions would place our implied organic growth rate toward the low end of our medium term guidance of 30% to 35%.

Speaker 3

This is despite excellent new customer momentum exhibited in 2023. We would attribute 2 key factors to a more conservative stance as we approach 2024 revenue guidance. 1st, we have assumed elongated implementation times for liquid biopsy applications given the complexity of the workflow as compared to tissue. Further adding complication is a need to help our customers gain access to tumor normal reference samples for proficiency testing. We currently believe this may add up to 3 months to implementation timelines, meaning we will likely see a larger impact from recent key wins in 2025.

Speaker 3

2nd, we are seeing increased adoption of new sequencers in the market. This includes companies like Complete Genomics, PacBio, Ultima, Oxford Nanopore and Element. At Sofia Genetics, we welcome this diversity. One of the founding principles of our platform is to be technology agnostic. While the prevalence of these new sequencers is driving opportunity across our offering, the changing adoption pattern also warrants some conservatism about customer readiness to implement our solutions as they first need to manage their sequencer transitions.

Speaker 3

Thus, a majority of the growth forecasted in 2024 is from the expansion of existing customers. This is consistent with our historical NDR of 125% to 130%. We will update you over the course of the year as to how new implementations are trending. With respect to seasonality, we would expect 2024 to follow our typical cadence, whereby 1Q and 3Q tend to be seasonally softer from a revenue standpoint, while 2Q and 4Q tend to be seasonally stronger, With 4Q being the largest in terms of percent of revenue contribution to the full year, as many of our recently signed logos will likely begin ramping up at that point. We continue to expect a larger portion of our 2024 revenue to be recognized overall in the second half of the year.

Speaker 3

Following on our strong cost performance in 2023, Sofia Genetics expects further gross margin expansion from 2023 levels in 2024. We currently forecast adjusted gross margins for 2024 in the range of 72.5% to 72.7%, representing an improvement of up to 50 basis points. This is despite a challenging comp in the Q1 due to the remaining prior year Microsoft credit. Turning to operating loss. We currently expect adjusted operating loss to fall between $45,000,000 $50,000,000 This is yet again another notable improvement from 2023 levels despite a less material benefit year over year with respect to headcount, which drove a majority of our loss improvement in 2023.

Speaker 3

We are confident in our medium term path to profitability. We have taken the required actions to expedite that goal and remain obsessed with capital efficiency. In the second half of twenty twenty three, we took some tactical headcount actions to further optimize our operations while also continuing to focus our R and D efforts on increasingly high ROI projects. These were difficult decisions, but we prioritized sustaining medium term revenue momentum at our previously communicated targeted expenditures and execute on identified savings in systems, professional services and certain public company costs. The combined nature of these items and the natural operating leverage in the business from strong revenue growth will further our path to profitability in the next 2 plus years.

Speaker 3

With that, I would like to turn the call back over to Jurgen for the closing remarks before we take your questions.

Speaker 2

Thank you, Ross. We're proud of our performance, which we believe reflects our continued ability to execute on our vision and the opportunity ahead. Sofia's success stands on our ability to delight customers and continue driving more and more usage of our platform. After a successful 2023, our focus shifts to Sofia's future. I will share just a few final thoughts as we look towards the near future with 3 key priorities for 2024.

Speaker 2

First, we look forward to seeing significant growth from new liquid biopsy applications, including MSK Access powered with Sofia DDM, as we deploy the applications to customers worldwide with the help of our biopharma partners. 2nd, although we set the bar high in 2023, we're excited to continue growing SofiaDDM solid tumor applications and capitalize on the demand of increasingly complex signatures. And third, we plan to continue our strong trajectory of growth in the U. S. As we leverage momentum from 2023.

Speaker 2

In closing, thank you to our Sofia colleagues, partners, customers and investors for joining us in our journey. Without you, none of this would be possible. Please note that we are attending Cowen Healthcare success of democratizing Dataview and Medicine. Operator, you may now open the line for questions.

Operator

Before we begin, I'd like to turn it back over to Ross for a brief statement.

Speaker 3

Thanks. Please note, Yerge will be joining us today for the Q and A portion of the call as he had a minor medical procedure over the weekend. He sends his regards and apologizes for not being able to make it today. We look forward to having him back soon. Now back to you, Drew.

Operator

The line is now open for questions. We will now begin the question and answer session. The first question comes from Dan Brennan with TD Cowen. Please go ahead.

Speaker 4

Great. Thanks for the questions, Ross. I hope Yogi is okay. Maybe just on first question just on the guide. You talked about the elongated implementation for liquid biopsy and the newer platforms.

Speaker 4

Could you just contextualize that a little bit like just size the liquid biopsy business today, kind of frame exactly what's going on there? And then on the sequencing side, just give a little more color of it like how pervert how widespread is this new platform adoption? And

Speaker 3

like in

Speaker 4

the Q2, will we be talking about this? Could this be something that lingers throughout the year for you guys? And then I have a few follow ups. Thanks.

Speaker 3

Thanks, Dan. So in terms of some of the factors we put into the guidance. So one, I would point you to the fact that we had a tremendous quarter in terms of adding new core logos, right. So we added 35 in the period. We also had and again, this is not a number we typically share.

Speaker 3

We also had incredibly strong bookings toward the end of the year. So the new demand environment in general is quite healthy. A good portion of that is coming in liquid biopsy. And so I think that solution, again, relative to tissue is a bit more complex, right? And I think on our end, both given it's a tumor normal solution and so that means sample acquisition is a bit more challenging, but also just the workflow for the customer.

Speaker 3

We wanted to be a bit more, I would say, conservative and essentially added in our assumption of customers ramping about 3 months to the adoption process relative to our typical 6 months. So again, that mathematically would just mean we're only getting roughly 1 quarter of contribution from some of those new customers in the year, whereas typically we would get 2. So that's liquid biopsy. On the sequencer side, obviously, this has been a market where you've had essentially 2 players for the majority of the last number of years, with 1 player being quite dominant. We still see obviously no change in sort of the leadership position in the market, but we are seeing quite a number of new vendors having success in different applications within the market.

Speaker 3

And so for us, this is obviously a really nice development. We welcome the diversity of new applications and new sequencer types and vendors. But there is, I would say, to that degree, a bit less certainty for us solely because we have not seen this before, right? And so again, I wouldn't say there's anything we're necessarily seeing in our setup time that's elongated, but we wanted to add a bit of cushion, just in case, right? And so again, I think it's ultimately on both of these ends, very positive long term developments for us, but we wanted to be a bit extra conservative as we entered the year just because it does introduce in terms of new business a slightly different wrinkle than we typically have faced in the past.

Speaker 4

Okay, got it. Thanks. And then maybe just as a follow-up, it would be a 2 parter and then I'll just go back in the queue. Just biopharma, I think in the 20 F, you noted was up $3,000,000 year on year. Could you give us some color what the base was?

Speaker 4

And just any color on the biopharma contribution and how we're thinking about the impact in 2023? And then you discussed in the prepared remarks the medium term path to profitability and the actions that you guys are taking in order to ensure that. I know you haven't given us a distinct date or timetable, but any more color around what that medium term path looks like, whether how long, what the revenue base is, what needs to happen? Thank you.

Speaker 3

Excellent, Dan. Thanks for the question. So in terms of biopharma, so you'll note, we still have not broken that out. And we did obviously also call out in the period that there was a slight amount of revenue that shifted to the first half of next year. I would say that business remains in its nascent stages.

Speaker 3

We're still incredibly excited about the opportunity there. We're seeing quite a lot of synergy between our clinical and pharma business, particularly in liquid biopsy, where I think, again, this year you'll see continued updates from us on some of the new partnerships and success we're having there. But I think overall, obviously, longer term for us on top of what we've already done in terms of sponsored testing, we're very excited about multimodal. And multimodal for us is very present within sort of the pharma landscape. And that's where I would say, stay tuned for some of the other types of projects we're working on, right?

Speaker 3

And so overall, I'm pleased with how pharma performed this year. It actually outperformed our internal expectations. But I would say it's still small enough as a business relative to the whole, where we're not quite at the point of breaking it out. And so the disclosures I saw show you the nice momentum we're having, but we're still at a point where we want you to think about the platform as a whole. In terms of your second question relative to our path to profitability, I'm really proud this year of the work of the team.

Speaker 3

We did a great job on gross margins. In this quarter, excluding the Microsoft credit, gross margins were up over 600 basis points. We also made great progress throughout the year on headcount, which is our main expense. And so we'll continue to see that improvement play out. As you know, we're a European entity majority in terms of our headcount mix.

Speaker 3

And so it does take some time for headcount actions to work their way through the P and L. So you'll continue to see that benefit on OpEx in the 1st part of next year. And then we continue to be very disciplined on the rest of our discretionary spend, whether that's professional services or systems or our real estate, etcetera. And so we're constantly looking for areas to target. That being said, I would say from here, the biggest contributor to the path to profitability is going to be the drop down of incremental revenue, right?

Speaker 3

So the good news for us is we have incredibly visible strong organic growth, right? So we talked about net dollar attention being 130% for the year. So that gives us a very nice base with which to sort of model our forward growth. And so with this sort of continued gross margin expansion, we talked about this year and again, we haven't updated our long term target or medium term target, but we're obviously increasingly confident in our ability to drive margin expansion. With those strong incrementals off of the net revenue growth, we expect to drop down a very high portion of that incremental gross profit to the EBIT line.

Speaker 3

And so with that, that will materially help our path to profitability. So again, at JPMorgan, you already spoke about 2 plus years and our sort of sufficient capital base. So you can sort of back into you now know at least a range for this year in terms of loss. And now you can see that with continued improvement in 2025 and into 2026, that should be a pretty visible, I would say, trajectory with some of those assumptions to cross over the cash flow breakeven.

Speaker 4

Great. Thanks Ross.

Operator

The next question comes from Tejas Sivant with Morgan Stanley. Please go ahead.

Speaker 5

Hey, Ross. Good morning and best wishes to you here. Just a couple of quick cleanups there on some of the comments you just made on the guide and the path to breakeven. So I guess my question is really, you've been well north of 70% for a while now as you mentioned, really good progress in GMs in the 4th quarter as well, even adjusted for the Microsoft dynamic. So what's holding you back from perhaps bumping that target to, let's say, 75% plus on the margin line?

Speaker 5

And then, as a related follow-up, you talked about the I want to go on focus on the plus in the 2 plus years to operating profit breakeven. So is that just to preserve a degree of optionality? Should there be opportunities to really lean in and invest more than you currently anticipate over the next couple of years? Or is there something else that we should be reading into in terms of that sort of phrasing?

Speaker 3

Good morning, Tejas, and thanks for the question. So I would say, I'll take your second one first. So on the plus, yes, I think the way you characterized it, ultimately, it does give us a bit of degree of freedom. But frankly, I think as a public company, we're obviously incredibly focused, right, on this initiative given sort of the end market environment. But the practical reality is, as a business that's primarily a headcount, right?

Speaker 3

We have a high degree of control of where we land, but we also want to balance to make sure that we hit our growth objectives, right. As I mentioned before, so much of the drop down that comes is relative to that top line momentum. And so I think from that standpoint, it's really crucial that we don't lose sight that we still need to invest for the future, right? And we need to be able to drive really good operating leverage, but we also need to contain or sustain our revenue momentum within our targeted range. So again, I think it's always the balance.

Speaker 3

We're trying to delicately balance that and maximize shareholder value creation. And so I think, again, we've done a relatively good job of that so far and we're maniacally focused on continuing to execute and deliver on that in the future.

Speaker 1

Got it.

Speaker 3

Yes, go ahead. Sorry.

Speaker 5

No, no, go ahead. Go ahead.

Speaker 3

No. And I was just going to say, overall, right, as we just take a step back, I think the business has very good momentum on the gross margin side. We've done a fantastic job in terms of compute in store, which is a majority of our COGS. We've had very good labor absorption. I think there, the only sort of question for us is as well mix over time.

Speaker 3

There are elements of our business, right. We are somewhat focused. We haven't talked it out of the ton, but we have, I would say, started to really push on our professional services effort. With our size and scale and with the number of laboratories we touch, there are, I would say, really nice opportunities to further engrain ourselves within our customers and help them on a number of items. So if you think about today, like the LVT legislation, for example, this will be an area where I think we potentially can help.

Speaker 3

Additionally, I would say on the pharma side, there could be some elements of that business over time that have service components. And so I would say given those moving parts, we have waited to sort of better understand where those pieces will fit in, in terms of overall mix. But frankly, overall, we feel quite confident on our continued ability to drive GM expansion. You can see that in the guide this year. And certainly over time, maximize gross profit dollars, which again at the end of the day, it's going to be, I would say, crucial to that path to profitability being closer to that 2 figure versus the sort of 2 plus.

Speaker 3

So again, we're super focused on it. We just we have a high degree of, I would say, visibility and accuracy in our ability to predict our business. And so we don't want to commit to something until we're 100% sure we can deliver it. And that it's today the right sort of mix for the business given some of the other pushes and pulls we're seeing from a demand perspective within the business. And again, I would argue are all positive developments.

Speaker 5

Got it. Super helpful, Ross. My next question here is really related to the expand part of your land and expand sort of algo, right? And would you be willing to share a little bit more color in terms of what you're doing to incentivize cross selling into your existing customer base once you land them? You called it out as one of the more conservative assumptions in the guide.

Speaker 5

So I'm assuming it's an important focus area for you. And of the growth that you saw in 2023, do you think you could parse it out for us in terms of how much came from just new accounts versus existing accounts ramping volumes on your legacy solutions, so to speak? And the 3rd leg being existing accounts adding new Sofia solutions that they haven't used before?

Speaker 3

Sure. And it's a great question because I really think it speaks to sort of the differentiation of our business. And again, as a software company, net dollar retention remains a crucial metric for us, right? Because that truly kind of, I would say, shows the health of the expand, right. And so, Yerdi, in the prepared remarks, did share that our average number of applications per customer expanded this year from 2.3 to 2.5, right?

Speaker 3

With many more, I would say, having multiple applications that we've seen in the past. This is incredibly crucial to us and it gives us again very high degree of visibility, but it's also a very high return on CAC, right, in terms of the customer acquisition cost, because you're obviously selling with an already landed customer. And so in that, I would say, and even more so over the last 6 months, we put a real focus on the expand. And I think we're seeing really nice dividends. And you can see the growth we have this year in HRD are solid tumor overall.

Speaker 3

I think 2024, 2025 liquid biopsy will remain a really good story for us. But frankly, there are quite a number of applications for folks to adopt. There was a client, Yurghi, called out on the call that actually is going to start with us with 11 applications, right? I would say this is not the norm, but it just gives you the sense of how much expand potential there is at many accounts. And so I would say we're doing a much better job now of incentivizing that behavior, albeit I would caveat and say it's still challenging at times because if you're using an existing solution and even if you're not happy with it, the friction to change is high, right?

Speaker 3

So this is why our churn is so low in general. So it also benefits us, but it does make, I would say, the pace of expansion a bit more elongated than you would see in most markets. But still, again, longer term, this is quite a positive. The one other thing I would say to your question is obviously a good proportion, a very high proportion of our growth came from the expand from existing customers this year. The land typically for us is anywhere between 0% to 5%, right, of our growth.

Speaker 3

This year was sort of in the middle. I would say the ideal situation for us is that sort of sustains solely because it essentially positions us for a much more, I would say, visible elongated period of elevated growth, because all of those customers, the 80 plus that came on this year, they will contribute materially in 2024 and 2025, right, and the ones we land this year thereafter. In the guide, we obviously are assuming a much more conservative amount this year. It's towards the lower end of that, so we have very little contribution. And so again, maybe that will prove conservative, but we just wanted to call it out this year relative to some of those dynamics that we're seeing, right.

Speaker 3

And so ultimately, we feel good about that. Kellen, do you want to maybe add a key point there?

Speaker 1

Yes, sure. Thanks, Ross. I think as mentioned, we've had a we've demonstrated a proven ability to expand within our existing customers, which makes the announcement that we had today that we're adding 35 new core genomics customers. We landed 35 new core genomics customers in Q4, even more exciting. These are customers who are going to be ramping up and implementing Sofia DBM over the next 6 to 9 months within 2024.

Speaker 1

And so after landing those, we see even more potential to expand within those accounts in the areas that we mentioned around liquid biopsy or solid tumors or the other growth drivers.

Speaker 5

Got it. Very helpful, guys. Last one for me here. Ross, any thoughts on this on the LDT regulation from the FDA? It now appears increasingly imminent.

Speaker 5

What are you hearing from your customers? And should that final rule not include grandfathering or any further push outs to implementation? What can SOPHIA do to help your customers adapt?

Speaker 3

That's a great question, right? And so I would say overall, we view the regulation as positive. This has been quite a good result for us in Europe as well if you think about IVDR. And so we're essentially using the same playbook we saw with IVDR for the U. S.

Speaker 3

With LVT, albeit to my other point of gross margins, there might be a higher professional service component as the potential pace of transition is probably a bit more, I would say, expedited than what we've seen with IBDR, although that's been pushed out several times. And so I think the need for a validated platform and the ability to track QMS events, right? This is all stuff we already do to some degree. And so now it's more formalizing. And so I think the pressure on our customers essentially to move to a validated platform will just be higher because the ability to maintain your own pipelines or multiple disparate pipelines and approaches, I think will be quite a challenge.

Speaker 3

And so, it's our view that the ultimate net of this will be, I would say, a positive. But obviously, we'll monitor the situation. We have to see the final rule. We're eagerly awaiting, as I'm sure you are. But in the end, regulation tends to be favorable to larger scaled players, which I would say fits our profile.

Speaker 5

Super helpful. Thanks so much. Appreciate it.

Operator

The next question comes from Mark Massaro with BTIG. Please go ahead.

Speaker 6

Hey, Russ. Thanks for taking the questions. This is Vivien on for Mark. So in terms of the strong HRD growth that you've been seeing for some time now, I think, just how sustainable do you think that growth is and just where you think you are in the adoption curve? Thanks.

Speaker 3

Sure. So I think relative to the initial opportunity in ovarian, we're making very good progress. And I think our share in many key markets has been quite high. And so as we've spoken about before, the next phases of growth for HRD will come as the class of PARPs kind of moves out of ovarian into other indications. And so we're obviously monitoring that incredibly closely.

Speaker 3

We think as a signature overall, this will continue to be quite important. I'm not quite sure, right, we can sustain the growth we saw this year as we're sort of in the early phases of kind of the product cycle. But ultimately, for us HRD and solid tumor overall remain a really key element of the platform. It remains quite, I would say, a popular application for us as we look at our pipeline and we're eager to continue to work in this category, particularly with our pharma partners over time.

Speaker 6

Okay, perfect. And then as far as the bio reference customer add last quarter, what has the early feedback on MSK access been there? And just how winning that account has helped move along conversations with other large U. S. Customers?

Speaker 3

Yes. So I don't want to specifically comment on a customer, but I would say overall, we're quite happy with both the pipeline we've built for MSK access as well as I would say the early experience of what we're seeing both in our own R and D lab as we've decentralized the solution as well as we're starting to bring it to some of our early access customers. So stay tuned. We hope to have more updates here. But overall, I would say things are progressing quite well and I'm incredibly proud of the hard work of the team.

Speaker 3

I do think, again, for us, this remains a really unique partnership with MSK and an asset that over time for us that could really, I would say, transform elements, not just of our business, but of care in the decentralized world. We have the types of conversations we're having with institutions. And I would say the places in the world we think we can take this are really quite expanded from what I would thought even 6 months ago. And so I'm incredibly encouraged around the early interest and now it's on us to turn that activity and interest into revenue, right? And so, I would say again, this will be something that plays out primarily for us in the second half of this year, but we'll move into 'twenty five as well.

Speaker 3

Kellen, you want to maybe comment as well on the biopharma opportunity?

Speaker 1

Yes, sure. So specifically for liquid biopsies and MSK access, we're getting a lot of interest as Ross mentioned in the clinical market. It's one of those solutions where you bring the Memorial Sloan Kettering name and the customer almost immediately perks up both our existing customers who might want to add that application as well as new customers that we're speaking to. You mentioned BioReference. We also announced Tennessee Oncology at JPMorgan.

Speaker 1

But outside of the clinical market, it's we're also getting a lot of attraction from biopharma. So we announced a collaboration earlier last year with AstraZeneca, who is sponsoring the deployment of our HRD application in Spain. We gave an update today on that and mentioned that it was an incredibly successful partnership. We're now, I think, testing approximately 90% of all HRD patients in Spain, which has been a great success. And we announced later last year that we're going to be expanding that partnership with AstraZeneca and they'll now be sponsoring the deployment of both MSA Access and MSA Impact globally.

Speaker 1

So this is really exciting for us in the liquid biopsy space as they help offer their footprint to reach more clinical customers globally. And then that will help also with MSK Impact, which is slated to launch later this year.

Speaker 6

Perfect. Thanks so much guys.

Operator

The next question comes from Connor McNamara with RBC Capital Markets. Please go ahead.

Speaker 7

Hey, Ross. Thanks for taking the question. Just a quick follow-up on the new sequencing technology and how it impacts your customers that you talked about. Did you guide it are you anticipating actually potentially losing customers as they switch vendors? Or is it more a function of as they implement and validate or just evaluate a new vendor that it slows down their overall volume?

Speaker 3

Yes, it's really the second, Conor. I think in general, and again, I want to be very clear, this is not something we're actually seeing in practice. It's more of an assumption as we're seeing in our pipeline as well as in our bookings, a different sequencer mix than we did in the past. And so our assumption is that the delivery of those sequencers, the installation of those sequencers and thus the onboarding of our platform may just take longer. And again, it's not clear to us if that will be the case.

Speaker 3

We'll obviously track it and report over the balance of the year. But given our lack of historical context with many of these businesses, right, again, you well know the market had been dominated by 1 or 2 players for the better part of the last decade. And so again, I'm not suggesting a significant shift, but I think at the margin, we are seeing in the clinical market more players pop up and we're seeing more requests for new players in many different geographical markets. And so we just want to be prepared in the case that there's some change in the typical cadence of onboarding for us. And so again, no loss.

Speaker 3

If anything longer term, this expands the market overall. And we think for us, the diversity plays into our strengths as a business.

Speaker 7

Great. Thanks for clearing that up. That's all I have and thanks for the question.

Speaker 3

Thank you, Connor.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Ross Muken for any closing remarks.

Speaker 3

Thank you everyone for joining us. We are pleased to have an incredibly strong end of the year. I'm proud of all of the Sofians that contributed to it and we look forward to having Yergi back with us here on the call very shortly. So thank you everyone, and I send our best wishes to Georgi and we'll talk to you all soon at conferences next week.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
SOPHiA GENETICS Q4 2023
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