Tempus AI Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 11 speakers on the call.

Operator

Thank you for standing by. I am Augusto, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2024 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer Thank you.

Operator

I would now like to turn the call over to Ms. Liz Krugelow, Vice Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to Tempus' Q2 2024 Conference Call. This afternoon, Tempest released results for the quarter ended June 30, 2018. Joining me today from Tempest are Eric Lefkovski, Founder and CEO of Tempest and Jim Rogers, CFO. Before we begin, I would like to remind you that during this call, management may make forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.

Speaker 1

For a discussion of these risks, please visit our 10 Q for the quarter ended June 30, 2024, filed on August 6, 2024, as well as any future reports that we file with the SEC. During the call, we will discuss non GAAP financial measures, which are not prepared in accordance with generally accepted accounting principles. Definitions of these non GAAP financial measures, along with reconciliations to the most directly comparable GAAP financial measures, are included in our Q2 earnings release, which has been furnished to the SEC and is available on our website at investors. Tepids.com. I would now like to turn the call over to Eric.

Speaker 2

First, welcome everybody to our first earnings call as a public company. We're excited to be here and happy to answer questions. I'll just maybe for 30 seconds give some color. Q2 is a strong quarter as we provided some additional insight in our overview letter. Our core businesses remain on track.

Speaker 2

Everything is just how you want to see it up into the right. And we're executing as we had intended both when we began the process a few months ago going public and then certainly carrying into the quarter. So I would say that we feel like we're in good shape and happy to answer any questions that people have.

Speaker 1

Operator, we can open the line for questions, please.

Operator

For our first question, Deha Saba with Morgan Stanley. Please go ahead.

Speaker 3

Hey, guys. Good evening and congrats on a good start out of the gate post IPO. Eric, maybe you or Jim can chime in on this. Nice progress on ASPs here on the genomics side in the quarter. Can you just walk us through how you're thinking about potentially ASP upside in the back half of the year?

Speaker 3

You've got the ADLT rate on XT coming through as well. But any color on how much of that is baked in versus progress on the commercial payer front would be great? Thank you.

Speaker 2

I'll start by covering just the core genomics business volumes that Jim could talk a little bit about on the reimbursement side. I think in terms of the overall strength of our units and the unit growth, as we covered in our overview letter, we feel like we're completely on track. We delivered roughly 4,000 more tests in the quarter in Q2 over Q1. We expect that trend to continue. And there's obviously some kind of percentage seasonality of growth rate in that you could have fewer days in the quarter or ASCO depending on when it falls could have some impact.

Speaker 2

But we feel like our core genomics business is performing as we expected. We feel like we can be in that 25% to 30 percent growth range in terms of units. And given our size and scale, at this point, it's certainly one of the largest therapy selection sequencers that are out there. We feel like that's a really healthy place to be. And in terms of ASP and the reimbursement of our program?

Speaker 4

Yes. Thanks, Tejas, for the question. So our average reimbursement in Q2 was about $1500 an increase of about $50 over where it was at in Q1 of 2024. The biggest drivers in kind of that uplift were a slight mix shift to more Medicare and Medicare Advantage patients, which typically get reimbursed at a higher rate than we get from commercial payers. As a reminder, we're primarily an out of network provider with commercial payers.

Speaker 4

So average reimbursement is significantly lower than what we've received from Medicare. This presents an opportunity for us going forward as we negotiate with those payers to cover kind of the various tests that we have in market. Tayo, as you also mentioned kind of the ADLT status for our XT CDx assay, which is our FDA approved version of XT, the initial price there was set at $4,500 but that pricing process will play out over the back half of this year. So there won't be a meaningful impact to ASPs in 2024 as it relates to the FDA approved version. But as we start to migrate volume to that version of the assay in early 20 25, we should see some additional tailwind.

Speaker 3

Got it. That's helpful. And then guys, just want to dig in a little bit on the MRD launch or Any anecdotal early customer feedback you can share? Any sort of like differences you'd like to call out in the reception tumor naive version versus next personal at this stage? And how are you thinking about volume contributions from MRD in the back half of the year?

Speaker 3

And then, is reimbursement essentially a back half 2025 dynamic or could it happen sooner than that?

Speaker 2

Yes. Again, I'll cover the overall launch and maybe Jim can cover some thoughts on reimbursement. So we launched for those who don't know, we launched basically our entire MRD platform at ASCO with a tumor naive assay in colorectal cancer. And then in partnership with Personalis, we brought a breast, lung and IO to market as well with a tumor informed assay. I think the response has been quite positive even though we're both metering out volume at this point, because if we kind of opened up the floodgates, you would likely have an enormous amount of volume that's at the present moment not reimbursed.

Speaker 2

So given that it takes some time to get reimbursement, we're metering out accounts that we offer the assay to and ramping up slowly, so that we can kind of manage the expense side of getting the tested market. That said, everything we hear anecdotally is super positive. I think, as I mentioned to a bunch of folks historically, Tumor Naive has a place in the market given that logistically and administratively, it's just easier than tumor informed for many accounts that can't do an additional biopsy or don't have enough tissue to basically run a second set of sequencing, consumes a lot of tissue every time you sequence a patient. So if you've done therapy selection once, now you could do MRD for an informed assay, it can be logistically problematic. So I think naive has a place.

Speaker 2

And then the next assay that personnel has brought to market, which we're obviously their partner in is really ultra sensitive. And so there's a place for that as well where people are really looking for that ultra sensitivity and specificity and looking at the limits of protection. And so I think we feel like we've got a really nice MRD bag in market where we have a really good logistical product and a really ultra sensitive product And we think we can meet the needs of the market across that spectrum. But we won't dial up those units or that volume until reimbursement is in sight and maybe Jim can give some comments on that.

Speaker 4

Yes. In terms of reimbursement for our internal tumor naive panel, we're packaging that up to submit it to Oldecks right now. And then that process will play out. So you've mentioned kind of back half of 25 PDJOS. I think that's a typical timeframe.

Speaker 4

We'll certainly provide more color as that process unfolds.

Operator

Our next question comes from Rachel Battendale with JPMorgan. Please go ahead.

Speaker 5

Perfect. Good afternoon and thanks for taking the questions you guys. So first up on the genomics performance in the quarter that grew 22% year on year. You mentioned all tests performed well in the quarter, but I was wondering if you could unpack that for us a bit more. Walk us through, even if it's from a high level color standpoint, how each test performed in 2Q?

Speaker 5

And then were there any notable shifts in terms of volume contribution by each test as well?

Speaker 2

Yes, there was nothing material in terms of like a systemic shift of how the orders came in. We have a platform that's we're in inherited cancer risk. We're in solid tumor profiling and liquid biopsies. So we kind of cover all 3 pretty broadly. And I would say all are kind of performing in terms of both unit and revenue growth as they historically have.

Speaker 2

There's been no there was no like very large cyclical shift as if like all of a sudden our solid tumor went one way or liquid went another. They're all kind of moving in the same direction they were moving in. Obviously, or not obviously, but liquid for us was a newer product than solid. Solid was the 1st assay we launched and liquid came later. And so the growth rates of that product historically have been higher.

Speaker 2

But at the end of the day, as these products now get to scale and we are at scale in terms of ctDNA assays, we're at scale in terms of cell to profiling, we're approaching scale at inherited cancer risk. I would suspect that the growth rates will start to normalize where you won't see very large differentials between the 3 as we keep getting bigger. And I think we've also historically said that liquid was about a quarter of our volume and it remains as such. There's been no systemic shift there.

Speaker 5

Perfect. Okay, that's helpful. And then maybe just for my follow-up, can you break down for us the data revenues into insights, trials and AI applications in 2Q? And then if I look at guidance, you pointed us towards that $700,000,000 mark on revenues for the year. How should we think about that mix between data versus the genomics business?

Speaker 5

And then is there any seasonality that we should be aware of across 3Q and 4Q for each of those segments as well?

Speaker 2

I'll cover the first part and Jim can take the second part, which seems to be a theme today. So in terms of the data business, which obviously has some accelerating growth, we provided some color that insights led the way. We had a really strong insights quarter, which is our data licensing business. The trials business grew, but didn't grow as fast as our data licensing product Insights. Insights also has a much higher margin.

Speaker 2

So to the extent we want some part of our data and services business growing, we want the insights portion growing. It has the highest margin and it's the one that we spend a lot of time focused on. Our trials business is really made up of a few components. It's made up of our just in time network, which we call time. It's made up of the small studies component and it's also made up of our CRO business that we call Compass.

Speaker 2

And we are not investing as heavily in growing our CRO. It's not a core part of our growth strategy. It's an important component of what we do, but it isn't something that we focus on growing as much as we do, for example, our insights business. And so I would suspect that over time, if we continue to deliver, Insights will continue to outpace our trials business. And so I would suspect that will be a trend we see going forward as well.

Speaker 4

Yes. Just adding a little bit of color to that breakdown. So the Insight business represents about 75% of the data and services revenues and to AresPoint also growing the most quickly amongst those components. In terms of the 7 about approximately $700,000,000 total revenue for full year 2024, historically, it's been kind of a 2 third, 1 third split, 2 third genomics, 1 third data and services. Obviously, the data and services side of things growing more quickly than the genomics business.

Speaker 4

And so we would slightly kind of slightly toward the data and other business over genomics for the remainder of the year.

Operator

Michael Ryskin with Bank of America. Please go ahead.

Speaker 6

Hello, afternoon. This is John Kim on for Mike. Any update on the Guardant lawsuit? I know it's going to take a few years to play out, but yes, I wanted to see

Speaker 2

if you

Speaker 6

guys have had any updates?

Speaker 2

No, there's no update. And there likely won't be a material update unless something happens like for years, these things take a long time to get resolved as we've said historically. And we don't feel like it's material. We feel like we've got appropriate defenses and it's not something that we're overly concerned with and I suspect it will take years to play out. Unfortunately in our space, mitigation has been a pervasive component of a lot of activity and I would expect that will continue just by nature.

Speaker 2

But we're focused on doing what's right for patients. We're focused on making sure that our tests are the best in market, detailed access and that's where we continue to keep our eyeballs.

Speaker 6

Got you. And then in terms of the costs, they came in as expected. But looking ahead, you guys also gave us the EBITDA guide there. Any thoughts on when any change in your thoughts on when you're going to hit the adjusted EBITDA profitability?

Speaker 2

At a high level, we made, I think, really strong progress in the quarter. I mean, we were 12.5 $12,700,000 in improvement quarter over quarter. So I think as we told people, we felt like the leverage was showing up in the business and that was demonstrated I think in Q2 and we would suspect additional leverage will continue as we keep growing and so we feel like we're right on track.

Operator

Daniel Brennan with TD Cowen. Please go ahead.

Speaker 7

Great. Thanks for the questions. Congrats on the quarter here in the IPO. A lot of detail in the prepared remarks or in the script that's on the you discussed there, you're going to deliver this throughout 2024. Can you help kind of you discussed there you're going to deliver this throughout 2024.

Speaker 7

Can you help kind of us think through kind of the size of that contract or any details around it? And then the new 5 year agreement with Takeda, you discussed it as a significant expansion in size and scope. Maybe can you provide some color on that contract and how we might think about sizing it?

Speaker 2

Yes. I mean, we obviously didn't include numbers for a variety of reasons, not the least of which we're sensitive to that we've got partners and those things there are times that there are appropriate times that they're not. These are all good sized deals for us. And they're I think what we represented in the quarter is that we had multiple large pharma companies and we didn't list all the smaller biotechs, but we also signed various agreements with, but we had kind of 4 larger pharma companies that all did significant deals in the quarter. And for us, it was just a sign of both in terms of the revenue we delivered in our Insights business and the bookings we delivered.

Speaker 2

Q2 was a really strong data licensing quarter. And that was good to see. We expected to see it, but it was good to see. And we expect that momentum to continue at least in the foreseeable future. But we don't really comment on the size of these deals unless they get so big that we kind of have effectively no choice.

Speaker 2

And these deals were really good sized deals, but they weren't $300,000,000 deals where we would be talking about a bigger deal.

Speaker 4

Dan, I would also add that the total remaining contract value is still north of $900,000,000 So again, as Eric pointed out, we delivered a lot of revenue, but obviously had bookings that kind of refilled that total remaining contract value. And the other metric, which we present on annually is net revenue retention. These are again highlighting ones that we had agreements in place and we're able to expand those in subsequent years. So we're excited about all the agreements

Speaker 2

that were mentioned in the release. Yes, it's really another just to jump on Jim's comment, one of the most exciting things about the Astellas syndicated arrangements in addition to Novartis' these are people that had multi year agreements and re upped for larger agreements or re upped for larger periods of time. And so that's what you want to see. Our Tempur is only 8 years old, right? We've only been licensing data for 5 or 6 years.

Speaker 2

So what you want and which means that most of these most of our clients have only been clients for 2 or 3 years on the data side. So seeing big renewals occur over and over again is a really good sign that we're adding a ton of value and that value is resonating with our clients.

Operator

Dan Arias from Stifel. Please go ahead.

Speaker 8

Afternoon guys, thanks. Eric, maybe to your point there on data contracts, one of the questions that we got during the process was on the $900,000,000 plus in revenues that are already contracted, but which contains the $300,000,000 from customers that haven't formally renewed. Can you just talk to confidence in re upping those two accounts and then maybe remind us when it is that those contracts actually come up again for renewal?

Speaker 2

Yes. I mean, they've actually both contracts have actually already been extended in terms of timing. So I think in one of the amendments, we had another year I think to AstraZeneca something like that and we have a longer duration now going out with GSK as well. So we have we've got I don't know the exact dates, but I'll say roughly 2027, 2028, somewhere 20 27, 20 28. So these contracts go better years in the future.

Speaker 2

So there's no immediate eclipse coming up. And we feel good about all of our larger deals in terms of the value that we're delivering. And we would suspect that the vast majority of all our big deals renew and hopefully expand.

Speaker 8

Yes. Okay. And then just as a follow-up on the excess asset, do you think you end up submitting that this quarter or is

Speaker 4

it best to think about it as by the end of the year? Sorry, Dave, I didn't catch that one. Next question for what?

Speaker 8

Just the middle of the assay to the FDA, I was under the impression that that was that's a process that's ongoing now. I'm just curious whether you think you get over the hump on that in the next couple of months or is it more like a December?

Speaker 2

I don't have the exact timing, but it's those teams are working on a submittal that's fairly imminent. And so I think the bigger issue for us is, both in terms of RNA and our liquid biopsy, we've got efforts in place for both to submit. And whether it's 1 quarter away or 2 quarters away, it's these things are all kind of imminently coming.

Operator

Andrew Brakman with William Blair. Please go ahead. Andrew Brockman, your line is on mute. Yes.

Speaker 6

Hey, guys. Sorry about that. Good afternoon.

Speaker 9

Thanks for taking the question. Maybe on the rep side of things, I know you added a few or I think it was somewhere around 30 in the 1st part of the year. So can you just give us an update on the productivity of that new cohort as well as just sort of working through any sales force changes or disruptions that may occur as

Speaker 4

a result of that? Thanks.

Speaker 2

Yes. I mean, productivity is not where we want it to be. That's the nicest way for me to say that. I mean, we added I think it was probably closer to 60, not 30 in terms of total heads that got added in a fairly short duration across the entire sales infrastructure. So we added a lot of folks in the first half of this year.

Speaker 2

We made a lot of territory changes. We introduced a new assay and the combination of adding a lot of people, changing a lot of territories and adding a new assay means that our the efficiency of our sales force in Q2 was not where we want it to be. We continue to see improvement and I'm confident I'll get back to where it was in Q3 or shortly thereafter. But at the end of the day, when you're growing as quick as we are and you're adding a lot much of new assays. From time to time, you have these step functions and territorial change and you've got to manage it really well.

Speaker 2

And we're a young company and we're always going to have some amount of bumps to get over.

Speaker 3

Okay. Thanks for that.

Speaker 2

But you see the numbers, we kind of as you can see the numbers, we managed through all that and still grew our genomics business 22%. So we feel good about it.

Speaker 9

Perfect. Thanks for that color. And then maybe just on the Purist algo, first, can you just remind us the importance of that test for your portfolio and how it can be a differentiator? But then also you received the PLA code last month. So how are you thinking about obtaining potential reimbursement there or in this to be sort of a first in the process to obtain reimbursement for these AI tests?

Speaker 9

Thanks.

Speaker 2

Yes. It was very exciting to be the 1st company ever had to have one of these algorithms get a code and get to this point. It's very cool. But I think the way I think about this business and our apps business in general is, we're fortunate that we have a genomics business that's healthy and growing with high margin. We have a data business that's healthy and growing with high margin.

Speaker 2

And so in the near term, we don't have to rely on our apps business to generate lots of revenue, which is a very good thing because we as a country and as a healthcare system haven't figured out how to pay for AI. We haven't figured out when it should be ordered. We haven't figured out how it should be delivered. We haven't figured out how

Speaker 3

it should be paid for.

Speaker 2

It's just too new of a space. And so even though we're excited that a lot of these codes are getting issued and physicians want these kind of algorithmic diagnostics. We still have a ways to go before we can figure out how to get it into guidelines, how to get into routine practice and how to ultimately get reimbursed for these kind of tests. And I would suspect that's a kind of a multiyear journey. We also had our cardiac algorithms to predict atrial fibrillation was also approved by the FDA, which is amazing.

Speaker 2

But again, there's not currently a reimbursement pathway for that test. So we need to work on demonstrating, we've obviously already demonstrated analytical validity. Now we got to demonstrate clinical validity and ultimately convince payers that it's in their best interest to pay for these kind of tests. So that's a multiyear journey. I would suspect that we'll continue to bring many algorithms to market.

Speaker 2

And our hope is to build a very broad portfolio of lots of algorithmic diagnostics that are part of our applications business And to begin this journey of getting reimbursed and to the extent we're successful, this could be a very big business one day. I mean, as we've said historically, it could dwarf the other business. But it is a long journey and I can't tell you that we're 6 months or a year away from seeing line at the end of the tunnel. It's just too new. So as we know, we'll let you guys know.

Operator

Mike Scheppel with Loop Capital Markets. Please go ahead.

Speaker 8

Hi, thank you for taking my question and congrats on the quarter and the IPO. Eric, kind of building on the earlier question, I was just wondering if you could just talk about the uptake of your emerging AI applications business. I know it's still early days, but maybe just talk about what you saw in the quarter on that front and then maybe just talk a little bit more about your efforts and initiatives to kind of get those solutions into the healthcare ecosystem, if you would?

Speaker 2

Yes. We have it's a really promising story, but it's super tiny in terms of revenue. So the growth rate of our applications business is really high. But it's also relatively small because again, this stuff we as a healthcare system haven't figured out how to pay for a lot of these applications. So the core components of our apps business today or application business today, 2 of the biggest are Next where we're basically closing care gaps in real time.

Speaker 2

And then we have a series of algorithms, whether that's across digital pathology or cardiology that are also algorithm based. But if you look for example at NEXT, just take that one product. It's an amazing product in that we're able to scan real time clinical data, relatively real time clinical data and see essentially errors or mistakes occurring in real time where there are guidelines established and there's routine practice and yet for some reason some patient has fallen through a care gap. And it happens in healthcare. It's just part of the system.

Speaker 2

No one's perfect. Using AI and technology to spot those and try to correct them is really powerful in terms of the benefit provides patients and physicians. How you get paid for that though, it's a bit harder. And so again, like we're experiencing, I would say, really positive strong signs of adoption. People want these kind of applications.

Speaker 2

They're excited to deploy them. We're making a ton of progress, but there's still a significant amount of work we have to do as a system, not just Tempus, but anyone who's in AI in healthcare to get these things paid for at scale. And so that's what takes us from being a high growth with small business to a high growth with big.

Speaker 8

Thank you.

Operator

Ryan MacDonald with Needham. Please go ahead.

Speaker 10

Thanks for taking my questions and congrats on the successful quarter in IPO. Eric, I'm kind of curious from our healthcare IT side of things, we've actually seen the data space as one that's been really challenged in terms of the level of investment or spend that a lot of large pharmas and biotechs are willing to allocate this year from other vendors. Can you just talk about why you've been able to see so much success on the data side of the business and how you're differentiating there? And then maybe within the quarter sort of with the mix of expansions versus net new logos you brought on in the data business? Thanks.

Speaker 2

Yes. I mean, we're experiencing really positive momentum and really strong growth in our data business, I think in a very tough background. And I think you highlighted that. I mean, the macro conditions are not great. You have biotechs, especially smaller biotechs that have had a really hard time raising capital for the past several years.

Speaker 2

And big pharma has been really conscientious about its R and D budgets. And so we're growing really quickly and continuing to sign big deals despite what I think of as a tough environment. So I think I'm hopeful that the next year or 2 when the environment changes and I believe it will change, I think biotechs will eventually be able to go public again and raise capital. I think we're going to have some really nice tailwind to that business. But at the end of the day, the reason that I think we're growing is it's a very simple equation.

Speaker 2

If you deliver something of value that people want that's helping them improve their efforts in early stage discovery, improve their ability to design clinical trials, improve their ability to develop assets more efficiently and bring them to market, get clinical trials closed quicker. Like these things are all a big deal and companies are willing to pay money, but you got to demonstrate that value. So in tougher markets, there's kind of like nice to have and need to have. And Tempest, at least at the present moment, is kind of need to have data for a lot of people. And I think you're right, they're probably cutting back on budgets for nice to have things.

Speaker 10

Really helpful color. Thanks. Maybe as a follow-up, on the genomic side, given all the positive news that you continue to receive in terms of reimbursement for assays from CMS, can you talk about how you're sort of going about using this in discussions with the commercial payers to potentially improve reimbursement and what sort of stage are we at in sort of the progression of those discussions? Thanks.

Speaker 4

Yes. So I think on the commercial affairs side, we're certainly on the same journey that kind of all, sequencers have kind of followed. Getting CMS coverage is great. That unlocks and that the approval, so whereas that unlocks kind of the ability to have these discussions with commercial payers. We have gone in network with Cigna, Humana and Aetna.

Speaker 4

And so we have started to make some progress, still plenty of work to be done. And we're having those discussions, but they just take a long time to play out. So over the next few quarters, we'll certainly share progress.

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Key Takeaways

  • Tempus’ core genomics business delivered ~4,000 more tests in Q2 than Q1, targeting 25–30% unit growth; average reimbursement rose to $1,500, and the FDA-approved XT CDx at $4,500 will begin volume migration in early 2025.
  • The Data & Services segment was led by insights licensing, which now represents ~75% of that revenue, and saw multiple large pharma renewals that keep total remaining contract value above $900 million.
  • Tempus launched its MRD platform at ASCO with a tumor-naive colorectal assay and tumor-informed breast, lung and IO panels, but is metering volume until CMS reimbursement, expected in H2 2025.
  • The Applications business achieved a milestone by receiving the first PLA code for its Purist algorithm and FDA clearance for an AFib prediction tool; revenue is still small but growing, with reimbursement pathways under development.
  • Q2 saw a $12.7 million QoQ improvement in adjusted EBITDA, demonstrating operating leverage and keeping the company on track for its profitability guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
Tempus AI Q2 2024
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