GeneDx Holdings: Charting a Path to Leadership in Pediatric Genetic Testing (NASDAQ:WGS)

Company summary

GeneDx Holdings Corp. (NASDAQ: WGS) specializes in providing accurate medical diagnostic results by leveraging its genomics and data science expertise, particularly its extensive rare disease data. This allows the company to interpret large volumes of clinical data at scale. GeneDx focuses on pediatric care, using exome and whole genome sequencing tests to identify rare diseases and provide more definitive diagnoses. Additionally, it licenses its rare disease data and expertise to accelerate drug discovery.

Founded in 2000 by scientists from the National Institutes of Health (NIH), GeneDx was originally created to make genetic testing accessible to patients with rare diseases. It was incorporated in July 2020 as CM Life Sciences, Inc. In July 2021, CM Life Sciences merged with Sema4, which in April 2022 acquired GeneDx. In January 2023, Sema4 Holdings was renamed GeneDx Holdings Corp.

A short primer

Genes, compound of DNA, are the basic building blocks of life and heredity. The entire set of genes in an individual is known as a the genome. Within the human genome, approximately 19,900 genes are involved in protein coding. These protein-coding regions, called exons, are collectively known as exome. The exome makes up about 2% of the genome, but encodes the majority of disease-associated gene variants. Exome sequencing studies these regions, while genome sequencing examines the entire genome. Genetic testing includes molecular, chromosomal, gene expression and biochemical tests.

Exome and genome testing as a growth promoter

GeneDx offers molecular testing, specializing in Whole Exome Sequencing (WES) and Whole Genome Sequencing (WGS). This segment, which accounts for 70% of revenues in the first quarter of 2024, is key to achieving profitability by the end of 2025 and represents a major reason for investor interest. Whole exome testing is highly effective in early disease identification, enabling timely intervention and reducing healthcare costs from misdiagnoses.

The cost of misdiagnosis

All exome tests offer a higher probability of identifying genetic diagnoses, compared to other gene tests, which may not provide definitive results. Many genes may be involved in major diseases, and a whole exome or genome test is more effective. For example, the American Epilepsy Society 2023 Annual Meeting reported that 768 genes are associated with epileptic seizures, but commercial gene panel testing covers only 43% of them. Exome sequencing tests all associated genes.

GeneDx targets the pediatric care market, demonstrating the value of early genomic testing. Studies such as the SeqFirst project with the University of Washington have shown the effectiveness of rapid whole genome sequencing (rWGS) in diagnosing critically ill infants in neonatal intensive care units.

GeneDx is supporting whole-genome sequencing and interpretation services for the Columbia University-sponsored GUARDIAN study, providing screening of up to 100,000 newborns for more than 450 rare genetic conditions not currently included in standard newborn screening . Data from the study of 5,000 infants showed a positive rate of over 4% for rare diseases.

A platform for interpreting gene data

GeneDx’s extensive rare disease database, one of the largest, is a significant competitive advantage. With over 600,000 exomes and genomes sequenced, the company leverages its data science expertise to deliver genomic diagnostic data at scale. As more genomes and exomes are sequenced, the data interpretation platform continues to mature, increasing accuracy in diagnosis and insights. Such a critical mass of scale and platform intelligence can become a major competitive advantage that increases revenue and builds market share as gene diagnostic testing grows.

Acceptance and growing market opportunity

The shift toward cost-effective diagnostics creates opportunities for exome and genome testing to become a standard for diagnosing genetic diseases.

The pediatric care market is valued at $3 billion, and GeneDx is expected to significantly expand its market opportunity over the years as it targets both newborn and adult screening.

Health care costs are determined by payer coverage, which is being expanded in the case of full genetic sequencing. GeneDx services are contracted with major commercial payers and Medicaid, and state coverage is expanding. So far, there are 28 states covering exome sequencing and 11 states covering rapid genome sequencing.

finances

GeneDx’s revenue growth reflects the growing acceptance of genome and exome testing, which is a higher-margin business. In the first quarter of 2024, total revenue grew 51% year-over-year, with whole exome and genome revenue growing 96%. Gross margin improved to 61% from 56%. The company reported an operating loss of $13.7 million, down sharply from $60 million a year earlier. Cash burn improved significantly, with net cash used in operations falling to $16.4 million from $56 million a year ago.

As of March 2024, GeneDx had $114 million in cash and equivalents. The company also has a $75 million term loan facility with Perceptive Advisors, with $50 million drawn down and $25 million available upon the satisfaction of certain conditions. In April 2024, the company filed an amendment to its listing, allowing it to sell up to $75 million of shares from time to time as a market offering.

Long-term debt was $52.3 million at the end of the first quarter, almost all of which would mature in 2028.

MANAGEMENT

The management team is led by Katherine Stueland, who in June 2021 became President and CEO of GeneDx, a company founded by NIH scientists. She became co-CEO of the combined company when it was acquired by Sema4, and eventually its sole CEO, playing a defining role since the rebuilding of the new GeneDx.

Previously, Ms. Stueland was the Chief Commercial Officer of Invitae, a medical genetics company. GeneDx’s management team includes experienced professionals from the genetic testing industry. The team is focused on driving the company to profitability by 2025, emphasizing growth in exome and genome testing, reimbursement rates and reducing cash burn. The laser focus is important in a highly competitive medical diagnostics market with companies like Natera (NTRA), NeoGenomics (NEO) and now Lab Corp. with the purchase of Invitae.

The company must maintain growth, improve gross margin and reduce operating expenses in its quest for profitability, and the path it has set reflects this.

The Risks

GeneDx faces several risks, including dependence on payer coverage and reimbursement rates. The company’s primary customer groups include healthcare professionals, who bill third-party insurance providers (commercial or government) and represent about 72% of billing revenue, and institutional customers, such as hospitals and laboratories, who represent over 27%. Any changes in payer instructions or disputes could significantly affect the company’s liquidity and business. Exposure to a single payer, such as a large health insurance company, can be high even though it represents multiple claims and plans, and any dispute can have a magnified impact.

In December 2022, GeneDx settled with a payer over billing issues that resulted in overpayments for the legacy Sema4 business, which requires GeneDx to pay $42 million to the payer in a series of payments through June 2026.

With a concentration of accounts receivable with payers, collection management is vital and the company’s days sales outstanding have been trending lower, standing at 41 days in the March quarter, compared to 73 days a year ago.

CONCLUSION

GeneDx is a turning point company, leveraging its advanced genomic testing capabilities to capitalize on the growing demand for precision medical diagnostics. With a strong foundation built on its extensive rare disease dataset and expertise in whole exome and genome sequencing, GeneDx is strategically positioned to lead the market in pediatric care and beyond. The company’s focus on early and accurate diagnosis not only benefits patient outcomes, but also presents a compelling value proposition by reducing systemic healthcare costs associated with misdiagnosed treatments.

The management team, led by experienced professionals from the genetic testing industry, is committed to driving GeneDx to profitability by 2025. This goal is supported by a clear strategy to expand exome and genome testing, increase rates of reimbursement and reduce cash burn. As healthcare trends increasingly favor cost-effective and accurate diagnostic solutions, GeneDx’s model aligns well with market needs, offering significant growth potential. An investment in GeneDx hinges on management’s ability to effectively execute this strategic plan, making it a promising candidate for those looking to invest in the future of genomic diagnostics in pediatric care.

A more favorable macro backdrop with rate cuts as the year progresses, the defensive nature of healthcare spending in a slower growth environment, and GeneDx’s strengths and positioning, could create an opportunity for the share price to advance to above $50 over the next 6 years. up to 12 months.

Investors should exercise due diligence and understand the risks associated with small-cap speculative stocks.