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Sema4 to Embrace Co-CEO Model After $623M Acquisition of GeneDx

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CHICAGO – A notable feature of Sema4's planned $623 million acquisition of GeneDx from Opko Health is the decision to split the CEO role into two parts.

Sema4 founder and CEO Eric Schadt will focus on growing the information side of the Stamford, Connecticut-based genomic and clinical data intelligence platform firm's business, particularly with health systems and biopharmaceutical companies. Current GeneDx CEO Katherine Stueland will run the diagnostics side of the combined company, attempting to push it to what she called "operational excellence" in that arena.

Schadt will also lead R&D and IT, while Stueland will head up business planning.

"What you're seeing increasingly is not an unusual model," Schadt said. For example, Guardant Health shifted to a co-CEO leadership structure last year. Outside life sciences, Netflix and Salesforce have dual CEOs, while Samsung has three.

Schadt said that he asked Stueland to be his co-CEO because he noticed that he was spending 90 percent of his time on Sema4's small but rapidly growing molecular diagnostics business, particularly with burgeoning demand for data-intensive reports for pharma customers. That has caused him to neglect planning for the "future state" of the company and building relationships with health systems and pharma alike.

"Not only does GeneDx complement [us] in terms of the genomic solutions side, but they have Katherine," Schadt said. He explained that Stueland understands that the healthcare industry is moving away from gene panels to whole-exome sequencing, and ultimately to whole genomes.

"Companies can get to this particular inflection point and put 100 percent of their focus into the day-to-day operations and growth of the diagnostic side of the business and lose sight of the innovation," Stueland said. "It gets really hard to figure out how to lead both."

Stueland joined GeneDx last summer after serving as chief commercial officer of Invitae.

The acquisition deal, reached Jan. 14 and announced Tuesday, is somewhat complex and led the companies to make some bold forecasts.

Under the terms of the acquisition, Sema4 will pay Opko $150 million upfront in cash along with 80 million shares of its stock. Up to an additional $150 million in revenue-based milestone payments may be paid to Opko during the next two years. Based on Sema4's $4.04-per-share stock price as of Jan. 14, the total upfront consideration is about $473 million. Including the milestone payments, the price tag for the deal is approximately $623 million.

Additionally, Sema4 said that it has reached agreements with institutional investors including Pfizer for a $200 million private placement of Class A shares. The firm expects both deals to close concurrently during the second quarter.

During a conference call with investors this week, Schadt expressed hope that the Pfizer investment "may serve as a foundation for potential future collaboration."

In the same call, Sema4 CFO Isaac Ro said that the goal of the Pfizer-led placement would "more than replace" the upfront costs of the acquisition.

"We … saw a unique opportunity to bring in Pfizer as a new investor, which we hope will serve as a prelude to a broader relationship over time," Ro said. "This also validates the unique value of our platform and should serve to help open the door for additional biopharma collaborations over time."

Opko Health actually did not explicitly set out to sell GeneDx, according to Steven Rubin, senior VP. "We started a process with the intention to grow the asset," he said. "The goal was to raise capital" and potentially spin off GeneDx.

However, when Sema4 came along with the kind of artificial intelligence and bioinformatics technology that GeneDx would have to spend millions to develop, a sale became a better option, Rubin said.

With the sale, Opko will be left without any assets in molecular diagnostics, and will now instead focus on clinical diagnostics and pharmaceutical development. Its most notable clinical diagnostic is the 4Kscore test for prostate cancer that gained US Food and Drug Administration approval last month.

GeneDx spun out of the US National Institutes of Health in 2000 and was sold to BioReference Laboratories in 2006. Opko Health acquired BioReference Laboratories in 2015. GeneDx still trains NIH fellows in genomics.

Rubin said that GeneDx has essentially been run independently within BRL and Opko, other than sharing administrative support at the corporate level. The only key BRL executive moving to Sema4 will be CFO Kevin Feeley, according to Rubin.

Stueland is joining the Sema4 board, while Opko will also get a chance to nominate a director as the closing date nears, Rubin said. Jason Ryan, former CFO of Foundation Medicine and COO of Magenta Therapeutics, is Sema4's new executive chair. Ryan has been on the board since the company went public in July through a reverse merger.

Schadt said that the acquisition of Gaithersburg, Maryland-based GeneDx will augment Sema4's product line and accelerate the firm's path to profitability.

He said that potential pharma customers want "far more than NGS as a service, and the first step is offering a scaled exome sequencing platform that is linked directly to large, diverse patient populations, along with longitudinal medical record data to provide the most holistic model of a patient's health course."

GeneDx has begun to focus on neonatal intensive care units to help with diagnosing rare newborn disorders. Sema4 currently has a gap in NICU and outpatient pediatric care and is "underdeveloped" in newborn screening, Stueland said.

Ro said there is "virtually no overlap" between GeneDx's existing customer base and Sema4's health system partners. He named NorthShore University HealthSystem in Illinois, Avera Health in the Upper Midwest, and AdventHealth in Florida as "green field opportunities" for GeneDx.

Sema4 had net income of $31.4 million in the 2021 third quarter, though it historically has been in the red. The Q3 results were aided by $122.2 million in other income related to the change in fair market value of warrant and earn-out contingent liabilities recorded in connection with the reverse merger. The firm will report its 2021 Q4 and full-year results in March.

Ro said the company will have a long-term 30 percent compound annual revenue growth rate, pro forma gross profit margin of 16 percent by the end of this year with a "clear path to 50 percent gross margins" by 2025, and positive free cash flow by the end of 2025.

Raising adjusted growth margin to 50 percent in four years is largely contingent upon product mix, as GeneDx is strong in rare disease testing, including in pediatrics, a higher-margin segment than any of the areas Sema4 currently operates in, according to Ro. Testing volume and scale, as well as improvements in revenue-cycle management, will also contribute to higher margins, he said.

"GeneDx's clinical genomics solutions in the rare disorder arena, combined with Sema4's core women's health business, which includes heritable cancer testing and other genomics solutions in oncology, will transform Sema4 into a powerhouse across the continuum of family health," he said.

Sema4 estimates that 48 percent of 2022 pro forma revenue will come from women's health and another 25 percent from whole-exome and whole-genome next-generation sequencing. The combined companies will conduct NGS-based testing on more than 350,000 patients this year, according to Schadt, excluding COVID-19 tests, a market segment Sema4 plans to exit by March 31.

Clinical exomes currently account for 30 percent of GeneDx's revenue, though the firm estimates that this share will grow to 80 percent in a few years. Schadt said that the merger will also strengthen Sema4's Centrellis database with the 2.1 million curated phenotypes and more than 300,000 clinical exomes that GeneDx has generated to date.

Stueland said that about one-third of GeneDx's clinical exomes were added in the last year or so. She said that indicates a market shift from panels to the exomes and genomes that GeneDx specializes in. "Our exome program accelerates Sema4's transition to using exome, and ultimately, genome as the one test that replaces all other panel testing," she added.

The combined company is expected to generate about $350 million in pro forma revenue in 2022, the firms said.

Sema4 standalone revenues in 2022 will be $215 million to $225 million, representing year-over-year growth in core business of 23 to 29 percent, an estimate Ro called conservative. Sema4 is estimating 2021 core revenues of $175 million, excluding $29 million in COVID-19 testing revenues.

GeneDx 2022 revenue will be $130 million, representing 12 percent growth over the estimated $116 million that segment of Opko brought in last year. The GeneDx 2022 milestone target is $163 million, however. Reaching 90 percent of that target triggers payments to Opko.

Reimbursement remains an issue for Sema4, as payors do not always cover somatic tumor profiling. Ro said that he does not expect any improvement on that front in the company's oncology business until the second half of this year, and even then, it will "remain well below market rates."

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