Tempus AI, Inc. Class A Common Stock 0 Earnings Call

Ladies and gentlemen, thank you for standing by. My name is Duncan, and I will be your conference operator for today. Ladies and gentlemen, thank you for standing by. My name is Duncan, and I will be your conference operator for today. I would like to welcome you to Tempus AI Company Update. All lines have been placed on mute to prevent any background noise. Now, I'd like to turn the conference over to Elizabeth Rohosa Low, VP in Investor Relations. Please go ahead. Thank you.

Good morning. Thank you for joining us to discuss Tempus' agreement to acquire Personalis, which we announced this morning. Joining me today are Eric Lefkofsky, CEO of Tempus, and Jim Rogers, CFO. We issued a press release and posted an investor presentation this morning, both of which are available on our investor relations website. As a reminder, during this call, management may make forward-looking statements. Slide two of our presentation and the press release issued this morning contain additional information on forward-looking statements and other important information on the proposed transaction. We welcome any questions specific to this transaction. Please be advised that we are currently in a quiet period, which limits our ability to offer further comment. I'll now turn the call over to Eric.

Thanks, Liz. This morning, we announced that Tempus has entered into a definitive agreement to acquire Personalis. Per the terms of the agreement, Personalis shareholders will receive consideration of $16.25 per common share, common stock, representing $1.5 billion net of Tempus' existing ownership interest. MRD represents a $20 billion plus market and is one of the fastest-growing segments in oncology diagnostics. It is transformative for cancer care, allowing clinicians to detect disease recurrence earlier than traditional imaging, enabling more informed treatment decisions when cancer recurs. We've been the exclusive distributor of Personalis' tumor-informed MRD assay, NeXT Personal, since 2023, which we believe is a best-in-class assay given its ultra-sensitivity. By combining Personalis' tumor-informed assay with our tumor-naive offering, xM, we're able to offer solutions that meet each oncologist's MRD needs and provide a wide variety of solutions across tumor types.

Bringing Personalis' testing portfolio under one roof accelerates commercial adoption of NeXT Personal while strengthening the multimodal data flywheel that differentiates our business with longitudinal patient data providing insights. Our partnership with Personalis has been very successful. NeXT Personal is now reimbursed across multiple use cases in breast, non-small cell lung cancer, and IO monitoring. As we've discussed historically, we've phased our rollout of the assay based upon reimbursement of the various indications, and we're on track with growth rates that have exceeded our expectations, having run about 6,500 tests in Q1 of this year and roughly 9,000 tests in Q2, growing 38% quarter-over-quarter. That's just the test that we distribute for Personalis. They sell some of their own tests, which makes that number even higher. This growth is exceptional when you consider that only 10% of our sales force is currently selling MRD solutions today.

When you think about that 38% quarter-over-quarter growth rate, it puts it into context. Going forward, we believe volumes could be even more material and higher as we equip additional sales reps with our offering and as more indications secure reimbursement. In addition to strengthening our MRD leadership, the Personalis portfolio enhances our biopharma offering through profiling and IO capabilities. The potential addition of de-identified longitudinal MRD data also creates really interesting opportunities to enrich our models and provide differentiated insights for our biopharma clients. Serial measurements reveal disease dynamics, treatment response, resistance, and recurrence, which are helpful for biomarker discovery, patient selection, and trial optimization. With reimbursement in place and more coming, Personalis exiting a period of heavy investment and losses. Given the improving financial profile, we felt now is the right time to pursue a strategic acquisition.

Under the agreement, Tempus will acquire all outstanding shares of Personalis not already owned by Tempus AI at a price of $16.25 per share, representing a 6% premium to Friday's closing price and a 28% premium to the unaffected 30-day VWAP. Consideration will be structured as 100% stock, with Tempus having the option to elect payment in up to 50% in cash. Personalis shareholders will receive a floating exchange ratio of Tempus common stock for each share of Personalis common stock and a closing subject to a maximum exchange ratio of 0.3356. Cash consideration can be financed with cash Tempus has on hand and original borrowing we procure between signing and closing. Both parties expect the close of the transaction to be late 2026 or early 2027.

We'll provide additional detail on the transaction's financial impact on our outlook during our Q2 earnings call on July 30th, which is in about a week from now. As we've highlighted in previous calls, there's a certain amount of discretionary investment that we are able to make each year, given that we have increasing gross profit dollars from the growth of our core business across therapy selection volumes increasing, ASP tailwinds, which we've discussed, and continued growth and strength in our data business. We'll utilize some of those investment dollars to drive our MRD offering growth while continuing to demonstrate leverage in the business, both from an adjusted EBITDA and cash flow perspective. Even with this acquisition, we intend to be EBITDA and free cash flow positive in 2027. Thank you for your time this morning and for your continued interest in Tempus and our evolving growth story.

Thank you. With that, Liz, I'll turn it over to you.

Great. We can now open the line for questions.

We are now opening the question and answer session. We are asking that please limit yourselves to one question only. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. We will be taking a moment to let the questions come in. Your first question comes from the line of Kallum Titchmarsh from Morgan Stanley. Your line is now open. Please go ahead. Hey, guys.

Thanks for taking the question. Obviously still somewhat in the initial innings of the launch, but maybe just talk to some of the feedback you've been hearing on the ground on NeXT Personal that I assume supported this decision. It seems like pretty nice growth out the gate. Any sense of whether you're seeing competitive shifts here or it's more of kind of a market expansion from accounts that weren't utilizing MRD tests beforehand? Thanks a lot. Yeah, I would say, the growth in terms of obviously percentages is pretty extraordinary.

Anytime you have a business that's growing almost 40% quarter-over-quarter, those would be exceptional year-over-year growth rates. These are quarter-over-quarter growth rates. I think it's safe to say that we are quickly gaining market adoption. I think that over the last several quarters has been both a function of the market, the overall MRD market is growing. It's a very healthy market and one that's growing pretty rapidly, I think, as evidenced not just by our growth rates, but by Natera and others. I also think that given the really fantastic performance of Personalis' assay in their suite of products, I would expect to see more market shift.

This really kind of speaks to the, I think when the Tempus real flywheel gets humming, it's a function of a best-in-class diagnostic test, and certainly NeXT is that, combined with all the other technology attributes we have, from a broad connectivity to hospitals all over the country, to a whole suite of AI-enabled solutions that make ordering our products easier, to a variety of AI insights we're able to deliver through the models we build. I would suspect all of those will be more tightly embedded into our MRD offering over time. As they continue to get more and more indications covered, we will dramatically expand the amount of our sales force that can sell it.

Your next question comes from the line of Kyle Nixon from Canaccord Genuity. Your line is now open. Please go ahead. Hey, guys.

Thanks for the questions. Congrats on the deal here. Just first, maybe just talk about why now, as was discussed in the last question. It's kind of early for Personalis. I know they have a lot of reimbursement and so forth, but not a lot's been proven. Maybe why is now the best time? Also just talk a little bit about the dilution kind of roadmap here and the burning $20-plus million a quarter. You have that target positive cash flow in 2027, this doesn't help you kind of get there. Just maybe expand upon those factors. Thanks. Yeah, we looked at Personalis back in 2023 and decided to do a commercial deal in large part because we could see that there were several years of significant investment at the time that they were going to have to make.

In fact, I think you can see from their financials, they've made those investments in 2023, 2024, and 2025. Now we're almost at the end of 2026. I think it was kind of the right decision for us to let them make those investments and get the assay to this point. The point that it's at now is it is beginning to get and will continue to get, I would assume, a very broad coverage. The economics of these assays begin to turn pretty dramatically once they are covered more broadly.

Unlike other assays where you can get coverage quicker, here you have to basically demonstrate analytic validity and clinical validity. You have to publish, you have to get MolDX approval, and then all of a sudden one day you just turn on reimbursement. You go from zero revenue for some of these tests to significant revenue. They are now entering that part of the cycle where their financials should improve dramatically. That's why it was the right time for us to decide to acquire them. In terms of it being a proven test in market, I think it is widely considered, if not the best, one of the best tests in market today. As the financial profile of these assays gets better, I think you'll see pretty dramatic expansion and really strong operating results in terms of revenue.

Yeah. On the second part of your question, as Eric kind of noted in his prepared remarks, we're fortunate that the core business obviously has good tailwinds, both from a therapy selection volume growth plus the ASP tailwind that we've highlighted over the last several quarters getting the tumor only for xT FDA approved and then having xF. We're generating a lot of incremental growth profit dollars. As we've previously discussed, we've always intended on investing a certain percentage of those back into the business. MRD was a big area of investment, and that allows us to absorb some of this burn given the strength in the core business.

Yeah. Sorry to jump in. I think Jim makes the most compelling point, so that's why I highlighted, which is we're fortunate that we have this high growth business that just generates lots of gross profit and lots of gross profit dollars. We look for what are the best places to invest that. As Jim mentioned, this, in our opinion, is the best place. We're thrilled that we're able to lean into growth and position the business for long-term success.

Your next question comes from the line of Dan Brennan from TD Cowen. Your line is now open. Please go ahead. Thank you.

Thanks for the questions. Maybe just I'll ask one, obviously, but a couple-parter. Eric, I think you mentioned at the onset, 10% of the sales force is directed towards, I guess, MRD today or maybe specifically Personalis. Is the implication that that number goes up and the growth rate accelerates from what we've seen? B, I know you mentioned the ability to integrate their data more, so I'm just wondering if you could share what the relationship was prior to owning the business outright in terms of the ability to use the data within your pharma offering and how that might change now. C, does this impact your own plans on your own MRD assays? The final one would just be on the Personalis pharma business. They had an important pharma business. They've got deals with, I think, Merck, Moderna.

There's some outcomes data coming out later this year, early next year. Does this deal impact in any way the relationship with those companies and that offering? Thank you. Yeah. I learned a long time ago, I'm not smart enough to remember four questions in a row, so I'll try to cover some part of that.

The pieces I can recall. Yes, we have a limited, rough somewhere around 10% of our sales force selling the MRD product today. We will continue to un-gate that and invest in additional salespeople in the field. It's more a function of the balancing act between when they get additional categories reimbursed and so on and so forth. I think they've got a really strong R&D portfolio, which they've disclosed in their own investor meetings, so you can get some sense as to when various things are coming to market.

It's going to line up here likely in 2027, somewhere in, it's hard to know when, early, late, whatever, but at some point, you'll get to this tipping point where the revenue generated from these assays is high enough that you can more completely unlock and fully unshackle the sales force. We'll just keep people informed as to how that's going. We expect really strong growth rates. We said this in our investor day a month ago or so. We expect really strong MRD growth rates to continue, and when you have a business growing 40% quarter-over-quarter, that gets very big very quickly, and we expect that to continue.

As it relates to data, yes, the deal was originally structured where we had broad clinical distribution rights, but they had their own biopharma business, they had their own data rights. Post-closing, we will more tightly couple these things together, I suspect it'll be catalytic to both their pharma business and our pharma business. I think there'll be some really nice data benefits as we don't really fully bring in these MRD time points in a way that they do. Finally, hope I don't miss anything, as it relates to our own tumor-naive product, we have told folks over the last several quarters that we were seeing the market had shifted really pretty dramatically to tumor-informed in terms of volume, and that the tumor-informed part of our business represented, I can't even know, 95+, high 90s of the orders we were receiving.

I suspect that will continue for some period. We still believe tumor-naive has an important place. We'll continue to invest in tumor-naive. We'll continue to bring it to other indications. We're working on a more sensitive version of our assay now, that's moving along well. The market is just really leaning into these ultra-sensitive tumor-informed assays that have incredibly low limits of detection, we're excited to ride that wave for the next several years. Longer term, I would suspect both will do quite well.

Dan, I think on your final question around their biopharma business, obviously, we also have a large data business with biopharma. We also do some sequencing for biopharma as well. Again, we can integrate that business with the current offerings and think we can be helpful in expanding the overall relationship with biopharma.

Your next question comes from the line of Brad Bowers from Mizuho. Your line is now open. Please go ahead. Hi there.

Thanks for the questions here. Maybe just a two-parter on the revenue side. Just wanted to hear about the pathway to reimbursement. Obviously, the opportunity to have significant reimbursement here with the signature test of $3,500. Wanted to hear about the timeline for that process. On the other side, what does market share look like in the deepest Personalis accounts? What does MRD penetration look like since you're the first, I guess, alongside Personalis, it's the first pair to come at this market here. Wanted to hear about the deepest county you're in and what that might imply for future market share. Thank you. I'll cover the market share.

Jim can take reimbursement. I don't think we're prepared to go too deep in reimbursement, largely because they've got a roadmap, but Jim can cover it in a second. On the penetration side, we have been very judicious with who we let carry the MRD product within our world. We have hundreds of sales reps in the field across hereditary profiling and comprehensive genomic profiling with therapy selection. We've been very restrictive in terms of which of our accounts can order MRD and how and so on and so forth. I would say most things are under-penetrated or not fully penetrated. It really does come down to the balancing act of reimbursement across enough indications that you're able to generate an ASP high enough that you're not losing money on every test.

What's happened to them is they're just beginning that. That pendulum is starting to turn, and you'll see ASPs of this particular test should rise pretty precipitously over the next year. You'll go from losing money to breaking even to then making money. It's in that journey that we'll start to penetrate these accounts more fully. They're highly under-penetrated. Yeah. Just quickly on reimbursement, NeXT Personal's reimbursed across multiple use cases in breast, non-small cell lung cancer and IO monitoring.

They've laid out their roadmap for additional indications and have pretty robust plan to bring additional indications to MolDX for approval. We think that they're set up, obviously, with what they have in place today, that's allowed us to start ramping as they continue to get more indications, as Eric indicated, that allows us to ungate additional volume and have more reps selling. They're making really good progress over the last 12 or 18 months from a reimbursement standpoint, and we anticipate that continuing as they submit for additional indications.

Your next question comes from the line of Subbu Narayanan from Guggenheim. Your line is now open. Please go ahead. Good morning.

This is Ruki on for Subbu. Thanks for taking the question. Most of the focus has been on MRDs, maybe something that hasn't been asked about NeXT Dx. Is there anything we should be thinking about in terms of that NeXT Dx clinical therapy selection test? Where does this fit in the portfolio, and is it additive or competitive with xT/xR? Thanks. I'll just quickly say, I think the portfolio at this point is holistically complementary and now I think getting very complete.

Post the closing of Personalis will be very complete. You have this range of assays from best in class, am I at risk of getting cancer to best in class, I have cancer, how should I be treated? Whether that's from a tissue biopsy or a liquid biopsy to I'm post-treatment and I need to be monitored, and across a variety of subtypes of indications, what's the best test to order for that monitoring and for that early detection of recurrence. We just have a really incredible portfolio. Obviously, in our world, I think that portfolio with this acquisition is really as good as it gets.

The only place that we still have work to do is obviously on the MRD tumor-naive side, where we're just earlier in that game, and so we'll continue to try to make investments there to figure out how to get those assays over time up to the same quality as what Personalis has been able to develop on the tumor-informed side. It feels to us like we have a really strong portfolio across diagnostic, and we're in an interesting position in a world where these kind of tests will be ordered far more often, I think, across all the different categories we're in, both in cancer and then increasingly in non-cancer. I would be very surprised if a decade from now we're not sequencing just multiples of the number of patients we sequence today clinically.

In a world where we're going to generate an incredible amount of molecular data, it's going to become increasingly important for health and wellness and helping people fight disease. The data's going to become increasingly critical for biopharma to make decisions. You want the best portfolio, you want scale, and you want to be in the best position to win in that world and we think this helps us and we are. Couldn't be more excited. In terms of time, your last question comes from the line of Mark Massaro from BTIG.

Your line is now open. Please go ahead. Hey guys, congrats on the deal.

If I remember, I think Personalis has talked about scaling to gross margins of about 50%-60% over time. Can you just share with us whether or not you agree with that margin target or if you think there could be upside to that? Also, would you mind just confirming that some of the reimbursement dollars from Medicare have trickled in? Just to confirm, last question, that ImmunoID NeXT will remain part of the portfolio. Thanks. I'm hesitant to go too deep into some of the intricacies of Personalis' business before they provide some of that color.

They are collecting dollars on the clinical side. Those funds are flowing, so there's certainly no issues there. In terms of long-term margin target, we'll provide more color on our call in a week. Obviously we wouldn't have made the decision to acquire them if we didn't believe the margin profile was going to be super healthy. We're, I think, financially disciplined in that regard. We try to be conscientious when we're buying assets, that we're paying the right price. As we said historically, we believe a business like ours that is 10-plus years old should be generating EBITDA and cash flow and one day significant operating income and we're on that journey.

We don't intend to go backwards. For us, the timing, as we talked about a few minutes ago, was really important, and the reason we didn't do this a year or two ago is we wanted to be at the point in the curve where this was going to quickly turn into a really healthy business from a gross profit perspective and a margin perspective, and they're getting close to that.

That concludes our question and answer session. I will now be passing the call back over to Elizabeth Cristofalo, VP in Investor Relations, for a quick closing remark. Please go ahead. Thank you.

Thanks everyone for joining us this morning. We look forward to speaking with you on our Q2 call on July 30th.

Thank you everyone for attending this call.