Good day, and thank you for standing by. Welcome to the Sema4 Second Quarter 2022 Earnings Conference Call. . Please be advised that today's conference may be recorded. I would like to hand the conference over to your speaker today, Joel Kaufman, VP of Finance and Corporate Development. Please go ahead.

Thank you, Michelle. Good afternoon, everyone. Thank you all for participating in today's conference call. Joining me from the company today will be Katherine Stueland, Chief Executive Officer; and Kevin Feeley, SVP of Operations and Head of GeneDx. Rich Miao, the company's interim CFO, is recovering from a medical procedure and will not be able to join the call this afternoon. Earlier today, Sema4 released financial results for the second quarter ended June 30, 2022. A copy of the press release and our second quarter earnings slide deck are available on the company's website. Before we begin, I'd like to remind you that management will make forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. Additionally, these forward-looking statements, particularly our 2022 financial guidance and our expected cost savings involve a number of risks, uncertainties and assumptions. For a list and description of the risks and uncertainties associated with Sema4's business, please refer to the Risk Factors section of our Form 10-Q filed with the Securities and Exchange Commission today, August 15, 2022. We urge you to consider these factors and you should be aware that these statements should be considered estimates only and are not a guarantee of future performance. During the call, we may discuss certain non-GAAP financial measures. For reconciliations of the non-GAAP measures to GAAP financial measures as well as other information regarding these measures, please refer to our earnings release and other materials in the Investor Relations section of our website. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 15, 2022. Sema4 disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. And with that, I will turn the call over to Katherine.

Thanks, Joel. Just 3 months ago, Sema4 closed on the acquisition of GeneDx and announced that we were restructuring the company to support a new foundation for the future, one focused on profitable growth, operating efficiency and data-driven decisions. Given the immense market opportunity, our industry-leading technology and consideration of the market conditions, we are well on our way to turning Sema4 into a stronger company than it ever has been. In the second quarter, our teams have continued to drive meaningful revenue growth, in fact, hitting record volumes in pediatrics, thanks to the GeneDx acquisition, while putting the company on track to deliver our target of approximately $50 million in cost savings this year. And with the actions we've taken since the last conference call, we can confidently debut a target of approximately $200 million of cumulative cost savings through 2023. Our new management team has been reviewing our business lines and is acutely focused on assessing what's working and what's not. And as a result, we're making changes to ensure we strengthen our foundation and financials so we can continue to realize our mission of unlocking insights from data, leading to healthier lives and in doing so, realizing value for our shareholders. What remains the same is our vision to deliver personalized health and wellness plans for patients based on comprehensive data. How we realize that vision will be very different by virtue of strategy, execution and how we show up in the world. We're now operating Sema4 as a commercial business focused on profitable growth. After comprehensive reviews of our business lines, we've decided to focus on an area where we're well positioned to win and can drive profitable growth, helping families make better health decisions with our panels, exomes and genomes, fueled by an industry-leading interpretation…

Thank you, Katherine, and good afternoon, everyone. Since joining Sema4 upon completion of its acquisition of GeneDx, I've had the privilege of leading a number of our operational teams across the company, including, but not limited to, laboratory operations, genetic counseling services, supply chain management, and the revenue cycle across the combined company. In this past quarter, we've been focused on integration in all areas of the company and key initiatives to drive forward the third area of focus Katherine outlined, which is driving operating efficiency. All operational aspects of the company are under review to ensure proper resource management, automation, and enabling technologies are in place to drive cost efficiency. I look forward to updating you on our progress in future calls. Today, I'd like to focus on revenue cycle management and adjustments we've made as we take a fully integrated approach with our billing operations and relationships with our third-party payers. We disclosed today in our 10-Q filing that we're currently negotiating with one of our larger commercial payers regarding the potential recoupment of payments for Sema4 carrier screening services rendered from 2018 to early 2022. As a result of the negotiations to this point and an assessment of our current reimbursement landscape for third-party payers, Sema4 has reversed $30.1 million of revenue this quarter related to prior periods. We believe this reversal of revenue accurately reflects and captures the potential risk of recoupment from our entire portfolio of third-party payers, which is a risk that is common in our industry. Our new leadership team is committed to strengthening our relationships and partnerships with the payers to improve access for our customers who need and require our services. And now I'd like to hand the call to Joel to bring you through our financial results and guidance.

Thank you, Kevin. For reference, we have provided a detailed breakdown of historical volumes and revenue on a pro forma basis beginning in the first quarter of 2021 in the appendix of the second quarter earnings presentation posted on our Investor Relations website. During the second quarter of 2022, total Sema4 revenue was $36 million compared to $47 million in the second quarter of 2021. When adjusting for the $30 million of revenue reversal related to prior periods recorded in the second quarter, second quarter revenue would have been $66 million. Regarding volumes, we achieved a new record this quarter with approximately 118,000 resulted tests, excluding COVID-19. Pro forma resulted volumes in the quarter were 133,000. This represents a 19% year-over-year increase versus the second quarter of 2021 on a pro forma basis. As a reminder, we completed the previously announced wind down of our COVID-19 business in 1Q 2022. Turning to gross margin. I'll be referring to non-GAAP results. I encourage you to review the reconciliation of GAAP to non-GAAP measures, which can be found in today's earnings release and 10-Q filed with the SEC. Adjusted gross margin, excluding the prior period revenue adjustment, recognized in the second quarter was 4% for 2Q '22. Gross margin was also negatively impacted by lower recorded ASPs and the reproductive health business during the second quarter. Turning to the balance sheet. As of June 30, we had total liquidity of approximately $410 million, with cash and cash equivalents of $285 million and an undrawn revolver of $125 million. We anticipate most of the restructuring process Katherine reviewed will be completed by the end of the year. Combined with the announcements earlier this year, these actions will generate approximately $50 million in 2022 savings. These actions, combined with a focus on capital controls…

Thanks, Joel. With our focus on profitable growth, scalable R&D strategy, and improved operating efficiency, I'm confident that these changes will result in better outcomes for our patients, providers, payers, partners, team members, and importantly, the shareholders who entrust us to realize our mission. We're grateful for the opportunity to do so. I would now like to open the call up for questions. Operator?

. And our first question is going to come from the line of Dave Delahunt with GS.

Any additional color you can provide on the outlook for signing additional health system partnerships?

Yes, absolutely. That's a fantastic place to put some attention. So first, what we are doing is taking a look at the existing health systems that we're working with. I think historically, they've been characterized as learning partnerships. And what we're doing is working with them to figure out exactly how to ensure we can scale before we add additional health partnerships. So right now, each one has a unique focus. One is focused on hereditary cancer screening. Another is focused more on healthy mom and healthy baby. And that gives us an opportunity to be able to bring to our health system, the GeneDx suite of products in the pediatric setting. So we've actually hired somebody to join the team to be able to work with our new R&D leads to really build that road map to scale health systems before we continue to invest in yet another learning system. And so that is what our plan is. Once we have an approach to being able to scale them, I think we'll be able to provide a better insight in terms of how we might be able to go to market to bring more online.

And on the biopharma partnership side, any additional color you can give us on the level of demand you're seeing in the market?

So first, in terms of the selling approach that we're taking with biopharma, it really was previously a group of Sema4 folks who are coming together and really ideating with different biopharma companies in the same way that we're trying to bring some commercial rigor and scale to health systems as well as the entire business. We want to do the same with biopharma. So I would say with the close of the GeneDx acquisition, we've been really pleased, particularly in the rare disease space, the types of partnerships that we have in the pipeline. But we have a lot of work to do to really pull those through and realize them into partnerships that will be gross margin positive. And again, what we want to do is spend some time figuring out how to productize that. So we can actually go to health systems with a very clear suite of services that we can provide to them rather than approaching each one as kind of a unique go-to-market approach. So more to come on that.

And our next question comes from the line of Brandon Couillard with Jeffrey.

This is Matt on for Brandon. Just quickly first on the updated guidance. I appreciate the color on the quantifying the adjustment for the prior period changes on the other part of the lowering of the guidance related to volume and pricing within the reproductive health. Can you just talk a little bit more about what changed there? And any way to kind of quantify what you're assuming for ASPs there now versus prior to quantify the magnitude of the step down there?

I'm glad you heard the message loud and clear. It's really 2 factors, one being ASPs, and the other being volume related. It was a pretty aggressive back half of the year. And as we have a new commercial lead in place and a new commercial leadership team, we're just trying to be really clear eyed in terms of the volume that we see right ahead of us. Obviously, some of them have been really focused in the IVF setting. There is an entire universe of OV volume that is also out there that we may focus on, but that also requires a different commercial strategy. So what I really tried to talk through in some of my remarks was the commercial rigor that we're bringing to there. Jen Brendel is leading that effort. She was an adviser at Bayer and Invitae, and really has developed, I think, an elegant strategy that provides all of the things that you need to deliver on volume, on strong ASPs. We have a full operational plan to continue to drive down our COGS to deliver on stronger gross margins. So all of this, I would say, we're seeing play out very nicely in the pediatric setting, and it's that same approach that we need to drive in terms of reproductive health. But for the back half of this year, I think we wanted to take the most conservative approach in terms of what we could see by way of ASPs and by way of volume that would accompany that.

And Matt, just sort of walking through the ASP dynamic embedded in the guidance. So I'd point you to the updated table we provided both in the press release and within the appendix of the investor presentation that was posted on our website today. If you sort of normalize for the out-of-period revenue adjustment in the quarter, ASPs in our complex reproductive health segment here were about $520 in the quarter. That compared to about $712 in the quarter prior. I would say we're expecting for the remainder of the year, at least double-digit sequential declines from 2Q into 3Q for those ASPs in the reproductive health business. And stabilization ‐‐

And then jumping over to the additional $150 million of annualized cost savings, you guys laid out a number of items from semi‐tumor testing, further reorganization, moving the lab and some commercial moves. So I guess can you kind of talk about maybe the relative kind of size and comfort with that another $150 million? And then going forward into '23 and beyond, kind of what do you think is the right size of the commercial organization?

I'll share my perspective and then we'll hand it over to Kevin as well. We've had a full transformation management office that has been leading a pretty thorough effort in terms of being able to ensure that we can deliver on the cost savings, particularly given the markets that we're all living in. And so it's everything from revenue optimization ‐‐ that's something that Kevin is focused on ‐‐ to lab and footprint optimization in addition to taking a look at ‐†the last possible elimination that you want to have to make a decision on is your people. Today, as I said on the call, with the 250 folks that we're parting ways with, that is about 30% of the legacy Sema4 team. So I would say that we have made a pretty multidimensional approach here in terms of being able to realize that cumulative $200 million in savings. And some of it is a matter of timing. So I'll let Kevin talk a bit more.

Matt, and some of the confidence comes through leveraging a blueprint that GeneDx has previously established running a full suite of germline test. So the move down to Maryland allows us to leverage a fair bit of automation and other laboratory techniques that have been in place at GeneDx and Maryland for a number of years. And this shift down to the Maryland lab really gives us the ability to run costs at level of efficiency that would have taken Sema4 a fair bit of time to accomplish on their own. And so really it was one of the premise of the integration was to rationalize the laboratory footprint and leverage some of the investments that GeneDx had been making over the past decade into laboratory automation and techniques in the laboratory. Across other operational functions, we see the implementation of other automation and technology that should help us get more efficient in servicing our products. So looking at some operational groups outside the laboratory as well and finding meaningful cost reductions as we turn the page into 2023.

And our next question comes from the line of Max Masucci with Cowen.

Just a question on the second half guide. With the revenues being a bit below, but it also looks like you raised the resulted test volume guidance. So I appreciate the comments around reproductive health outside of that segment. Would love to hear which other products and services are driving that upward revision for the full year volume growth guidance.

That is exactly the place to zero in. So about a year ago, we assembled an overall business strategy for the GeneDx suite of products, which includes neurodegenerative panels really for rare disease, but those are rapidly being adopted into the developmental delay setting in addition to other places as well in the pediatric sector. So we put together, I think, a pretty elegant commercial strategy to ensure that we could drive volume growth, that it was revenue driving volume, and that would -- that we can make an impact on the reimbursement landscape as well to ensure that we're opening up access, we're getting paid for this volume. So we're seeing now a year later. We started making the investments in the commercial team, commercial leadership, medical affairs team. A year later, we're seeing those investments paying off. So as we're continuing to evolve the reproductive health strategy is really the pediatric sector where we're seeing a lot of uplift as we think about the back half of the year.

Max, just like in the mechanics in terms of the updated guidance, the way I would think about it is you have the onetime out-of-period revenue adjustment that was a headwind in the quarter. The legacy Sema4 business, we're taking a more conservative view on both volume and ASPs, but we are revising our underlying assumptions at the legacy GeneDx business up based off of the demand we're seeing for the whole suite of GeneDx's products to date.

Second one related to gross margins. In the second half, gross margin guide, just as we think through the pacing of the gross margins in Q3 and Q4, how should we think about the timing of some of these key milestones or factors you're solving for in terms of the lab operations and the movement there? And then just more generally, if we sort of separate the opportunity for organic gross margin improvement that's unrelated to, say, reclassification of items between OpEx and gross margin, just trying to get a sense for how we can best track your progress towards the organic gross margin improvements and the pacing in Q3 and Q4 in the context of the guide?

So Max, I'll start with the pacing. So if you think about the mechanics of the exit of the somatic business, which will essentially be a wind down of that product line throughout the remainder of the year, and we're going to essentially stop accepting samples in November, so you're going to likely see somatic volumes decline, which will be less of a drag on gross margins for the remainder of the year, a greater impact in 4Q than 3Q. And then thinking about the move of hereditary cancer from Stamford down to Gaithersburg, again, that will not impact the third quarter. So that would be a benefit that we realized in the fourth quarter. And then on top of that, highly encouraged by the trajectory of gross margin that we're seeing at GeneDx. Margins continue to beat our internal expectations and are up meaningfully relative to the exit trajectory out of last year. So if you think about that is a part of the business that's growing, let's say, above the corporate average, contributing more gross margin in the fourth quarter than the third quarter. So that's how I would think about the pacing. I'll kick it over to Kevin who may have some more details around underlying operations and how that will impact the gross margin.

Not much to add there except for beyond those identified items. We've got established now, well-established to transformational office. Really looking at all other additional levers that we could pull to explore strategic options to drive down costs, not just in COGS, but operationally as well and look forward to providing further updates as the year progresses. Okay.

Final question. I just want to first wish Eric best is the next chapter. And then second, Matt is stepping in as Chief Technology and Product Officer. So could you just maybe give us a sense for some of the initiatives or efforts that Matt spearheaded during his time at Invitae, where he can have an immediate impact at Sema4? And then just generally, if there are any major changes to the R&D and biopharma strategy going forward?

You're asking one of my favorite topics. Matt Davis' contributions. And I worked with him for several years. Matt has, I think, one of the -- he's uniquely capable in being able to think through vision in terms of where we're going with exome and genome and a data strategy, while also being able to sit in a business review, here is a problem and think about if I had a squad of 5 of my people, we can probably solve that issue, whether it's a revenue cycle issue or an ordering issue. He's able to really do both the high science and vision work that we need him to do in partnership with Gustavo, while also being able to look at the business problem, the business operation opportunities that we have in front of us to really run the company more efficiently. And he also brings, thanks to his time at IBM and some work that he and I partnered on while at Invitae, was a design approach to product development. So we're really excited about the many different ways that Matt's going to be contributing, including what we've talked about today in terms of being able to develop a road map for scale for R&D. I think part of the immense excitement about Sema4 in the early days being a spinout from Sinai, very academically minded where all of the different places that you can go from a data perspective and being able to place a lot of bets. And now we want to move into a new chapter from an R&D perspective, where we're placing fewer bigger bets that have behind them a business plan and a full product road map and a clear approach to being able to take an idea, turn it into a product or service, and turn that into a revenue-generating approach. So that's really the kind of shift that we want to see out of the team here at Sema4 in terms of product, technology, data science, how do all of those come together to really ensure that we're able to support a commercial stage growth company that has an incredible market opportunity in our hands. So we're thrilled to have Matt. Gustavo stepping up into a fantastic role and we're just thrilled to be able to have them both leading us in this new chapter.

. And our next question comes from the line of Mark Massaro with BTIG.

Maybe the first one, I don't think I heard the topic of Centrellis come up. So maybe can you just talk about how important sort of the big data platform strategy is at Sema4 at this time. I know that about a quarter ago, I think Dr. Schadt indicated that he was planning to focus on big data, the information platform, helping with health systems and pharma companies. So maybe just an update on the Centrellis strategy. How core is it? And then on a related question, can you maybe update us on who may be stepping in for R&D? Or is that a position that you're looking to fill?

So first, yes, Centrellis is central to all of this. So when I talk about the data engine and how we are combining genomic data with longitudinal data, clinical data, that's what we're referring to. So Centrellis is absolutely a key part of the data strategy moving forward. We're continuing to build on that by working with health systems and continuing to ensure that we have got a strong pipeline of genomic volume coming in through our commercial channel. So yes, when I'm talking about the interpretation platform that we've built, in that case, I'm referring to the interpretation platform that we built at GeneDx, which is the most advanced platform in terms of being able to take an exome or genome's worth of data and be able to deliver it with fewer with every patient that we're running through that platform. So I think those 2 platforms that we're talking about that I think really helped contribute to a richer data strategy moving forward. And that interpretation platform gives us a really important commercial competitive advantage because we've been running these exomes and genomes and that platform has been getting smarter over the past 8 years. So it's one of the reasons that our exome, nobody can compete with it. So yes, absolutely central to the data strategy moving forward, and we're excited. In terms of R&D leadership, that is Gustavo and Matt coming in. So all of the folks who were reporting to Eric and others on the R&D or product teams will be reporting in Matt and Gustavo. So research and development is, I suppose, rebranded as a technology product, data science moving forward.

I also wanted to ask about the -- I think it was the $30 million adjustment in the quarter. Would you be willing to provide a little more information about what some of the changes and estimates were related to? And then was this one payer or was it multiple payers? And do you think there could be any impact to either pricing of these tests or potentially the contract status of any of these payers?

First, I'm sure, hopefully, you can appreciate, we're in ongoing negotiations with the payer. So I'll share as much as we can at this point, but potentially more limited than you would like. So in the second quarter, a large payer of ours completed an audit. That audit span back 3 years, the results of which is a refund request on previously paid claims. These were services provided by Sema4. So the dispute really comes down to a coverage decision with the payer requesting recoupments of amounts previously paid. We've taken reserves on our balance sheet based on current information to date captures what we believe is the potential risk of recruitment from this and other third-party payers in our portfolio. To your question on contracting in the context of this dispute, we're working to finalize an updated contracts with this particular payer on a combined company basis. I'll note that this was one payer that had significantly higher contracted rates than standard commercial lab rates. But hopefully, you can appreciate that. Discussions are ongoing, but we look forward in the days to come to resolving not only dispute but the go-forward contract disposition with this payer. But I believe the reserves on the balance sheet cover off on what we'd expect is risk in the portfolio at large.

So I totally understand the closure of lab and brand for Connecticut, given the somatic testing business is quite small, and it certainly makes sense to lower your cost structure and move hereditary cancer testing elsewhere like Maryland. Maybe can you just remind us where the bulk of the carrier screening testing is being assessed at this time? And like how strategic is operations in Connecticut at this time? And are you contemplating potentially moving operations to other lower-cost jurisdictions?

So our expanded carrier screen or carrier screening testing is germline in nature and run in the laboratory in Stamford. And we're exploring all options for the rest of the reproductive health line of testing and where that should be performed and how frankly. With respect to your question on Connecticut, the company headquarters is in Connecticut. I think we mentioned in our prepared remarks, our headquarter space, which is office space, probably not unlike many other companies, we found we have far more office space than individuals to fill it at the moment and a beautiful laboratory facility right down the street from the headquarter office space. And so we'll be looking to consolidate that space in Stamford, Connecticut over the coming months.

And I'm showing no further questions, and I'd like to turn the conference back over to Katherine Stueland for any further remarks.

Well, thank you for joining us. Really important thank you to our team members who have been working with us. And we look forward to catching up with you some time in the coming weeks and months. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.