Good day, and thank you for standing by. Welcome to the GeneDx Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Be advised that today's conference is being recorded. I would now like to hand the conference over to Tricia Truehart, Head of Investor Relations. Please go ahead.

Thank you, Joel, and thank you to everyone for joining us today on this call. I'm Tricia Truehart, Head of Investor Relations at GeneDx. On the call today, we have Katherine Stueland, President and Chief Executive Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, GeneDx released financial results for the second quarter of 2023 ended June 30, 2023. 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 2023 financial guidance, our expectations for revenue growth, gross margins and profitability over the next several years and our expected cost savings and reduction in cash burn, involve a number of risks, uncertainties and assumptions. For a list and description of the risks and uncertainties associated with GeneDx's business, please refer to the Risk Factors section of our latest Form 10-K filed with the Securities and Exchange Commission and the other documents filed by us from time to time within the SEC. 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 financial 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 8, 2023. GeneDx 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.

Thank you, Tricia. Over the course of this year, our team has been focused on 3 clear goals: one, driving sustainable growth measured by increasing the utilization of our flagship exome; two, becoming the most efficient company measured by improving our gross margins and reducing COGS; and three, driving our company to profitability by way of increasing revenue while reducing cash burn and by building a phenomenal team to get us there. We are relentlessly focused on these goals, and I'm pleased to share that we turned a critically important corner in Q2. We saw our biggest revenue month in history in June, and this is the direct result of the exome conversion strategy that we doubled down on in the first quarter. More specifically, we saw record-breaking increase in whole exome and genome test volume this quarter with nearly 12,000 patients tested, a 56% increase year-over-year and 36% increase compared to the first quarter of this year. Revenue from whole exome and genome testing increased 28% compared to the first quarter of this year to $28.7 million. What our second quarter performance tells us is that our team is well on our way to delivering on a growth strategy centered on exome and balances the use of strategic tests that serve as a pipeline for introducing and expanding the use of our exome. While our test menu is expansive today, our goal is to get to an optimized test menu of simply exome and genome as the backbone for testing all inherited diseases, going beyond the rare disease population to cover every stage of life from newborn screening to adult diagnostics. So I'd encourage you to think about our business in 2 parts: one, our exome and genome business, which today is generating more than 60% gross margins and…

Thank you, Katherine, and good afternoon. I would like to first take you through the growth in revenues, both on a year-over-year and sequential basis, cover the expansion of gross margins from continuing operations and then address what we are doing to continually reduce spend and cash burn. I'll wrap up with 2023 guidance. During the second quarter of 2023, total revenues were $48.7 million. Pro forma revenues from continuing operations was $45.2 million compared to $40.1 million in the second quarter of 2022 and compared to $40.7 million in the first quarter of 2023. Those increases were driven entirely by growth in whole exome sequencing revenue, which grew 36% year-over-year and grew 28% sequentially compared to the first quarter. Our team resulted nearly 12,000 exome results in the quarter. That is by far an all-time high in terms of the number of lives we are impacting and represents exome volume growth of 56% year-over-year and sequential volume growth of 36% compared to the first quarter. Pro forma adjusted gross margins from continuing operations in the second quarter of 2023 was 37%, expanding from 34% in the first quarter. As a reminder, we exited 2022 with 41% pro forma adjusted gross margins and have reaffirmed our guide to expand beyond that for the full year of 2023. Let me bring you through the ways we will do that. First, growth in exome. Adjusted gross margin for whole exome sequencing remained at a portfolio-leading 60%. Whole exome sequencing represented 22% of all tests delivered in the second quarter of 2023, up from 17% in the preceding quarter. Notably, we saw momentum with each month of the second quarter, with June topping out at 26% of all test results being whole exome. In the first half of this year, we've successfully built…

I'd like to take a moment to thank our incredibly dedicated team, the parent advocates who fight each day to get their children tested and the clinicians who work with us to get them answers. The work we do is hard, but the parents and children we serve inspire us to continue to strengthen our company every day. And it is our shareholders who enabled this. And for that, I want to say thank you. And with that, we can open it up for questions.

[Operator Instructions] Our first question comes from the line of Mark Massaro of BTIG.

Congrats on the strong growth in exome and genome. If I -- yes, if I'm doing this math correctly, it looks like you generated about 40% to 41% of revenue in the first half, obviously implying nearly 60% revenue growth in the second half. I think we knew that this year would be back-end loaded, but it seems a little more back-end loaded than I previously thought. So maybe could you just walk me through some of the moving parts and what gives you confidence that you can maybe get to the midpoint of the guidance? Or do you think you're now perhaps more likely to hit the low end?

Certainly, I'm happy to kick it off and would like Kevin to share as well. I think we've talked previously about the commercial investments that we've made to add territories. So we added about 10 territories. We have built out for the first time ever a team of medical science liaisons or MSLs. So we now have a team of 9 who are fully [staffed] in the field, I believe, as of June. And they work really hand in hand with sales reps to be able to focus on that conversion to exome. And what we've seen just based on some of the early experience with those MSLs that we had is that they are able to really effectively accelerate that switch. So they help kind of supercharge our sales team. And I think what we saw in June this year was our strongest month ever. It's the direct product of the strength of our exome performance and commercial execution. So I would say that, that is the major factor that really gives us the confidence, and we've gone through to really understand what that sales execution looks like for the second half of the year. And now that we have, I would say, a more robust sales team amplified by those medical science liaisons, we feel really confident that we're going to continue to be able to drive that conversion and that growth in the second half of the year.

Yes. The only thing I'd add to that is that, that amplified team is just also supported by typical seasonality, which sees the fourth quarter for us come in the strongest over the years, both in terms of ordering volume but also average reimbursement rates.

Yes. Great. And then just for housekeeping, Katherine, the 10 territories and the 9 MSLs, sorry, is that 10 direct reps or is that 19 adds? And can you just remind us when these folks joined the company?

Certainly. So we -- last year, we ended, I believe, it was about 58 territories. And so we've added about 10. We usually account that there's going to be a handful of regions that are open throughout the course of the year as we continue to drive sales force productivity. So the total size of the field force is in that range. And then on top of that, there are 9 regions, and those 9 regions each have a medical science liaison. So each of those MSLs is working with all of the reps within each of those regions.

Great. And sorry, just to double check, when did the new reps start at GeneDx?

So we've been adding them throughout Q1, and they were largely in place by, I would say, middle of Q2. So we expect really that there's about a 3- to 6-months window by way of them getting ramped up and getting to full productivity. So we've had a really good seasoned team that has been working with each of those reps to make sure that they know exactly who their targets are. They have the targeting data that really helps ensure that they're going to clinicians where there's good coverage, and then they now have the additional bolster of that MSL. And the MSL, for clarity were fully staffed as of June. We've been adding them throughout the first half of the year.

All right. Great. And just a last one for me. The exome and genome volume was 22% of your volume. At the time that you expect to become profitable in 2025, do you have a sense for what percentage of your mix will come from exome and genome?

Yes. I think we've said in the past, the longer-term target there is around 40%.

Our next question comes from the line of Brandon Couillard of Jefferies.

This is Matt on for Brandon. Appreciate all the color around the part of the portfolio that 80% or so that's not currently -- or I guess it's under 50% reimbursed. Katherine, you talked a little bit more about investing to increase collection. So any chance you guys could talk about where that number could go over time? And what any improvement there would be? I think, Kevin, you talked about it being a substantial opportunity. So any more color on where that improvement in reimbursement can go and kind of how to think about it from a timing perspective?

Yes. Look, I think from a timing perspective, it's going to take several quarters. I think in the longer term, we would expect a mature product in our space to likely see a payment rate around 70% to 80% of the time. What we've found recently is that across commercial insurance and even a number of state Medicaid programs, there is coverage for exome and genome. It's fairly opaquely written in many cases, which is just a function of the product not being well established for many years under coverage policy. We expect that those guidelines and payer policies to tighten up and crystallize over time. And in the meantime, we're really focused on the front end of our processes to ensure that we're driving home ordering behaviors that as closely can -- as closely align to payer policies as we see. And we think there's a number of operational steps that we can improve on to drive higher payment rates. It will take some time to get there. But nonetheless, we see the overall denial rate and payment rate today as a significant opportunity to accelerate ASPs and therefore, revenue growth into the future. What has us most encouraged is GeneDx very well contracted across the country. I think 80% of all commercial lives or thereabout we are in-network with for a number of years now and not necessarily reliant on new payer policies to come out in order to ensure we get paid properly for the work, but more so ensuring that in the fields, ordering behaviors and our front-end processes are paying attention to the various web of rules and requirements that are specific to each payer. And so we look forward to providing you progress reports in coming quarters on how we're progressing in that regard.

And then, Kevin, maybe stick with you. Appreciate all the color around the gross margin improvement in the quarter is really helpful. Any clarity or just additional clarity adding into the back half of the year? I mean, is kind of the improvement we saw here sequentially fair to think about 3Q and then 4Q maybe a bit higher, given the seasonality in some of the other initiatives you guys have underway really starting to take form, any help there?

Yes. I think that's precisely how we would walk to get to that full year being above that 41% mark, which will mostly be driven by overall mix. But it's also going to be helped by a number of COGS reduction initiatives that we have in place for the exome portfolio. And so the order of magnitude of expansion we saw from Q1 to Q2, you might expect something in that range sequentially over the next 2 quarters.

Okay. Great. And then if I can just sneak one more in on the Prognos Health partnership you announced a few weeks ago. How long do you expect it to take to become fully integrated on their platform and be live? And maybe just talk a little bit more about the structure of the deal. Is there an opportunity to work with or expand your work with some of the biopharma customers that are leveraging their marketplace?

So we're getting started working with Prognos now, and we expect it will be a few months for us to be able to upload the rare disease database. And I think we see this as a great opportunity over the next several years just to be able to really ensure that the rare disease data is being put to work for patients themselves by really connecting the clinicians who may have a patient who may be eligible for an FDA-approved therapy. So this is something that we think is a wonderful long-term partnership. And we expect that as Prognos really leads the way and working with these companies to bring them onto the platform, we'll get a nice additional lift over time. Simultaneously, we're going to be continuing to drive additional, what we call fine deals where, again, in a de-identified way, so similar to Prognos in that respect, we are able to connect biopharma companies with clinicians who may have patients eligible for clinical trial development and other efforts more on the R&D side of things. So we think this is a nice way to have both the commercial stage biotech companies engaging with us and with Prognos as well as the R&D stage companies interacting directly with us. So we'll continue to drive business development across both of those efforts.

[Operator Instructions] Our next question comes from the line of Prashant Kota of Goldman Sachs.

Can you speak to the impact of the PanGenome Research study? What are the key findings from that study and how they informed your R&D spend?

Certainly. So the PanGenome study, I think, is one that was an important development coming out of the combination of Sema4 and GeneDx. It certainly is something that I would say is not a huge area of focus for us from a commercial standpoint. But we think that ultimately, they really help to advance the scientific community's understanding of the complex genetic structure and variations across diverse genome sequences. So it's our way of contributing to ensuring that the data that we have continues to be presented in peer-reviewed fashions that continue to advance our overall understanding of a diverse group of humans and how their genomes may be different. I would say what's really a moment of pride for us at GeneDx is the diversity of patients that we have in our database, which I think is very unique to our space. And I think it's reflective of the patients who we serve. Our diversity is actually quite similar to the general population of the United States. And typically, because of the use of genomics and hereditary cancer, it tends to be really optimized for the Caucasian population. So we have a unique database. We want to continue to ensure that we have a diverse group of patients who we are serving and that we're able to contribute to a growing body of evidence that really helps support our understanding of disease.

Got it. That's great to hear. And have there been any updates in the federal regulatory landscape in terms of additional funding for rare disease research? And could you just remind us of the current federal or private initiatives in this space?

Sure. It's a really important element of the business because the Orphan Drug Act has been for a decade now, one of the most important enablers of ensuring that patients have access to treatments. If you go to any of the patient advocacy groups, the #1 thing that they advocate now for is diagnosis. And they are very strongly talking about full exome sequencing because they recognize the fact that we're able to provide a more definitive diagnosis and then panels or single gene tests. So we work cooperatively with the patient advocacy organizations. And I think as we're starting to see a stronger voice on the hill as it pertains to opening up access for rare diseases, we're only seeing greater momentum to support, I would say, a more robust future for the Orphan Drug Act.

[Operator Instructions] Our next question comes from the line of Dan Brennan of Cowen.

Great. Congrats on the quarter. Maybe the first one would just be on exome mix. Should we expect this, call it, 22% mix in Q2 to be the baseline going forward? Or are there some more one-off factors in the quarter?

Yes, I wouldn't call out any one-off factors other than to say, Dan, that we did see with each month throughout the quarter that number of exome results as a percent of total increase with each month of the second quarter with, again, June topping out at 26%. And we really think that, that's a launching point and would expect that as we move into the third quarter that we'd see continued growth commensurate with what we saw quarter-over-quarter from the first quarter to the second.

Great. And then maybe just on -- and sorry if this was discussed earlier, but we were under the impression that Q1 was generally the ASP [indiscernible] for the year. It looks like [indiscernible] exomes' went down sequentially in Q2 a bit to 20 -- I think from 2,600 to 2,400. So kind of how should we think about pricing? And should we expect kind of prices to rise going forward from here?

Yes. From Q1 to Q2, we saw some variation. We've got a keen eye on it, but we don't necessarily view it as down for any systematic or pervasive reason, more so just fluctuations. I do expect that in the third quarter, we'd hold flat or slightly up within an uptick in ASPs in the fourth quarter, consistent with past seasonal practices. What we expect to more significantly contribute to in terms of revenue growth is continuation of the volume momentum that we've seen through the first half of this year and would expect growth rates on the volume side to be consistent with what we saw sequentially achieved in the second quarter within really the fourth quarter uplift coming in part through increased reimbursement rates or collection rates and then in part by continued volume ramp.

Great. And then if I can sneak one more in just in terms of gross margins. When we were thinking gross margin -- like mix shift is the biggest driver. You had a material mix shift is there from this quarter. The GM went below the 40%, you've gotten in prior quarters. So can you just walk us through a little bit of this dynamic?

Yes. I think from a mix perspective, what's important to also keep an eye on is the number of non-exome tests, those really are important seeds for future growth as we expect tests like CMA and FMR1 to convert over time to exome. But they are low and, in some cases, negative gross margins within our portfolio. So improving the ultimate mix and then just seeing the overall either retirement or trimming of volumes in those low to negative gross margin tests, very important to the overall blended gross margin accretion that we expect over time. At the same time, in the background, there's COGS reductions that we do expect to materialize in the second half of this year and beyond. And overall increase in payment rates or ASPs can have a significant upside to us in the future periods outside of 2023. So it really is the combination of all of those factors over time that come into play to boost gross margins from today's levels.

Well, we appreciate everyone joining us today. Again, I want to thank our shareholders who support us and make all of this important work possible. And we look forward to seeing you at upcoming conferences. Have a great rest of your day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.