GeneDx Holdings Corp.

and patients with rare disease, which is increasingly recognized as being better for patients as well as better for our business. As discussed during our last earnings call, we're actively working through several cross-channel initiatives to build this momentum. These include investments in our commercial team to include new territories and dedicated cross-functional teammates, and launching a variety of marketing and educational outreach to aid in physician engagements. We're also focusing efforts on product development to improve customer experience and operating efficiency, including automation of services and shortening the turnaround time for results. We continue to contribute to clinical research, demonstrating the value of exome sequencing for patients, and importantly, this work is amplified by medical societies and by payers. Through this strategy, we're gaining significant traction with both geneticists and non-geneticists who recognize the superiority of exome and genome tests. Exome volume is growing at a faster rate than what we call stepping stone tests, which include tests such as CMA and FMR1, as well as multi-gene panels that have long been a standard practice. These strategically important non-exome panels lay an important foundation for us to execute product switch to clinically superior, higher margin, whole exome and genome tests. Encouragingly, we've been able to demonstrate we can expand markets and gain new customer types. We've increased utilization of our services among pediatricians by 17% in June. We've also seen growth among pediatric neurologists who have made up the largest proportion of new exome ordering clinicians in 2023, and ordering productivity is going fastest in this clinician segment. Based on recent claims data, we have more than 80% of the exome and genome market share in the United States, and physicians have come to rely on our exceptional diagnostic and analytical expertise, clinical support, and speed at which we can reliably provide a full report. We also continue to strengthen our leadership by leveraging our unique knowledge and database and building a better product with AI. These tools enhance our interpretation capabilities, such as improved genetic variant discovery and mapping, and better understanding of variants in certain non-coding regions of the genome, which can provide a more precise diagnosis for physicians and patients. To enable this, we recently acquired and welcomed a team of Icelandic engineers who have spent decades in the industry, including pioneering work at Decode Genetics. They are already accelerating our work to continuously improve our clinical interpretation platform. As a leader in the market, we're also focused on navigating improved payer medical policies and reimbursement coverage. And this is another pillar in our strategy to provide patient access to this new standard of care and capitalize on our commercial success. There's been continued momentum in Medicaid coverage with 28 states covering outpatient whole exome sequencing. And recently, Florida and Arizona added inpatient whole genome sequencing coverage, becoming the seventh and eighth states to do so. We have a focused team continuously working on improving ASPs, and we have increased resources for claim management to improve collections. We're confident that these initiatives will enable re-acceleration of ASP growth for the next several quarters, and Kevin's going to dive into that in greater detail. Our commitment to patients extends to our recent collaborations and partnerships as well. We signed several new partners to our growing network this quarter, including a strategic deal with Prognos Health to integrate our rare disease data into the Prognos marketplace, providing life sciences companies with a comprehensive de-identified data set to accelerate patient access to life-saving therapies. This partnership gives us the opportunity to go a step further in ending the treatment odyssey to connect clinicians and their patients with rare diseases to appropriate treatment options and to ultimately improve health and health economic outcomes. And we just announced yesterday morning a fantastic collaboration with PacBio and our SeqFirst partners at the University of Washington to study long-read whole genome sequencing. This is the first study of its kind to compare diagnostic yield rates across short- and long-read sequencing platforms for neonatal and pediatric care. Our pioneering interpretation platform built on genomic-based diagnostics will be paired with innovative technology to further advance the field of genome sequencing to deliver precise genetic diagnosis for young children. And as we continue to drive progress over the rest of the year, we'll remain absolutely focused on our three goals of sustainable growth, operating efficiency, and strengthening our path to profitability. That means you can expect our teams to continue to drive expanded use of our exome, continue to improve ASPs, and continue to reduce our cash burn. And any day now, we'll be hitting a new milestone of more than half a million exomes sequenced since we introduced it a decade ago, nearly half of those just in the past two years since we implemented a strategic shift in the company. It's a privilege to be able to set a new standard of care and to help so many more patients each and every day. and we're grateful for the opportunity to do so. With that, I'd like to pass the call over to Kevin.

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're 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 up volumes on certain non-exome tests that represent near-term candidates to convert to whole exome. Examples include CMA and FMR1, which made up approximately 16% and 10% of all test results in the second quarter. Although these carry lower average reimbursement and low to negative gross margins, We previously discussed that the strength in non-exome mix is meant to be transitory this year, and we're pleased to see momentum in the proportionate exome mix this quarter. As our strategy to weigh volume mix towards whole exome and genome takes hold, we expect to see continued natural accretion in our blended gross margins. Second, increased payment rates. Within the exome and genome test portfolio, 82% of aggregate volume runs through commercial insurance, managed care, and Medicaid programs. Approximately 70% of all commercial payers in nearly half of all state Medicaid programs have some level of positive coverage for exome and or genome, all subject to various medical necessity criteria. Today, we're currently being reimbursed on less than half of all claims. Our revenue cycle improvement efforts are mobilized and focused on improving target targeting towards well-reimbursed regions, and the use of automation and artificial intelligence and process design to ensure we're capturing upfront medical necessity information in real time prior to claim submission. This will help drive ordering behavior and adherence with individual payer policy and increase the likelihood of payment. We also have identified a number of process improvements necessary to navigate disparate prior authorization hurdles in order to avoid unnecessary denials. Improving claim payment rates are within our control and offer a substantial opportunity ahead. The remaining 18% of all volume is institutional bill, which tends to be highly predictable with near 100% collectability. As utilization of whole exome and genome increases on the back of emerging guidelines and clinical support, in particular with respect to our rapid product in the NICU and PICU, where there is a large unmet need, We expect over the long term the proportion of this relatively high-priced institutional payer mix to increase. Overall, we're pleased with where pricing has leveled out on this portion of the portfolio following some pricing resets we discussed last quarter. Third, reducing cost per test. In the second quarter, our team implemented a number of projects aimed at further improving both turnaround times and COGs throughout our lab operations. These include but are not limited to wet lab savings through the validation and launch of our first next generation Illumina X Plus sequencer in June, with another machine expected to be validated in the third quarter. Dry lab savings through consolidation of our library preparation processes to twist biosciences, which is on track to launch this month. And we expect to implement further automation and AI across a number of end-to-end production steps in the fourth quarter and beyond. Fourth. portfolio rationalization. We are closely monitoring the economic and clinical performance of our legacy panel test menu through periodic review. We've begun retiring low volume, low margin tests and have a phased plan over the coming quarters and years to continue this work as guidelines, policies, and the marketplace evolves ultimately until we arrive at our goal of an exome and genome backbone for all inherited disease tests. Turning to expenses. Adjusted operating expenses have declined 5% in the second quarter compared to the first quarter of 2023, are down 22% from the fourth quarter of 2022, and have declined a transformative $31 million, or 34%, from the comparable 2022 period. In April 2023, following the completion of substantially all semaphore wind-down activities, we reduced our combined workforce a further 5%. primarily across G&A support functions. This is equivalent to roughly $10 million in cost reductions, the effect of which will not translate into operating expense declines until the third quarter of 2023. We will continue to drive operating expense leverage as we separate from discontinued operations, leave substantial legacy tech debt behind in the coming quarters, and continue our work to gain efficiency across all aspects of the business. At the bottom line, Total company adjusted net loss for the second quarter of 2023, inclusive of all activity, including the discontinued legacy semaphore diagnostic operations, was $42 million compared to an adjusted net loss of $49 million in the first quarter of 2023 and $66 million in the same period of 2022. Improvements of 14% and 37% respectively. We've decreased our cash burn by 10% sequentially and 36% year over year to $53 million for the second quarter of 2023. Our total cash and cash equivalents and restricted cash were $157.6 million as of June 30th, 2023, which included proceeds from the final tranche of $7 million from the registered direct offering that was part of the $150 million capital raise in January, 2023. Now turning to guidance, we reaffirm our previously issued 2023 revenue and gross margin guidance of $205 to $220 million in revenue and our expectation to expand gross margins in 2023 beyond the 41% adjusted pro forma gross margin reported in the fourth quarter of 2022. We are updating previously issued cash use guidance and now expect to use $70 to $85 million of net cash in the remaining six months of 2023 inclusive of servicing obligations of the discontinued semaphore business. By the end of 2023, we expect to have the quarterly cash burn from continuing operations from today's levels. We are reaffirming our long-term guidance to turn to profitability in 2025. To conclude, as of June 30, 2023, we had 25,761,147 shares of common stock outstanding. And as a reminder, we affected a reverse split of our stock at a 1 to 33 ratio. Accordingly, all common stock share numbers, per share amounts, and additional payment capital for all periods presented today and filed in our 10-Q have been retroactively adjusted where applicable to reflect the reverse stock split. And with that, I will turn the call over to Catherine.

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 enable this. And for that, I want to say thank you. And with that, we can open it up for questions.

Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.

Our first question comes from the line of Mark Massaro of BTIG.

Your line is now open.

Hey, guys. Thank you very much for the question, and congrats on the strong growth in exome and genome. 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 invite 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 nine 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 with 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 you know, 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.

Yeah, 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.

Yeah, great. And then just for housekeeping, Catherine, the 10 territories and then nine MSLs, sorry, is that 10 direct reps or is that 19 ads? And can you just remind us when these folks joined the company?

Certainly. Last year we ended, I believe, with 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 Salesforce productivity. So the total size of the field force is in that range. And then on top of that, there are nine regions, and those nine 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 three to six month 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 MSLs 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 the last one for me. The exome and genome volume was 22% of the year 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?

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

Excellent. All right, guys, thanks so much.

Thanks, Mark.

Thank you. Please stand by for our next question. Our next question comes from the line of Brandon Couillard of Jefferies. Your line is now open.

Thanks. This is Matt on for Brandon. Appreciate all the color around the part of the portfolio, the 80% or so that's not currently, or I guess it's under 50% reimbursed. Catherine, you talked a little bit more about investing to increase collections. So any chance you guys could talk about where that number could go over time and, you know, 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 and reimbursement can go and kind of how to think about it from a timing perspective? Thanks.

Yeah. 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 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 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 GDX, very well contracted across the country. I think 80% of all commercial lives or there about, um, we are in network with for a number of years now and not necessarily relying on new payer policies to come out in order to ensure we get paid properly for the work, but, um, more so ensuring that in the fields, ordering behaviors and our front end processes, um, are paying attention to the various web of, um, rules and requirements that are specific to each payer.

and we look forward to providing you progress reports in coming quarters on how we're progressing in that regard thanks and kevin maybe stick with you appreciate all the color around the gross margin improvement in the quarter is really helpful um any Uh, clarity or quality like to add them to the back half of the year. I mean, it's kind of the improvement we saw here sequentially fair to think about 3Q and then 4Q, you know, maybe a bit higher given the seasonality and some of the other initiatives. You guys have underway, you know, really starting to take form any, any help there.

Yeah, I think that's precisely how we would walk to get to that that full year being above that 41% mark, which. will mostly be driven by overall mix, but is 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 two quarters.

Okay, great. Thanks. And then if I can just sneak one more in on the Prognose 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? Thanks.

So we're getting started working with Prognos now, and we expect it'll be a few months for us to be able to upload the rare disease database. And, you know, 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, you know, as Prognos really leads the way in working with these companies to bring them onto the platform, we'll get, you know, a nice additional lift over time. Simultaneously, we're going to be continuing to drive additional what we've called 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.

Super. I'll leave it there. Thank you. Thank you.

Thank you. Please stand by for our next question.

Our next question comes from the line of Prashant Kota of Goldman Sachs.

Your line is now open.

Hey, guys. Thanks for the question. Can you speak to the impact of the pangenome research study? What are the key findings from that study, and how have they informed your R&D spend?

Certainly. The pangenome study, I think, is one that was an important development coming out of the combination of semaphore 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, you know, 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 GDX 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.

that's great to hear thank you 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 the space sure it's a really important element of the business because the the Orphan Drug Act has been

For decades 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 number one thing that they advocate now for is diagnosis. And they are very strongly talking about whole exome sequencing because they recognize the fact that we're able to provide a more definitive diagnosis diagnosis than panels or single gene tests. So we work cooperatively with the patient advocacy organizations. And, you know, 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, you know, I would say a more robust future for the Orphan Drug Act.

Awesome. Thank you.

Thank you. Please stand by for our next question.

Our next question comes from the line of Dan Brennan of Cohen. Your line is now open.

Great. Thanks for taking the questions and congrats on the quarter. Maybe the first one would just be on ExoMix. 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?

Yeah, 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. Thanks. And then maybe just on, and sorry if this was just earlier, but we were under the impression that Q1 was generally the ASP4 for the year. It looks like crisis axioms went down sequentially in Q2 a bit to 2020. 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?

Yeah, from Q1 to Q2, you know, 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. Do expect that in the third quarter we 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 in to 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 just take one more minute just in terms of gross margins. And we were thinking gross margin, like makeshift is the biggest driver. You had a material makeshift transaction this quarter. The GM was below the 40% you've gotten in prior quarters. So can you just walk us through a little bit of this dynamic?

Yeah, I think. From a mixed perspective, what's important to also keep an eye on is that 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. 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.

Great. Thank you.

Well, we appreciate everyone joining us today. Again, 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 participation in today's conference. This does conclude the program. You may now disconnect.