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.