Welcome to the Sema4 Third Quarter 2022 Earnings Conference Call. My name is Cheryl, and I will be your operator for today's call. I will now turn the call over to Joel Kaufman. You may begin.

Thank you, Cheryl, and good morning, everyone. Thank you for participating in today's conference call. Participating for the company today will be Katherine Stueland, Chief Executive Officer; and Kevin Feeley, Chief Financial Officer. Earlier today, Sema4 released financial results for the third quarter ended September 30th, 2022. A copy of the press release and our third-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, our expectations for revenue growth, gross margin 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 descriptions of the risks and uncertainties associated with Sema4's business, please refer to the Risk Factors section of our latest Form 10-Q filed with the Securities and Exchange Commission. 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, November 14th, 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'll turn the call over to Katherine.

Thanks, Joel. Since joining Sema4 in May, my top priority has been to drive long-term, sustainable, profitable growth and to preserve cash. This has been the case for two reasons: one, the unsustainable cash burn that Sema4 had incurred and two, the macroeconomic pressures that shifted virtually every company in every industry from a growth-at-all-cost mindset to one of profitable growth. Since then, our management team has undertaken a rigorous review of Sema4's financials, operations, R&D and commercial strategy for reproductive health, thematic oncology, health systems, pharma, and Centrellis. We've also continued to execute on a GeneDx growth strategy to expand the adoption and utilization of our pediatric and rare disease business, driven by differentiated panels, exomes, and genomes. What became clear is that we have an incredible opportunity steeped in areas of distinct strength. We have a highly unique competitive advantage in rare disease exome and genome testing, including data from more than 400,000 clinical exomes, over 1.7 million rare disease enriched panels, and 2 million biobank samples, covering a broad spectrum of rare disease. This is one of the world's largest rare disease data sets, which when coupled with Centrellis allows us to combine clinical and genomic data to deliver better insights to patients, providers, pharma partners, leapfrogging others in the space to advance precision medicine. Simply put, it’s combining the best of Sema4 and the best of GeneDx, which I'll come back to soon. What also became clear is that in order to drive the differentiated profitable growth of GeneDx and Centrellis, we needed to exit the reproductive health space. Earlier this morning, we announced to our team and our customers that we're exiting the reproductive health testing business by the end of the year, and as a result, parting ways with approximately 500 employees, representing one-third of our workforce. This decision was not made lightly and was informed by deep analysis, deliberation, and scrutiny by our management team, advisers, and Board. We considered every possible option to preserve the business, including the investment required to scale and improve margins, the competitive landscape, payer dynamics, including recent shifts in coverage and reimbursement, and costs associated with doing business in more commoditized markets. We contemplated moving operations from Connecticut to Gaithersburg, Maryland to improve lab efficiencies and reduce COGS. We looked at the cost of servicing the IVS market versus OPs and even contemplated a direct-to-consumer model. We considered the impact of this continuing carrier screening on our data strategy, which convinced us that our access to clinical data and our pediatric and rare disease genomic data is by far the most valuable combination. As you would expect, we explored an outright sale of the business, yet others arrived at the same economic analysis. The exit of reproductive health alone will eliminate at least $30 million in cash burn on a quarterly basis, which will immediately and significantly grow our gross margin profile. In the end, we determined that the reproductive health testing business is unsustainable and especially so in light of capital market constraints in the macroeconomic climate. It's not the decision any of us wanted to make, but it's necessary for the future health of our business, the delivery of better health insights to patients and partners, and ultimately, the generation of shareholder value for those who believe in our ability to change health care for the better. I'd like to thank the Sema4 team for their hard work and dedication in helping many families gain access to critically important information to inform reproductive care. The commitment and passion of our team helped Sema4 establish a leadership position in the reproductive health testing space, and today is a challenging day for all. With that decision being made, what I'm unequivocally convinced and excited about is our unique ability to lead what is a $30 billion market opportunity that centers around the clinical genomic insights that we are able to provide. And we're able to do that even with our deep legacy of genomic expertise that patients, providers, pharma partners, and payers all depend on day in and day out. So we'd like to spend a little bit of time diving into that $30 billion market that will generate a more complete understanding of complex diseases and how to treat them. The business moving forward is on a path to provide annual revenue growth in excess of 20% over the next several years and an adjusted gross margin profile in excess of 50% over the next several years with a return to sustained company profitability in 2025. The go-forward basis is driven by the expanding use of whole exome and genome diagnostic testing focused today on rare disease and Centrellis' data-driven insights. We are very optimistic about the growth and profitability prospects for this business, which delivered 43% year-to-date revenue growth and improved gross margins over the past year when we first put our growth strategy into effect. The main drivers of our growth are defined by four primary patient opportunities. First, leading today’s pediatric diagnostics market. We're a leader in providing services to children's hospitals, specifically in the NICU for inpatient care as well as more broadly in the pediatric and rare disease outpatient settings. We’re generating clinical and health economic data through our SeqFirst study with the University of Washington and Illumina. We recently published data at ASHG that showed that testing with exome and genome produces 30% fewer inconclusive results and a higher diagnostic yield compared to multi-gene panel tests. What that means is exome and genome testing will replace the need for multi-gene panels. The second patient population is expanding the diagnostic market. We’re focused on expanding the utilization of our services in the pediatric outpatient settings with an emphasis on autism and epilepsy. In fact, guidelines by NSCC and ACMG have provided further confirmation of the role specifically of exome and genome for these patients. In the adult outpatient setting, we're seeing increased utilization among patients with strokes and neurodegenerative diseases. We’re selling in these areas today, and we expect to begin investing in studies to generate clinical and health economic data. Third, establishing newborn screening as a new standard of care. This can best be described as providing whole genome sequencing for healthy babies, which we've already started to implement with the GUARDIAN study here in New York State. And fourth, introducing adult screening as a routine part of medicine. This represents a future market where we're able to generate genomic insights to enable a more proactive approach to managing health care, moving beyond monogenic disease and into more complex polygenic diseases including cardiovascular, neurodegenerative, and metabolic diseases. The genomic data generated by these patient populations becomes more powerful when combined with clinical data, which is where Centrellis comes in. A core part of our continued investment is in making this platform actionable for more and more patients, providers, and partners. Centrellis integrates digital tools and artificial intelligence and ingests longitudinal data to create unique and actionable insights for partners like pharma and health systems. Our pharma business is still in its initial stages, and we have learned a tremendous amount about how we can add value for drug developers as well as other healthcare industry partners. We intend to invest in and accelerate the commercial model for the Centrellis platform to expand utility and create a rich data pipeline to drive personalized medicine. Ultimately, we want to take an individual's genomic profile, pair that with their clinical data, deliver a personalized health and wellness plan, and provide treatment options and a prognosis for them based on other patients just like them. That is the vision, and that is enabled by Centrellis as a health intelligence platform fueled by GeneDx's genomic services and clinical data. To track our progress against this vision, we have set five company-wide objectives. These serve to operationalize our P&L, hold us accountable to one another, our customers, and shareholders, and to provide clarity and a framework for decision-making. You'll hear us refer to these over the next several quarters. Objective one is to sustainably capture and expand the market for data-informed healthcare decisions using genomic and clinical information. Objective two is to build quality and longitudinal relationships with and between customers centered on their needs. Objective three is to become the most efficient company balancing innovation and scale. Objective four is to strengthen our data assets to deliver better health outcomes. And objective five is to create the healthiest, most sustainable company. We've made significant progress towards improving the performance of Sema4 and GeneDx, reducing our cash burn, and expanding into areas with profitable growth prospects. We have clear goals for our team as we march towards a healthier future. All the changes we've made ensure that today we are a stronger company. And with that, I'd like to pass the call over to Kevin.

Thank you, Katherine. This morning, I will start by reviewing our third quarter results, both for the total company and for the GeneDx portfolio specifically, and then turn to guidance for the remainder of the year. I will also provide some color on our improved financial profile going forward. We have a strong team in place ready to maximize value for patients, customers, employees, and shareholders. I'm excited to highlight for you today what is real strength embedded in our results. During the third quarter of 2022, consolidated Sema4 revenue was $83.2 million compared to $43.2 million in the third quarter of 2021. The increased year-over-year results from the inclusion of GeneDx, which contributed $46 million to the top line, partially offset by declines in Sema4 somatic oncology, reproductive health, and COVID revenues. Importantly, GeneDx quarterly revenue growth was approximately 50% year-over-year. As a reminder, we completed the GeneDx acquisition on April 29th, 2022. We recorded roughly 128,000 tests this quarter, representing a 19% year-over-year increase on a pro forma basis versus the third quarter of 2021, excluding COVID. We saw strong growth in our pediatric and rare disease testing business, namely GeneDx, generating over 20% volume growth in the third quarter. Turning to gross margin, I will be referring to our non-GAAP results. Adjusted gross margin in the third quarter was 20%, up from negative 15% in the third quarter of 2021. The substantial turnaround reflected in gross margin results from the inclusion of GeneDx, which delivered over 40% gross margin in this third quarter of 2022, led by our flagship exome and whole genome sequencing solutions. Across all business lines, we had solid execution on various other operational improvements stemming from the transformation and cost-reduction initiatives I referred to on our second-quarter earnings call. As Katherine shared, we are discontinuing reproductive health testing before the end of the year. Combined with restructuring announcements earlier this year, we have dramatically reduced the total cost to operate the Sema4 business and are on track to reduce cash burn 50% in 2023. Today's action alone reduces annual cost by approximately $65 million. Combined with all actions previously announced this year, we are on track to surpass previous cost reduction targets of $50 million this year and approximately $200 million of cumulative cost savings through 2023. It is both a hard and exciting day here. I want to acknowledge and thank our departing colleagues for their service to Sema4 and to GeneDx. We carry forward their unwavering commitment to patient care and quality service. With a strong and passionate team now in place, we are focused on operating with discipline in order to maximize value creation going forward. As of September 30th, we had cash and cash equivalents of $191.3 million with a cash runway into 2024. Now turning to guidance, we are maintaining the previously issued full-year and second-half 2022 reported revenue guidance of $245 million to $255 million and $154 million to $164 million, respectively. We are also maintaining the previously issued full-year and second-half 2022 adjusted gross margin guidance of 4% to 9% and 15% to 20%, respectively. Finally, I would like to spend a few moments on the newly restructured business. Annualized revenue combining the GeneDx and Data Insight business based on Q3 results is approximately $185 million, with adjusted gross margin of 43%. With the changes we've affected this year, including those announced today, we are now confident that we can achieve annual revenue growth in excess of 20%, gross margin in excess of 40%, with a long-term target of plus 50%, and a very meaningful reduction in cash burn. The takeaway from the announcement today is a newly structured business that has significantly improved financial profile and leverages our most differentiated assets to expand our leadership position in pediatric and rare disease testing, data, and health insights. With that, I will turn the call over to the operator for Q&A.

Our first question comes from Mark Massaro from BTIG.

Can you hear me?

Yes, we can.

Okay. So yes, certainly, a little bit of a surprise. But on the other hand, I understand the focus on lowering cash burn. Before I get into other questions, I guess, can you just confirm that you did a thorough analysis and market check that there were no material interested buyers of your women's health business? And then related to that, my understanding is that ACOG is planning to review coverage of expanded carrier screening, which theoretically could have increased your margins and/or pricing. So maybe can you just expand on those topics as well as where you stood with commercial payers with respect to carrier screening?

Yes, you got it. And those are all the right questions. So one, with regard to the market dynamics, what we continue to see are declining ASPs. So that is a reality. And the costs associated with moving our operations down to Gaithersburg in order to really realize some of the lab operations efficiencies and pull that through to COGS. Given where we are, it's just from an overall strategic and cash perspective was not the right call. And I think one of the key things that we've been really focused on for the long term for Sema4 and GeneDx is where are the market opportunities where we have a truly differentiated offering in markets that are not really highly commoditized. So when it becomes a decision of, are you going to continue to build a product where you already have an incredible opportunity with a $30 billion market opportunity ahead versus trying to scale a part of the business where there is a high degree of competition and it becomes a bit of a sales force expenditure in terms of how to dominate that market? I think the other aspect, though, if you just zoom out a little bit, our view has been that the entire market, including carrier screening, is going to go to working off of an exome genome. So we would envision that we are going to be able to actually provide carrier screening to a woman who is thinking about having a family at some point; that absolutely is part of the strategy because realistically, we are the cost efficiencies associated with running exome genome versus trying to keep hundreds of panels relevant and the operational expense associated with that and all of the billing expenses—it's a very expensive endeavor for any company that’s in the panel space. And so we get such great operating efficiency on running exome and genome, replacing the need for panels. For the sales process, we ran a thorough process, an official one and a thorough one, and arrived at a place where others in the space did their own economic analysis. And while we had hoped that that would have been an option for us, both from an employee perspective as well as possibly an infusion of cash—unfortunately, it didn’t. In many ways, though, it really validated the fact that if we were unable to make it work here, others in the space who clearly have the scale were not able to make it happen either. So I'll see if Kevin has anything to add. But I think you're asking the right questions, but I can confirm it was an exhaustive analysis.

Yes, I'd say that's right, Mark. And then just back on the previous point. What we're most excited about on a go-forward basis is the focus that we now have on executing to bring in more exome and genome, which by far, is the most data-enriched genomic information that we can combine with the clinical data that the company has access to in order to drive the Centrellis data part of our strategy moving forward.

Okay. And then obviously, the GeneDx business, if it's okay to call it that, grew by 50% year-over-year on a revenue basis and 20% on a volume basis. Can you maybe just walk us through the puts and takes? Were there any catch-up payments? And which particular product lines do you think will carry that 20% run rate growth going forward?

Yes. It will be the exome and genome products. Much of what you see there as price appreciation is coming from an improvement in overall test mix year-over-year. What you should expect from us is the overall test mix as it relates to exome and genome and, in particular, exome and genome on a rapid basis being ordered in an inpatient setting. You should see the mix of that within our overall portfolio grow over time. We put some data in the earnings release and slide deck associated with that. And what you're seeing is the execution of a strategy that we put forth about 18 months ago to really take advantage of what we believe is a best-in-class rapid exome offering in the inpatient setting. Today, particularly focused in the NICU and pediatric markets, those carry higher ASPs and higher reimbursement amounts. Over time, you'll see the legacy portion of the GeneDx portfolio, which is individual gene tests and panels, diminish over time. So I look forward to updating you throughout the year on how that test mix shift continues to evolve.

Okay. Great. And just maybe last one. I know today's actions, I think you've lowered the annual cost by about $65 million. Understanding that your new business has a higher margin profile. Can you just give us a sense for what you expect the pro forma or annualized cash burn would look like?

So we have some wind-down activities. We're going to continue to accept samples through this fourth quarter. We expect that we have cash runway into 2024. And on a quarterly basis, we expect by the second half of the year to reduce current cash burn roughly 50%.

Our next question comes from Max Masucci from Cowen.

This is Joe on for Max. It'd be great if you could just dive into a little bit of the health systems signed in the quarter just in terms of size and economics of the partnership you signed.

So the health systems, I think there's ways to think about health systems moving forward. Historically, Sema4 talked about Founder Health Systems, where each one has had a unique product approach, where you're seeing either somatic testing that we're exiting or you're seeing hereditary cancer screening that drives a tremendous amount of utilization and value for the health system. So each one of the founder health systems that we've been working with have had a unique approach. We haven't added any founder health systems because we wanted to move away from having unique programs at each one and drive towards a place of how do we scale. Frankly, it's just costly to have bespoke programs at each one of these. What we're doing on a go-forward basis, as it pertains to health systems, GeneDx actually has relationships with hundreds of health systems. What we're going to be doing is selling clinician by clinician in a more traditional sense, but we're going to start going into health systems with a top-down approach of selling our exome and genome services in the NICU in the pediatric setting. Some of these health systems we will target to see if there is a strategic opportunity to procure and ingest clinical data from them that will help us continue to fuel Centrellis and generate additional health economic data. So on a go-forward basis, what we're intending to do is go to the customer base, which we're at 100 children's hospitals, apply more of a top-down approach from a selling perspective, and see where there might be some opportunities to procure data moving forward. I will say though, I think the importance of being able to procure data from additional partners beyond health systems is going to be one of the key results that I think defines our ability to really have a good diverse expanding data set that is one of the goals is to continue to grow the data set for Centrellis on the clinical data side. The genomic data that we're going to be able to procure will, of course, grow with selling our GeneDx platform, but we want to be able to pair that with an ever-growing set of clinical data that really has been stagnant. So that is a big strategic shift for us moving forward.

Got it. And I believe the previous cash guidance was a runway into 2024. And if I heard correctly, it sounds like that's largely unchanged. Can you just walk through the puts and takes with the much higher margin existing business here?

Yes, Joe, we've got to extinguish some liabilities from the exiting businesses. So we'll be focused on executing an orderly transition away from reproductive health and the exit of the business and those liabilities that exist and expect that we have cash available into 2024 at this point in time.

Our next question comes from Jefferies.

Sorry, I think it was by accident, sorry.

No worries. Our next question comes from Matt Sykes from Goldman Sachs.

This is Dave on for Matt. Could you walk us through how you calculate the $30 billion opportunity in rare disease?

Yes, happy to. The $30 billion opportunity for exome genome, just as a point of clarification, it starts in rare disease and then we expand out of rare disease into what the entire industry has been chasing, which is how do you have a genome test to be able to diagnose all diseases? So we're starting today in the NICU and outpatient setting, indeed in rare disease. We do expand into—and those are all obviously children who are affected. But as we're doing in New York State and talking with other states, there's also an opportunity for newborn screening. So doing a genome on a healthy baby and being able to have that information, should there be any symptoms. So it begins the entire service and business that many in our space have talked about of sequence and hold and be able to provide information throughout an individual's lifetime. So that newborn screening market is another $10 billion above the $3 billion for NICU and outpatient exome and genome. Then we get into a broader genomic health screening market that centers on the adult setting and being able to ensure that everyone can sequence, hold, and if there is a symptom, be able to rule in or rule out whether or not there is an underlying genetic condition that needs to be treated. Some of the conditions that we're treating today in adults include strokes, neurodegenerative diseases, etc. So how do you use that information in a more proactive way? So that's an additional $16 billion on that. The opportunity really is centered around the service of sequence and hold. Because of our underlying interpretation platform, what we're able to do, and this was true of some of the data that we presented at ASHG, we're able to provide fewer variants of unknown significance, which is absolutely key to being able to ensure that you can provide a more definitive answer. So that's the breakdown of the market. It's $3 billion NICU an outpatient, $10 billion for newborn screening, and then another $16 billion for genomic health screening.

Okay. And so if we could drill down into the newborn screen more so $10 billion, there's 3 million or 4 million pregnancies or births a year in the U.S. So you've got a couple of $2,000-something per test. Is that—can you tell us more how you get to that? And also, how long do you expect for it to take to fully penetrate that?

So this is a 10-year arc that we're talking about. The work that we're doing right now in newborn screening, we're doing it without charging them. This is an opportunity for us to generate data that really tests the actionability. We'll—once we learn more about how the commercial model can work for that, we’ll essentially be assembling more of a subscription-type model. It's also something that we want to work more proactively with payers because being able to get into value-based care. This is one area where we know that there's an interest from payers in terms of being able to essentially pay for positive results. So I would say more to come, but we're in the early stages still of the NICU and outpatient opportunity. That's where we're focused today in the next several years. Newborn screening—we're in an even earlier segment. So no commercial model to share yet but more to come in the future.

And on newborn screening, that links back to the announced launch of the GUARDIAN study that we initiated this quarter.

And presenters, at this time, I show no further questions in queue. I will turn the call back to Catherine for closing comments.

Great. Well, thank you all for joining. Looking forward to being able to share more about the go-forward strategy that we are excited about and with a year of impressive execution against this core plan on the exome genome in the pediatric setting, we're very much looking forward to continuing to deliver on continued growth over the next several years. So thank you.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for your participation. You may now disconnect.