Personalis, Inc. Q3 FY2021 Earnings Call

Good day, ladies and gentlemen, and welcome to the Personalis Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this call may be recorded. I would now like to hand the conference over to your first speaker today, that is Caroline Corner, Investor Relations. Please go ahead.

Thank you, operator. Welcome to Personalis’ third quarter 2021 earnings call. Joining me on today’s call are John West, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements within the meaning of U.S. securities laws. For example, any statements regarding trends and expectations for our financial performance, new orders, products, services and technology. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the third quarter of fiscal year 2021 to be filed today and our 10-K for fiscal year 2020. Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release with our third quarter 2021 results is available on our website, www.personalis.com under the Investors section and includes additional details about our financial results. Our website also has our latest SEC filings, which we encourage you to review. A recording of today’s call will be available on our website by 11:00 a.m. Pacific Time today. Now I’d like to turn the call over to John for his comments and third quarter business highlights.

Thank you, Caroline. Personalis continues to grow, driven particularly by our oncology business. In Q3, revenue from our oncology business grew 50% over the same period of the prior year. It has increased sequentially over each of the last eight quarters. New orders received in Q3 were more than three times the amount of revenue for the quarter. In addition, more than half of the orders are for prospective clinical trials. Our pharmaceutical customers are increasingly recognizing the value of our platform and incorporating it in their clinical trial designs right from the start. We expect our oncology revenue to become the largest part of our revenue in Q4 of this year, and based upon the midpoint of our updated guidance, a sequential increase of 57%. Our pharmaceutical customer base has broadened significantly over the last year, and that has contributed meaningfully to the record orders we received in Q3. Our partnership with Natera has also continued to grow, and in Q3, it comprised 10% of our total revenue. Natera's adoption of our NeXT exome gives them access to a relatively large footprint for identifying somatic variants for their Signatera MRD test. It also allows Personalis to participate in a part of the MRD market, which is complementary to our own product, NeXT Personal, which we plan to launch next month. We see a lot of opportunity in the MRD market and are pleased with our progress made to date. We have also made strides in Asia. Our plans to establish a lab and commercial operations in China are progressing well. We have now hired about 10 employees, and our team has begun to qualify our laboratory in Shanghai. We have received substantial pharmaceutical customer orders, and those customers are now pursuing local regulatory approvals. We expect to begin working with customers within a few months and be in a position to recognize revenue in 2022. In Japan, several major international pharmaceutical companies are now ordering NeXT, further supporting our efforts to expand in Asia. Our NeXT platform provides biopharmaceutical customers a better understanding of each cancer patient’s genetic profile. Both tissue and liquid biopsies together offer the most comprehensive view, leading to optimal therapy and treatment decisions. Our tissue and liquid biopsy-based offerings provide data on all approximately 20,000 human genes. Tissue samples allow us access to RNA and to the immune cells that have infiltrated the patient’s tumor. By analyzing liquid biopsy samples, we can provide information about a patient’s tumor across multiple time points from small blood samples. Used together, we believe our oncology platforms provide our customers with the most comprehensive analysis of tumor burden and biomarker identification available today. At Personalis, we plan two liquid biopsy products for different applications. NeXT Personal has been optimized for maximum sensitivity, particularly when the amount of tumor DNA in blood plasma is very low—such as in early-stage cancer, after surgical resection, or in patients with a complete response to therapy. The largest segments of this population are those who have or have survived breast and prostate cancer. To detect potential cancer recurrence, we can look in a patient’s blood plasma for the mutational signature of their tumor. However, these two cancer types have such low mutational burden that they can be difficult to detect. We realized early on that we could overcome this liquid biopsy sensitivity issue by leveraging our considerable high-volume whole genome sequencing experience. Using tissue whole genome sequencing, we can identify 20 times more somatic variants to serve as the basis for personalized cancer assays. By looking for the tumor's fingerprint at over 1,000 loci and being able to select cancer ranges that have a low level of background sequencing errors, we gained tremendous sensitivity. Our internal data now confirms that this approach can result in sensitivity down to a few parts per million. This sensitivity advantage may translate into much earlier detection of a patient’s cancer recurrence. We believe this can be a leading technology for several large market opportunities, and we’ll have more to say about that when we formally launch the product next month. For our whole exome liquid biopsy product, it is optimized for late-stage cancers, where the amount of tumor DNA in the blood is higher and tumors may be increasingly complex. For that application, the rich information from an exome can provide much more insight. We continue to make encouraging commercial progress with NeXT liquid biopsy. Notably, in Q3, we received a multi-million dollar order for the use of our tissue and liquid biopsy full exome products together, each at multiple time points. Personalis has also filed patents related to liquid biopsy methods for many years. In Q3, we received two new patents in this area. We believe that our liquid biopsy-based products will contribute increasingly to revenue in 2022. Personalis’ technological and scientific leadership has led to strong adoption by pharmaceutical companies who use our technologies to analyze the response of cancer patients in their clinical trials. We believe that these same advantages can be important for all cancer patients, not just those in clinical trials. As a result, we are taking steps to build a clinical diagnostic business for therapy selection and monitoring. We believe the combined market potential of these opportunities is approximately $30 billion in size in the United States. I would now like to comment on our recent progress. First, we are continuing to build our regulatory, clinical, and reimbursement capabilities. We have been hiring employees with clinical and medical experience within the diagnostic setting, and we will continue to hire and invest in this area. Recently, we announced the hiring of Bob Bruce as Vice President, Reimbursement Strategy and Execution. Bob has extensive experience with reimbursement, bringing over 25 years in the field, including serving as VP of Reimbursement at Clinical Genomics, where he was instrumental in obtaining reimbursement for their MRD test. This will be particularly relevant as we launch our NeXT Personal LDT offering. Additionally, to support our new diagnostic business, we will be incorporating FDA compliant protocols within our new facility, which we expect to move into within a year or so. To build a strong clinical diagnostic business, we believe it is vital to collaborate with world-class medical institutions. To that end, we recently announced a collaboration with the Mayo Clinic. This partnership establishes us as a preferred provider to the Mayo Clinic for clinical diagnostic research sequencing and analysis services using our NeXT Dx Test, particularly in the area of immuno-oncology. Furthermore, the Mayo Clinic will utilize aggregated de-identified patient data for research that may lead to the development of new and improved treatments and systems that will ultimately benefit cancer patients. We’re excited about the opportunity to work with the esteemed Mayo Clinic as we focus on helping cancer patients live better and longer lives—a mission and vision that we both share. Although we have work to do, we believe we will be well positioned for entry into the clinical diagnostic market with our comprehensive NeXT Dx test and a planned LDT version of our NeXT Personal test. I’d now like to update you on the population sequencing aspect of our business. In September, we received a task order from the VA MVP for approximately $10 million. Although this is less than in pre-COVID-19 years, we believe that the VA MVP remains committed to the program, which has been underway since at least 2011. Since early 2020, the VA has managed a significant influx of COVID cases, contributing to COVID vaccine clinical trials, vaccinating millions of veterans, and launching research initiatives related to COVID. We believe this contributed to them deferring an expected 2021 sequencing RFP, extending our work with the task order we just received. I am proud to say that we have continued our strong execution over the last 1.5 years during the COVID pandemic. Since it began, while dealing with consumable shortages, we implemented more rigor and focus around our supply chain, which has kept us in a good position to continue driving revenue growth. In summary, we continue to execute extremely well in growing our oncology revenue. Customer adoption of NeXT has been excellent, and our pipeline of compelling new products is robust. We believe we have the capital required to invest in our growth initiatives, putting us in a strong position for both near and long-term growth. With that, I will now hand it over to Aaron for our financial results.

Thank you, John, and good morning, everyone. We had another great quarter and achieved a new record revenue level for oncology. During my prepared remarks, I will provide details about our financial results for the third quarter of 2021, and our guidance for the fourth quarter and the full year. Total revenues for the third quarter of 2021 were $22.3 million, up 3% from $21.7 million for the prior quarter, and up 12% from $19.8 million for the same period of the prior year. Aside from the VA MVP, biopharma and all other customers accounted for revenues of $8.6 million in the third quarter, representing a 5% sequential increase and a 50% increase over the same period of the prior year. This was our fourth consecutive quarter with a year-over-year increase of more than 50% in non-MVP revenue and highlights a couple of key points. First, customer orders that we have won over the past 1.5 years are converting to revenue. Second, the new order amounts continue to exceed the revenue reported each quarter, increasing our backlog. This gives us confidence that our biopharma revenue will continue to grow in the future. Currently, our biopharma revenue is primarily from tissue samples. As we ramp up our liquid biopsy offerings, we expect this to accelerate growth due to the multiple time points or, in other words, the number of tests per patient. For the third quarter, the VA MVP revenue of $13.7 million was higher by 1% from last quarter and was 3% lower compared to $14.1 million for the same period of the prior year. The VA MVP unfulfilled orders were $12.9 million at the end of the third quarter. Based on current estimates, we expect the unfulfilled orders to convert to revenue during Q4 of this year and Q1 of 2022. Gross margin was 36.2% for the third quarter compared with 37.7% for the prior quarter and 26.9% for the same period of the prior year. The year-over-year increase of 930 basis points was primarily due to operating leverage from the 50% increase in biopharma and non-MVP volume, customer mix, and lab efficiency improvements. Over the next couple of years, we do expect some gross margin variability due to headwinds from investments in new capabilities, such as dedicated production lines for FDA-approved offerings, running diagnostic tests, while we work to increasingly secure reimbursement, adding more capacity, expanding in China, and others. Long term, we expect our gross margins to increase as we achieve scale and as our oncology revenue becomes a larger portion of total revenue. Operating expenses were $25.8 million in the third quarter compared with $15 million for the same period of the prior year. R&D expense was $13.6 million in the third quarter compared with $7.2 million for the same period last year, and SG&A expense was $12.2 million in the third quarter compared with $7.8 million for the same period last year. The increase in R&D expense was for new product development and the ongoing construction of our clinical and medical infrastructure. The increase in SG&A was due to commercial expansion, continuing to enhance our infrastructure, and obligations associated with being a public company. The net loss for the third quarter was $17.7 million compared with a net loss of $9.5 million for the same period of the prior year. The net loss per share for the third quarter was $0.40, and the weighted average basic and diluted share count was 44.5 million compared with the net loss per share of $0.27 and a weighted average basic and diluted share count of 35.5 million for the same period of the prior year. Now on to the balance sheet. We finished the third quarter with a solid balance sheet, holding cash and short-term investments totaling $305.2 million. In the third quarter, we used approximately $23.7 million of cash due to net loss, working capital needs, and capital equipment purchases. We expect our full year 2021 cash usage to increase from the mid-$40 million range in 2020 to approximately $85 million due to our investments in numerous growth initiatives. Now I’d like to turn to guidance. We continue to drive oncology revenue growth through our pharma partnerships and the adoption of our NeXT platform. Our backlog in this area has increased significantly and gives us confidence about our future potential growth. For Q4 of 2021, we expect total company revenues to be in the range of $20.2 million to $20.4 million, and we expect biopharma and all other customer revenues, excluding the VA MVP, to be in the range of $12.5 million to $14.5 million, representing a year-over-year growth rate of approximately 77% at the midpoint. Net loss is expected to be in the range of $22 million to $23 million and the weighted average basic and diluted share count is expected to be approximately 45 million. For the full year of 2021, we expect total company revenues to be approximately $85 million, and we expect biopharma and all other customer revenues, excluding the VA MVP, to be in the range of $37 million to $39 million, up from our prior guidance of $34 million to $35 million—an annual growth rate of 69% at the midpoint. Net loss is expected to be in the range of $67 million to $68 million due to the increase in expenses, and the weighted average basic and diluted share count is expected to be approximately 45 million. We plan to provide 2022 full year revenue guidance during our next earnings call when we report our fourth quarter and full year 2021 results. Now, I will turn the call back over to the operator to begin the Q&A session.

Your first question comes from Tejas Savant with Morgan Stanley.

This is Neel Ram on for Tejas Savant. Just had one question on the MVP. So now that you’re out of the Permian period, has there been any recent dialogue with the VA regarding the potential for another task order looking at March 2022?

Yes. This is John. Thanks very much for your question this morning. So we haven’t yet. I think it’s a little early for that. In general, the VA would look at a new request for proposal. Historically, that would be something we’d start to see activity on in May or June of next year, if they were going to do something for the next fiscal year. I haven’t heard anything else other than that.

Got it. And one other question, and this is related to your comments on consumables. Can you provide us with some color on how you’re managing supply chain disruptions? And any initiatives to manage inventory while working through backlog in 2022? Do you foresee this having any impact on gross margins?

Yes. This is John. I think we’ve commented that in prior quarters, actually starting back in early 2020, when we started to see the pandemic ramping up, we invested a fair amount in additional inventory. It wasn’t necessarily a huge dollar amount, but it was a lot of physical material, because we know that many things that can slow you down or become problematic are small, low-cost items like plastic pipette tips. So we had a, frankly, a wall of boxes of pipette tips and other items like that to ensure we didn’t run out. We’ve been able to continue production. We have seen issues where the shortage of lab-qualified plastic has caused delays from some of our reagent suppliers because they have the reagent but don’t have a bottle to put it in. We’ve been navigating around that. In general, we’ve increased our safety stocks substantially, and we’ve been very active from a purchasing standpoint. So we’ve been able to stay on track, but it’s something we’ve had to spend a lot more time and effort on. So far, fingers crossed, but it’s been going well, and we’ve kept up production each quarter. But it’s definitely a very active area of focus.

Got it. That’s it for me. Thank you.

Great, thanks.

Your next question comes from the line of Kevin DeGeeter with Oppenheimer.

Hey, great. Thanks. Good morning. Maybe just two quick ones from us. As we think about 2022 and beyond in terms of R&D spend and investments in the build-out for clinical diagnostics, should we expect a need for somewhat larger clinical trials around either NeXT Personal or MRD or kind of some of the other clinically oriented diagnostic tests to support reimbursement in a commercial model?

I think that given the performance of the Personalis product and the fact that it’s, in some ways, breaking new ground, it will make sense for us to conduct clinical studies that demonstrate that. I’m not sure that will be required to achieve initial reimbursement, but we do expect studies like that, and that's part of the reason that we’re partnering with the Mayo Clinic. I mean, you almost can’t imagine a better place to work with than the Mayo Clinic. They have about 12,000 cancer patients per year, covering almost every type of cancer. I think they will be a terrific partner in that, and I expect it will help us conduct studies like that efficiently and expeditiously. But yes, we look forward to working with them, and I think we’ll have other partnerships with other leading medical centers that we’ll be able to announce over time as well.

And can you provide an update on the company’s China lab expansion and FUS biopharma? I guess, if you want to comment on POPSEQ as well. But specifically, how is the build-out of the China lab going?

Yes. The lab build-out has gone well. We have a good team there now. We’re beginning to process non-customer samples just to demonstrate that we can achieve the same results in Shanghai as we do in Menlo Park. A key thing to understand about the China area is that we’ve received some orders from large international pharmaceutical companies, where about 95% of the value of the order will be processed in our lab in California and only about 5% in Shanghai. However, being able to complete the part in Shanghai and sign up to deliver the identical product has been instrumental in us receiving those orders. If you look at revenue generated in the Shanghai lab, it will take some time to grow and will likely be relatively modest in the early period. However, that doesn’t mean it isn’t having a material impact on our overall results because it helps us win these international clinical trials where some recruiting sites have to be in China. I hope that helps you. We're receiving a lot of positive feedback from larger pharmaceutical companies that operate in multiple countries simultaneously, and where China is important for them.

Great. Thanks.

Great, thank you.

Your next question comes from the line of Patrick Donnelly with Citi.

Hey, guys. Thanks for taking the questions. Maybe one of the oncology orders, obviously, encouraging traction there. I know when you spoke about the VA a couple of months ago, you mentioned growth expectations for 2022. Has the momentum increased since then? I mean, again, clearly, the numbers came in really strong. 4Q, it doesn’t feel like you need a whole lot of orders to hit the numbers you talked about, but I would love to discuss the setup there and how you’re feeling about the numbers?

Yes. We’re feeling great about Q4. You saw us predicting now with the new guidance at the midpoint that quarter-on-quarter growth in our oncology business would be 57%. That’s a strong ramp, 77% year-on-year. So I think we’re feeling very confident about that. These are things that have been building momentum for some time. We have several large pharmaceutical companies that have really scaled up rapidly for us. Over time, we had expected that the oncology business would become the largest part of our business relative to population sequencing. Interestingly, the way this has played out with the orders received from the VA was lower than we had anticipated for this year. Conversely, the orders from the pharma side have been almost a tidal wave, balancing each other out to some extent. I think we're turning that corner sooner than we had anticipated, and it's a good place to be in. We're excited about the growth of our cancer business, which is the biggest part of our company for the future and an enormous available market.

To elaborate a bit more on that, Patrick, so if you look back 1.5 years to two years ago, a large order for us was a couple hundred thousand dollars. At this time, we had significant concentration with just a couple of large pharmaceutical partners. If you look at the third quarter, we had three times the new orders come in compared to revenue reported. The mix of those orders included several customers with multi-million dollar orders as well as customers with hundreds of thousands of dollars of orders. In terms of the penetration that we’ve aimed for over the last few years with the adoption of the NeXT platform, it’s working. We have most of the top 10 pharmaceutical companies as our customers today. Our focus now is on deeper penetration with all of them, and we believe we have a long way to go. We're very excited about where we stand today. Moving into the fourth quarter and next year, while we’re not providing guidance for 2022 yet, we are very confident we can grow at least 50% in 2022 due to all the order traction we've seen thus far.

That’s really helpful. Thank you, Aaron. And maybe kind of following up on that, you talked about the VA. It sounds like your expectation, given the backlog, is we should assume it’s largely completed by Q1. Beyond that, should we just model essentially nothing? Is that kind of the message going out? I just want to ensure we’re thinking about the model correctly for next year?

Yes. Regarding the VA MVP, we have enough backlog right now that will be fulfilled in Q4 and into Q1. The RFP process, as John mentioned, would come out in the summertime. For the second, third, and fourth quarters, from a modeling standpoint, it's safe to assume zero as a conservative approach until we win the next contract in the summer. We’ve been good partners for nearly a decade, and we are confident that when the RFP process comes, we’ll secure the contract, but we lack information regarding the size or scale of it.

Very helpful. Thank you, guys.

Sure. Thanks, Patrick.

Your next question comes from the line of Arthur He with H.C. Wainwright.

Hi, good morning, everyone. This is Arthur in for RK. Thank you for taking my questions. So I believe, if I recall correctly, Aaron, you mentioned that about 50% of the oncology business comes from tissue biopsy. Could you give us more detail on new orders in terms of the mix of tissue and liquid biopsy? How is the internal strategy directed toward increasing the liquid or tissue biopsy business?

Yes. I want to clarify that we didn’t say 50% of the business came from liquid biopsy. What we meant was that the growth has been substantial, but most of the business we’ve had to date has been from tissue. We’ve made great progress over the last couple of quarters with orders for liquid biopsy and our exome-scale liquid biopsy. Moving forward, we see significant opportunity for us to scale with liquid biopsy, both our exome product and MRD NeXT Personal, which will be coming out next month. As of now, we have very little liquid biopsy business. However, we expect that to change rapidly.

Okay, I see. Are there any trends you observe in the new orders regarding mix?

This is John. I want to highlight that we see customers ordering both of our products together. Some companies that lack a tissue product often present liquid biopsy as a substitute, but we believe each provides different information and is valuable on its own. For instance, we recently highlighted a customer that ordered both liquid biopsy and tissue biopsy for a series of clinical trials they’re conducting, with multiple time points considered for each. With tissue biopsy, we can examine aspects like RNA and immune cells that have penetrated the tumor, which aren’t detectable with liquid biopsy. However, liquid biopsy offers an easier way of gathering multiple time points. Therefore, we encourage our customers to utilize both, as they complement each other well. Thus, we think we will observe increased usage of both.

Okay. Thank you for the insights.

Yes, thank you.

I’m not showing any other questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

Thank you.