Personalis, Inc. Q2 FY2022 Earnings Call

Good day, and thank you for standing by. Welcome to the Q2 2022 Personalis Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Caroline Corner, Investor Relations. Please go ahead, Caroline.

Thank you, Operator. Welcome to Personalis’ second quarter 2022 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 historical facts should be considered forward-looking statements within the meaning of US securities laws. For example, any statements regarding trends and expectations for our financial performance this year and longer term, 2022 cash use, cash runway, the timing for initiating clinical revenue from our new facility, new orders, products, services, technology, clinical and regulatory milestones, and our market opportunities and business outlook. 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, including the risk factors described in our 10-Q for the second quarter of 2022 to be filed today. Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release for the second quarter 2022 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 5 PM Pacific Time today. Now, I'd like to turn the call over to John for his comments on second quarter business highlights.

Thank you, Caroline, and good afternoon, everyone. I'm pleased with our progress this quarter as we drove growth from our oncology business by 74% over the same period last year. This reflects increasing demand for our highly differentiated and comprehensive cancer tests. Our pharmaceutical customers are increasingly seeing the value of our platform, and they are incorporating it in their clinical trial designs right from the start. In fact, approximately two-thirds of our backlog were orders received for which we are awaiting samples from prospective trial patients. Prospective trials are conducted with current patients who are being followed over time, whereas retrospective studies are based on patient samples collected in the past. In addition, we remain focused on preparing the company for success in the clinical diagnostic market, which I will highlight later. Our customer base continues to broaden. More than 70 customers have now ordered services using our NeXT Platform, including most of the top 10 global pharmaceutical companies as measured by their annual revenues. We are also in discussions with several potential pharmaceutical customers about NeXT Personal, our MRD test, and our funnel of business opportunities continues to expand. We expect biopharma orders for NeXT Personal to ramp throughout the remainder of this year with the potential for significant revenue acceleration in 2023 and beyond. Our NeXT Platform provides biopharmaceutical customers with the most comprehensive analysis of tumor burden and biomarker identification available today, to provide a better understanding of each cancer patient's genetic profile. We also believe that tissue and liquid biopsies together can provide a more complete view, leading to optimal therapy and treatment decisions. Our tissue and liquid biopsy-based offerings provide data on all of the approximately 20,000 human genes, a breadth and depth that notably differentiates us from competitive offerings. Tissue samples give us access to RNA, which can indicate certain tumor drivers, and to the immune cells, which may have infiltrated a patient's tumor and can indicate therapy response. By analyzing liquid biopsy samples, we can provide information about a patient's tumor across multiple time points from small blood samples. NeXT Personal has been optimized for maximum sensitivity, particularly for when the amount of tumor DNA and blood plasma is very low, such as in early-stage cancer after surgical resection or in patients with a complete response to therapy. We believe that the earlier you can detect cancer recurrence, the better your odds of beating it. This simple concept has driven intense efforts to improve cancer diagnostics. Next-generation sequencing has proven transformative in this respect, enabling highly sensitive detection of fragmented tumor DNA in blood plasma. We have focused on what this technology can do for the detection of molecular residual disease, MRD, the detection of very few cancer cells that have so far survived therapy and persist below the detection threshold of conventional technologies. But while these advancements are cause for excitement, caring for cancer patients requires more than early detection of recurrence; it also dictates data for long-term management. Our NeXT Personal design also provides that information. Even when a tumor is caught early and has been successfully eliminated, survivors are at a substantially increased risk of developing secondary cancers. This is because treatment rarely addresses the underlying cause of the malignancy. NeXT Personal has been designed to look for both recurrence of a prior cancer and the possibility of a new cancer. With more than 20 million cancer survivors in the United States alone, there's a significant population in need of ongoing detection and careful, active long-term management. In recognizing the fast pace of technological innovation, Personalis’ ethos has always been to build for the future. This ethos drove us to develop NeXT Personal, one of the world's most sensitive MRD assays, which can detect circulating tumor DNA with 10- to 100-fold increased sensitivity relative to contemporary tests. The NeXT Personal wasn't built just to detect cancer recurrence as early as possible; it was built to help cancer survivors actively defend their health by tracking both relapses and secondary tumors. The NeXT Personal platform is built to integrate custom content based on each patient's individual tumor, as well as fixed content that's common across tumor types. By capturing such a broad swath of data, NeXT Personal raises critical molecular information that may guide therapeutic decision-making. Our objective is to provide oncologists with information needed for them to advise on the optimal course of action for patient treatment. NeXT Personal, therefore, provides DNA sequencing coverage of variants which may indicate drug therapy options, response to therapy, or emergent resistance to therapy. We consider this approach not just tumor-informed, but comprehensively tumor-informed. To that end, we have recently been issued an additional US patent for our novel methods for detecting molecular residual disease, MRD, and recurrence by using whole genome sequencing of a patient's tumor to identify variants with a personalized liquid biopsy assay. I am pleased that our team has been recognized for our innovation with the granting of this new patent. In addition, we announced yesterday that we have filed a lawsuit against Foresight Diagnostics for patent infringement in the US District Court for the District of Colorado, where Foresight is based. The lawsuit is based on this new patent along with two other US patents issued to Personalis. These three patents span two separate patent families which claim priority back to 2013 and 2016, respectively. While we will not be discussing any further details regarding this litigation in today's call, I will say that as we indicated in our press release yesterday and our recent blog post, Personalis is a pioneer in the field of leveraging whole genome sequencing for medical applications. We have invested hundreds of millions of dollars in research and development across a broad array of disciplines since the company's founding over a decade ago. And I can tell you that we stand firm in our resolve to protect that investment and our leadership position in the field. We'd now like to comment on our recent progress on some of our planned milestones regarding our clinical diagnostic efforts. Although we have slowed hiring in general, we are selectively hiring staff with clinical and medical experience within a diagnostic setting as we prepare for our clinical launch. In support of our new diagnostic business, we're also incorporating clinical protocols in our new facility, and we remain on target to begin moving in during late Q3, conducting clinical qualifications during Q4, and initiating clinical revenue from our new facility in early 2023. We are also making progress to complete the validation study for our NeXT Dx test, which is our tissue-based diagnostic offering based on our NeXT platform. We expect to use this validation data to apply for New York State regulatory approval and to submit to the Palmetto MolDx technology assessment process later this year, with the aim of receiving a favorable reimbursement ruling from MolDx in early 2023. Our medical affairs team continues to forge relationships with world-class medical institutions. These relationships are critical as the cancer centers of excellence set the standard of care. We're in discussions with multiple institutions and will provide further updates in the future. With all of our progress on the mentioned milestones to date, we expect to be well positioned for entry into the clinical diagnostic market using our comprehensive tissue-based NeXT Dx test, and we expect to begin selling a small volume of these tests to oncologists before the end of this year. In addition to NeXT Dx, we're also planning a Laboratory Developed Test, or LDT version of our MRD test, NeXT Personal, and expect to complete this milestone in 2023. We expect clinicians who begin using our NeXT Dx test may later also use our NeXT Personal test since the two can provide complementary information. We expect that the path to reimbursement for our NeXT Personal LDT will also begin via assessment by the Palmetto MolDx program. Recently, we added Lonnie Shoff to the Personalis Board of Directors, and she brings extensive clinical diagnostic experience from her executive roles at Thermo Fisher and Roche Diagnostics. Welcome, Lonnie. Finally, I want to briefly comment on the exciting wave of breakthroughs in DNA sequencing technology that have been announced this year and what it could mean for Personalis. We have been an early access customer of Ultimate Genomics, for example, which is at the forefront of realizing the $100 genome. Most Personalis products are large scale, using either deep exome or whole genome sequencing. We built our platform expecting that the throughput and cost of sequencing will decrease over time. As that happens, and because of the size of our platform, we think we can benefit more than other companies whose products may use much less sequencing. New sequencing platforms focused on high throughput at lower cost potentially give us opportunities to reduce the cost of our large assays. In summary, our team continues executing on our strategic priorities and growing our oncology business despite some economic headwinds that Aaron will comment on. Customer adoption of our next products has been excellent, and we continue to drive further adoption and increased penetration with new and existing customers. We have compelling products and pipeline efforts for both biopharma and clinical diagnostic test markets. And we have a strong balance sheet, positioning us 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 afternoon, everyone. During my prepared remarks, I will provide detail about our financial results for the second quarter of 2022 and guidance for the full year. Total company revenue for the second quarter of 2022 was $18.2 million. Biopharma and all other customers, excluding the VA MVP, accounted for revenue of $14.2 million in the second quarter, a 74% increase over the same period of the prior year. The year-over-year increase in oncology revenue was driven by the continued adoption of our NeXT platform, which accounted for more than 75% of the oncology revenue in the quarter. For the second quarter, the VA MVP revenue of $4 million was 70% lower compared with $13.5 million for the same period of the prior year, and the decline was consistent with our expectations. As of the end of the second quarter, we have fulfilled all of our VA MVP backlog. Gross margin was 23.5% for the second quarter compared with 37.7% for the same period of the prior year. The year-over-year decrease of 14.2 percentage points was primarily due to the expected underabsorbed overhead costs from the 70% lower revenue volume from the VA MVP and an increase in expenses to support our growing oncology revenue. Within our production laboratory, we used more direct materials and sequencing equipment capacity for the VA MVP whole genome samples, while our oncology business requires a higher proportion of labor and overhead expenses such as direct and indirect labor, lab supplies, facility footprint, and other related costs compared with the VA MVP. Over the next couple of years, we expect gross margin variability due to headwinds from lower VA MVP volume, investments in new capabilities such as dedicated production lines for liquid biopsy offerings providing diagnostic tests while we work to increasingly secure reimbursement, expanding in China, adding our new facility, and others. However, we expect our gross margins to increase longer term as we achieve scale by growing our oncology revenue. Operating expenses were $32.2 million in the second quarter compared with $23.1 million for the same period of the prior year. R&D expense was $16.3 million in the second quarter compared with $11.7 million for the same period last year, and SG&A expense was $15.9 million in the second quarter compared with $11.4 million for the same period last year. The increase in R&D expense was for new product development, hiring employees to build our clinical and medical infrastructure and sample test expenses for clinical validation work. The increase in SG&A was due to commercial expansion and continuing to enhance our infrastructure. Net loss for the second quarter was $27.5 million compared to a net loss of $15 million for the same period of the prior year. The net loss per share for the second quarter was $0.60 on a weighted average basic and diluted share count of $45.6 million compared with the net loss per share of $0.34 and a weighted average basic and diluted share count of $44 million for the same period of the prior year. Now on to the balance sheet, we finished the second quarter with a strong balance sheet, with cash and short-term investments of $233.5 million. In the second quarter, we used $33.1 million of cash due to the net loss, working capital needs, and capital equipment purchases. We continue to work on extending our cash runway as far as possible. And as of the end of the second quarter, we reduced our 2022 cash usage estimate to approximately $125 million, down from $140 million at the beginning of this year. This amount includes a one-time investment of approximately $40 million for the construction and fit of our new facility, and this amount is net of $15 million for tenant improvements from the landlord. We are managing and investing our cash prudently and have two years of cash on the balance sheet. We have invested in many initiatives since our IPO three years ago, and believe several of them are very close to generating revenue. Now, I'd like to turn to guidance. During the first half of this year, our revenue was impacted by a slowdown of customer sample shipments to us due to COVID. We, like our peers, have also seen slower and reduced patient enrollment for clinical trials. With recession concerns, we are also seeing customer orders slow down a bit. Given that more than half of our biopharma work is now for prospective clinical trial projects, the delayed and reduced patient enrollment is having a bigger impact on their near-term revenue than before when most of our business was for retrospective projects. It is not entirely clear when patient sample shipments to us will accelerate again. But given that our backlog is healthy, we are optimistic about our longer-term revenue growth opportunity. For the full year of 2022, our guidance is unchanged, and we continue to expect total company revenue to be in the range of $62 million to $67 million, and we expect oncology revenue from biopharma and other customers to be in the range of $55 million to $60 million. Net loss is expected to be in the range of $110 million to $115 million. Now, I will turn the call back over to the operator to begin the Q&A session.

Thank you very much. At this time, we will conduct the question-and-answer session. Our first question comes from the line of Tejas Savant with Morgan Stanley. Tejas, your line is now open.

Hi. This is Neil on for Tejas. Thanks for taking my question. Just to get the ball rolling. Can you speak to some of the month-over-month trends you've been seeing as far as delays on the prospective trial side of things? And any high-level color on how you're thinking about utilization heading into the second half?

Yes. So, this is Aaron. Hi, Neil. In terms of what we're seeing month-over-month, we have been seeing some slowdown since the beginning of this year, and it's continuing right now, primarily because of the summer months we're heading into here. During the month of July, we have seen some slowdown. And it's our estimation that we'll continue to see this through the month of September.

Got it. Thank you. And how about in the Shanghai Lab, how are operations progressing there? I know you mentioned a slowdown due to COVID-driven delays in the first quarter. Do you see any foreseeable risk in the second half as well?

Yes. So just to be clear, Neil, we don't have any revenue being produced from our Shanghai operation just yet. We're going through internal lab qualification. Shanghai was closed down for about three months due to the lockdown that they had several months ago. For the last couple of months, our employees have been back in the lab, and we're going through internal qualifications. We expect to get through these protocols through the next month, month and a half or so, but then expect to begin working with our first customer from whom we have orders, and we expect to maybe realize or recognize a very small amount of revenue later this year in the fourth quarter ramping in 2023, obviously.

Okay. And then, any comments on how the partnership with Natera is progressing, and how we should think about that heading into 2023?

Yes. This is John. I think the partnership with Natera has been going quite well. I think the things that we do are quite complementary. Personalis has a lot of experience in sequencing difficult FFPE samples from all different kinds of cancer, and Natera has years of experience doing cell-free DNA sequencing through their non-invasive prenatal testing and so forth. So, having a combination where we do some of the upfront tissue sequencing from FFPE and then they do their Signatera test on the back end makes a lot of sense and gets out the strengths of each of the two companies. So that's revenue that's been growing for us, and I think a good relationship.

Great. And one last from me. So, just given some of the disruption seen with genetic testing peers, how are you thinking about these events in relation to the clinical long-term and the potential for winning any mind or market share?

Yes, this is John. I believe there has always been a challenge in accessing customers. When the pandemic began, we were quite worried about our ability to meet with them. However, we've managed to operate the business in a work-from-home mode for over two years, with very few in-person meetings. Surprisingly, we've become proficient in this approach, and in some situations, it has proven to be easier. In the past, scheduling a group meeting was often complicated with people frequently out of the office. But with a significant reduction in travel, especially for business, we've found it easier to connect with everyone, often using Zoom to gather groups. We're quite optimistic about moving forward. We've been effective in engaging pharmaceutical customers, and the new hires for our clinical sales team bring extensive experience and valuable connections in the industry. I believe they will have strong access to potential customers.

Great. Thank you.

Thank you. We will prepare our next question. Our next question comes from Max Masucci with Cowen. Go ahead.

Hi, this is Stephanie Iannetta on for Max. Thanks for taking my question. Aaron, appreciate the color you provided earlier on gross margin. In addition to the lower VA MVP revenues along with the growing oncology-related investments, were there any abnormal or non-recurring factors that impacted gross margin performance in Q2? And how should we think about the variability in gross margins for the coming quarters?

Yes, hi Stephanie. In Q2, the drop in margins to 23.5% was primarily due to under-absorbed labor and overhead costs, largely influenced by the lower VA MVP volume. We also utilized significant capacity in our lab for research and development, including new product testing and validation for study samples, which contributed to reduced volume in the second quarter and led to underutilization since those costs are charged directly to R&D. Additionally, most costs related to the VA MVP are variable, primarily direct materials, with fixed costs being mainly for the sequencers, equipment, and a small portion of the footprint. In contrast, the pharma segment is very labor-intensive with substantial overhead. As biopharma starts to ramp up, we expect an improvement in the gross margin profile over time, but currently, we are facing a considerable amount of underutilization.

Got it. Thanks so much for that additional color. Additionally, I know you've mentioned previously that you won't disclose specifics around forecast for material revenue. But given the large contribution from the previous quarter, is there any additional color or general guidance you can provide on how to think about the revenue contribution going forward? Would you still suggest looking at the average of recent quarters to forecast future contributions?

Yes, this is John. I believe the MRD area has significant growth potential. I cannot comment directly on the products from other companies; they will need to discuss their offerings themselves, and I believe they are addressing that tomorrow afternoon. Overall, this area presents enormous growth opportunities, and they are one of the early players in this field. Thus, it is reasonable to expect their business will keep expanding. We are willing to support them in this process, but they should be the ones providing details about the volume of their product.

Got it. Understood. And if I could squeeze in one more. It's good to hear that you are in early access as a customer in Ultima's Platform. Would be curious to how your experience with Ultima sequences testing, as you explore the performance of the platform that you are offering?

Yeah. This is John. It reminds me of the early days of Solexa before it became part of Illumina. These technologies are in their infancy. It's great to see them pursuing the $100 genome and pricing it at that level now. This is not just a future concept; they have it available. We've had the instrument in-house since January and have been experimenting with it across different applications. While I don't have specific announcements, I can say it's a very promising platform. However, it isn't a straightforward replacement for Illumina's platforms. It excels in some areas while underperforming in others. We need to identify the applications where it is especially suited. This was also true when we introduced the Solexa sequencers back in 2006 and 2007. At that time, there were doubts that we could replace capillary sequencing, yet it continued to thrive. New applications emerged because we introduced next-gen sequencing. I believe we'll see similar trends with the Ultima sequencer, enabling new applications that haven't been explored before, and I'm open to that. We view Ultima as an intriguing platform. Illumina has also mentioned their plans for the $100 genome and upcoming new chemistry next year; it's uncertain if that will require a new instrument. We're very interested in advancements in the Illumina platform as well. We will pay attention to their updates and are eager to be an early access site when they are ready to share more information.

Got it. Thanks so much for your color. And thanks again for taking my questions.

Thank you.

Thank you. Mike Matson with Needham & Company. You're next.

Hi, this is Joseph filling in for Mike. Thank you for answering my questions. I have one more regarding the backlog. I appreciate the insights you've provided. As we look ahead to the remainder of 2022, could you discuss the types of customers in the backlog, specifically the ratio of larger, more profitable pharmaceutical companies to smaller ones that may be struggling financially? Are you concerned about the possibility of smaller, unprofitable companies canceling orders in the future? Thank you.

Sure. Hi, Joseph, this is Aaron. So I'll take a shot at that and maybe just at a high level, so I won't give any specific backlog numbers, but just in general, we're doing business now with more than 70 customers on the NeXT platform. And so that's far different than three years ago when we had just a handful. And so, our customer base is far more diversified today than it was before. Having said that, large pharma is a bigger portion of our revenue. And so, therefore, more of the backlog is going to be weighted toward larger pharma. In terms of the smaller biotechs and biopharma customers, we do have a fair amount of business with them, and they are included in our backlog. In terms of some of those customers, due to the equity markets where they're at today, they've had some challenges in terms of burning capital and some might even be going out of business. So we have seen some of our backlog deteriorate from that. But I would say, where we're at today, the backlog is in a very healthy position compared to where we were a year ago, or even two years ago. And that gives John and I confidence that we can grow this business 50% per year as we go forward from an oncology revenue standpoint.

Okay, great. That's very encouraging. Thanks for that.

Sure.

Obviously, you guys did give some more information on the patent infringement case. I know you guys can't really comment on the case itself, but could you maybe just give a little bit more detail on the strength of the patents that you have? I believe they go back to somewhere around 2013, or could you maybe give any color about any previous cases that have been filed or litigated and maybe the result of those?

Yes, this is John speaking. You are correct. We hold several patents, with our earliest filings dating back to January 2013. These were submitted based on my prior experience at Solexa and other sequencing companies. I have been engaged in human genome work for nearly 40 years. Sequencing the first human genome felt like a monumental achievement. Then, with Solexa technology, we managed to sequence the first genome on our next-generation platform using just one instrument, which was remarkable. When we established the company, we relied on having some of the world's first genomes completed. We even sequenced my family's genomes and discovered the ability to phase them, setting us apart from others at that time. This initial experience with whole genome sequencing at the company's inception prompted us to explore further possibilities. Initially, obtaining someone’s complete genome sequence seemed to provide all necessary information, but we believed there was significant potential for improvement. We dedicated considerable effort to thoroughly understand the performance of full genome sequencing and how to combine multiple genomes for phasing. We also examined the integration of exome sequencing and the relationship between whole genomes derived from tissue samples and those from liquid biopsies. Genomes can change over time, particularly in cancer cases, and this can be observed in plasma samples. We recognized a substantial opportunity to expand on the whole genome approach, which also led to considerable business in sequencing whole genomes, enhancing our expertise. As sequencing platforms improved, we grew to become one of the largest laboratories globally, having sequenced over 150,000 genomes. Our management team comprises individuals with decades of experience in advanced sequencing at the genome level. This background positioned us well to file some early patents, which we did based on our extensive work in the field. Apart from this case, Personalis has not faced any other litigation; this is our only instance. Such legal challenges are common in this industry, as I've encountered previous litigation at other companies. We view this situation as a normal aspect of the field, and we feel it’s essential to defend our intellectual property, which is critical to our standing with NeXT Personal, where much of our differentiation stems from patents we filed early on. We aim to receive appropriate acknowledgment for that.

Yes. Okay. Absolutely. That makes sense. And then if I could just fire one quick one out in relation to the headcount in China. I believe you said last quarter that around 10 people have been hired. I guess just wondering if that number has changed? And should we expect a large uptick in staff, I guess, in 2023 when volumes are expected to start ramping?

Yes. So Joe, this is Aaron. The headcount in Shanghai is still in that ballpark plus or minus a few. We have not hired a significantly higher number than that. It's our anticipation to get through the next few months, get through early customer qualification here with what we have, prove things out. In 2023, we'll hire to support whatever that revenue need is, right? So as we receive more orders and we have more volume, if we need to add more variable capacity or capability in the form of labor, we'll do so. Other than that, we're trying to preserve capital to make sure that we can extend our runway. So we're going to be cautious in all areas.

Okay, great. That makes sense. Well, thank you guys for taking our questions and congrats on the quarter.

Thanks.

Thank you.

Thank you. Just queuing up our next question. Our next question comes from Jason Weaver with Citibank. Go ahead.

Hi, this is Lee speaking for Patrick and Jason. I was curious if you could discuss the progress on the NeXT Personal side. What milestones should we anticipate as we move into the second half of the year? Thank you.

Yes. I think in terms of NeXT Personal, this is John. I think we're seeing a lot of adoption there. Individual pharmaceutical companies that buy in toward the end of the year, some of the opportunities we're looking at are fairly large. But generally, pharmaceutical companies are not looking for us to talk about the individual cases. So, we may be able to comment on as the orders ramp more or less ideas of the scale of that and the uptake of the platform. I would say that if I look back to where we were three months ago, I think we've made a lot of progress on the interest side. People are beginning to realize the power of this, the scale of it. I think you'll see more as we go forward. We're working with a number of very high-end academic cooperators, and some of those we expect that we will be able to announce. I think there'll be some really good opportunities there. I expect that we'll have access to quite a few samples through that. That will lead to some pretty impressive data fairly quickly, because in some cases, the samples are already banked samples. So, I think as we have more and more data there, I think that will be something people will look to and see the potential of the platform, and that will lead to more and more uptake on the pharma side. I think the funnel of potential customers is large. Almost every large pharmaceutical company we've spoken to is intensely interested in this area, in particular because there's this opportunity to move cancer drugs from only late-stage patients now more and more into adjuvant treatment of patients. So this almost doubles the cancer patient population, which is an enormous change and opportunity in the pharmaceutical world. Tests like ours that could be involved in that kind of work. I think it's an enormous opportunity with pharma and then obviously, ultimately, on the diagnostics side.

Great. Thank you. Can you share how that turned out compared to your expectations? Also, what are your thoughts for the rest of the year regarding this? That's all from me. Thank you.

Yes, I believe things have turned out very well compared to our expectations. We always understood that what we've developed is significantly more advanced than what others have done before us, which means it sometimes takes time for people to recognize its impact. We experienced something similar when we first introduced next-generation sequencing; it was so advanced that it took a while for others to see how transformative it really was. People may start off curious but not fully grasp its potential. However, once they see the results from pilot studies, many have been truly amazed, leading to serious interest in substantial contracts with pharmaceutical companies. As Aaron mentioned, we anticipate an increase in orders this year and expect revenues, especially from exports, to rise next year.

To build on what John mentioned, three years ago we had only a few customers using the NeXT platform. Now, we have over 70 customers. In the second quarter, more than 75% of our revenue came from NeXT adoption. We believe our MRD offering is particularly sensitive, even more so than other similar products available today. As John pointed out, there's tremendous interest from the pharmaceutical sector. Our sales pipeline has expanded significantly in the past three to five months, and we expect a substantial number of orders later this year and into 2023. We are truly enthusiastic about the revenue potential in 2023. Currently, the majority of our revenue is generated from our tissue-based offering through NeXT. As we progress into 2023 and beyond, we plan to enhance our tissue offering with the MRD liquid biopsy, which will create multiple opportunities. This will significantly widen our total available market, and we are excited about the revenue prospects.

Great. Thank you.

Sure.

Thank you. Our next question comes from the line of Mark Massaro with BTIG.

Hey guys. Thanks for the questions, and I've been moving around the call tonight. So if you covered this, I apologize, but can you provide an update on NeXT Dx? That's your entry into the clinic, right? Are you on track to submit to MolDx? I think that's coming up soon, and are you still aiming to obtain Medicare reimbursement by the end of the year?

Yes, this is John. Thank you for being on the call. For NeXT Dx, we are largely on schedule. We anticipate having our initial sales personnel in place soon and will start attracting customers. Regarding MolDx, we aim to submit our application by the end of this year. If everything goes well, we expect to receive a positive reimbursement decision early in 2023.

Okay. Perfect. And then, I understand that the NeXT Personal is certainly gaining interest from biopharma. But maybe I wanted to just double-check to see where you're at in terms of the clinical launch. I think in the past, you've talked about the first half of 2023? And maybe can you just give us some expanded color on your path to reimbursement? In the last month or so, there were three significant MRD tests that received MolDx reimbursement. I think all of those developed the evidence to support that. I guess maybe just an update on where you are in terms of evidence development to secure reimbursement?

Yeah, this is John. Our expectation is that the first customers for NeXT Personal will be pharmaceutical companies, and we anticipate that this will be our largest revenue growth next year. While we haven't specified the exact timing in 2023, we do expect it to be available as a lab-developed test, which is certainly a priority for us. We aim to take this to MolDx, and we are working on a solid validation plan for that. Regarding evidence development, clinical validity will likely be key rather than the clinical utility of early detection, which is already well established for certain clinical indications that others have reimbursement for. We expect to demonstrate that we are at least non-inferior, but honestly, we anticipate being significantly better. We believe we will have strong validation to discuss with MolDx. A positive decision from MolDx could come in 2024, though we haven’t been very specific about that yet. We see this as a significant opportunity, and I also believe that pharma presents a substantial near-term opportunity as well, given the ongoing developments in that sector.

Okay. Awesome. And then one final question on MRD, the market leader, I think, looks at 16 variants, and aspiring entrants are looking somewhere between 40 and 80 or so. I think you're looking to track about 1,800. I guess, can you just comment on what early feedback you're getting from pharma customers about the size of monitoring 1,800 different variants? And maybe just what you're hearing? And are there any concerns about how to interpret this and what you're doing to kind of instill confidence that tracking more is superior?

This is John. We manage the complexities for our customers, so they don't have to analyze all 1,800 variants themselves. Our main takeaway is straightforward: we determine whether a tumor is present and its intensity, which is easy to grasp. Importantly, our sensitivity is significantly higher than other tests. This variance in sensitivity can be critical, especially since different cancers have varying growth rates, with tumor volumes possibly doubling in a few months to up to a year. Being 10 to 100 times more sensitive means we could potentially identify recurrences years earlier in some instances. As we gather and share clinical data from our collaborators, we expect the understanding of this to improve. The awareness is already there regarding sensitivity differences. Additionally, for recurrence detection and quantification, we assess nearly the same number of variants—that's a component of our fixed assay content, consistent across all patients. This comprehensive perspective aids in managing patients after a recurrence is identified, guiding treatment decisions and monitoring responses. In our earlier assessments of this field, we noted that the level of sequencing undertaken was surprisingly low, though it was an understandable initial approach. However, there is a wealth of information obtainable at a reasonable cost. For over five years, we've utilized high-end NovaSeqs and have collaborated with Ultimate Genomics, recognizing the imminent reality of the $100 genome. Our preparations are in place to handle extensive content, which ultimately provides more valuable insights for clinicians and pharmaceutical companies. We're aiming for a future where our testing integrates therapy selection with comprehensive data, all within a single MRD test.

That sounds great. Thanks so much for the color.

Great. Thank you.

Great. Our next question comes from the line of Derik De Bruin, Bank of America.

Hey, thanks for taking my questions. I've also been bouncing around, and Mark just took all the ones I wanted to ask. So I'll do this one. Can we talk preliminarily on what your sort of initial thoughts are in 2023? I mean, I know it's early, but there's a lot of moving parts. You're trying to manage OpEx. Any incremental color you can give us this time? You know, where the consensus estimates are? And just some general thoughts on capital raise and stuff like that? Just some general thoughts given that it's such a touchy topic these days?

This is Aaron. It's still early for us to provide specific guidance for 2023, but we can share some general insights. We aim to grow our oncology revenue by at least 50% year-over-year. Currently, we see no reason why this target isn't achievable. We're set to enter the clinical diagnostic market early in 2023 with a favorable reimbursement ruling, which will contribute to our NeXT Dx clinical revenue, though we can't determine the exact amount at this time. Biopharma has performed well for us, especially our tissue-based offerings, and we believe our MRD NeXT Personal will create further growth opportunities in 2023. China is also expected to come online this year, bringing moderate revenue, with one customer already placing orders and others evaluating our platform. It's uncertain how much revenue we'll see from China, but we anticipate some contribution. Regarding operating expenses and cash spending, we are currently being cautious. We've slowed hiring significantly after a period of growth, which has given us the capability to enter the clinical market. We still have a commercial team to support expansion in this area, and we will continue to build our reimbursement and billing teams in line with volume growth. As we start to see positive trends from the favorable reimbursement ruling, we'll expand accordingly, but we're mindful of our cash spending. Our objective is to extend our financial runway as far as possible. As for capital raising, I can't discuss that in detail right now. Given our current equity value, we don't see it as a pressing need. We're focused on maximizing our cash runway for the foreseeable future.

What you said on the call about the cash level too, is that by the end of the year, because the efforts to bring cost down also helped on that.

Yeah. So our cash usage in 2022 is expected to be about $125 million at this point in time. We've reduced it from $140 million just six months ago. If we can continue to reduce it, we will. Again, there's some one-time amounts in that $125 million; $40 million of it is for this new building, which won't repeat. So, when we get into 2023, our operating cash burn is somewhere in the $80 million to $85 million range. Obviously, if we can grow top line even faster, that will help us from a gross profit standpoint and pay for some of the investments we need to make.

One more item I'd add is that when we look at other companies, sometimes they'll talk about liquid biopsies as being a substitute for tissue biopsies. But actually, in our case, with the kind of products that we've developed, we have our whole NeXT Platform that's been built on tissue-based samples. Now we've been adding liquid biopsies; those are almost entirely additive. People are using those in addition to the tissue offerings, not instead of them. With all of the new things like NeXT Personal, that's all has the potential to be purely additive as opposed to being a new version of a product where we swap out the old one.

Great. Thanks for the detail there. Appreciate it.

Thank you.

Thank you. We have one more question. Our next question comes from the line of Arthur He from H.C. Wainwright & Company. Thank you.

Hi, good afternoon, John and Aaron. Most of my questions have been answered. I just wonder regarding the clinical diagnostics business, could you just give us more color on your interactions with the KOLs at the major cancer centers? Is there any pilot projects in place already for this business that we expect launching next year to try?

So this is John. In the diagnostic business, we are collaborating with several groups, including our ongoing project with UCSD that we've mentioned previously. We have also been working with a team at the Mayo Clinic and have other partners that we haven't disclosed yet. We are starting to receive samples and have begun processing them. While I don't have new names to share today, we are indeed making strides in sequencing samples, conducting analyses, and getting results. In the long run, this evidence development will enhance our credibility for customer adoption and reimbursement.

Thank you. I appreciate that and congrats on the quarter.

Okay. Thank you.

At this point, there are no more questions. So we want to thank you for your participation in today's conference. This concludes the program. You may now disconnect.