Good day, ladies and gentlemen, and welcome to the Personalis Fourth Quarter 2022 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, Caroline Corner, Investor Relations. Please go ahead, Caroline.

Thank you, operator. Welcome to Personalis’ fourth quarter and full year 2022 earnings call. Joining me on today’s call are Aaron Tachibana, Interim Chief Executive Officer and Chief Financial Officer; Chris Hall, President; and Rich Chen, Chief Medical Officer and SVP of R&D. 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 this year and longer term, cash runway, revenue expectations and timing, new orders, products, services, technology, the timing of data publications, clinical and regulatory milestones, the outcome and timing of reimbursement decisions, expectations for existing and future collaboration activities, cost expectations and our market opportunities, 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 special note regarding forward-looking statements and risk factors described in our 10-Q for the third 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 fourth quarter and full year 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 p.m. Pacific Time today. Now, I’d like to turn the call over to Aaron for his comments on fourth quarter business highlights.

Thank you, Caroline. 2023 is an exciting year at Personalis as we begin a new chapter in the company's story. Having built capabilities as a sequencing powerhouse and with several years as a trusted partner at many of the world's leading oncology companies, we believe we now have one of the most discerning technologies to both characterize and monitor cancer with the aim of driving a new paradigm for cancer management, guiding care from biopsy through the life of the patient. To seize the opportunities ahead of us, our leadership team has made three key changes in our strategic focus. First, we have defined a new strategy to win an MRD, starting with three high-impact indications for our highly sensitive tumor-informed liquid biopsy assay. NeXT Personal is particularly advantageous for detecting minimal residual disease. These indications are immunotherapy monitoring, breast and lung cancer. We will speak to this strategy in more detail in a few moments. But in short, our in-house commercial efforts in 2023 will be focused where our MRD offering shines most for detecting cancer recurrence at the earliest possible time, longer term with a broad utility of our technology when new partner and other cancer indications giving us access to additional pieces of the entire market, which could become more than $30 billion over time. Second, we have pruned our biopharma business to focus on profitability. Last month, we filed an 8-K explaining that we resized our employee base, reducing our workforce by approximately 30% and lowering payroll and other expenses by an estimated $20 million annually. After careful consideration and in line with our cash conservation objectives, we also decided to close our facility in China. While such restructuring is always difficult, we believe this puts us in a healthy financial position with a cash runway that is expected a few as through 2025. Also, it allows us to be even more strategic in providing compelling products and the highest level of service to key biopharma partners to drive clinical trial success, and that's an engine to power personalized cancer vaccine development, as evidenced by our recent announcement of the extension of our partnership with Moderna. Finally, we expect that the extension of our development timeline allows for sufficient time to achieve several critical milestones including launching NeXT Personal as an LDT for the clinical market as well as deepening the evidence and further validating the assays, ultra-high sensitivity, and clinical utility. This validation in turn lays the foundation for obtaining reimbursements and enables us to begin to ramp up test volume and subsequently clinical revenue. Now, I'll turn the call over to Chris to speak more about the strategies and the milestones that we will be tracking, and then I'll provide the financial results and guidance following his remarks.

Thank you, Aaron. Building upon the transition that Aaron has just laid out, we believe there are four key catalysts ahead, which will prepare us for rapid growth into 2024 and beyond. As we seek to grow profitable revenue, we will primarily focus on executing our winning MRD strategy. As such, our 2023 milestones are as follows. First, we expect to receive our first CMS reimbursement coverage decision before the end of Q3 of this year for our personalized, highly sensitive and ultra-comprehensive genomic profile offering NeXT Dx. We launched NeXT Dx to clinicians last year to help them find the most appropriate therapies for their patients. Our clinical sales and medical affairs teams have made solid progress in driving early adoption and booking additional revenue. We expect that a positive Medicare reimbursement decision will accelerate uptake and revenue growth and will also pave the way for success with our MRD offering. Second, we're on track to launch NeXT Personal Dx, the LDT version of our MRD offering into the clinic in the second half of this year. NeXT Personal Dx is designed to find MRD as simply stated as infinitesimal testable traces of cancer, allowing for earlier detection of recurrence, as well as to inform and enable therapy decisions and earlier intervention. As Aaron previously mentioned, our near-term focus will be on three indications where technology's high sensitivity has the potential to make a significant impact, IO therapy monitoring, breast cancer, and lung cancer. We believe our sensitivity can help overcome current challenges, such as distinguishing pseudo-progression from progression through imaging alone, assessing if therapy is working, and helping guide whether to continue, stop or switch to other options. We estimate breast and lung cancer alone represent almost 1 million cases for monitoring each year. In addition to the clinical launch of NeXT Personal Dx as we go through the year, we will also prepare the data and analytical packages for submission to MolDx in 2024, and we expect to obtain reimbursement for our first indication in 2024. Third, we will extend our Personalis inside strategy. Inside personal cancer vaccines were Personalis powering both design and manufacturing inside the government's population health program with the continuation of our support for the Veterans Administration's Million Veteran Program and importantly to our MRD strategy inside diagnostic products with partners with deep verticals, but who lack an MRD solution. For personalized cancer vaccines, for example, since 2016 Personalis has been the engine that has enabled several biopharma companies to develop vaccines for clinical trials. As Aaron noted, we recently announced we're continuing our strategic relationship with Moderna. Previously, our technology allowed them to progress through a Phase 2b clinical trial. We've been working with Moderna on all their clinical trials in cancer and the announced agreement extends our relationship to continue working with them, including their Phase 3 melanoma clinical trial, which is expected to begin this year. We're thrilled about this partnership and believe that our compelling technology and offerings can help other customers win in this rapidly emerging cancer therapeutics area. Fourth and finally, we're building and publishing the clinical evidence base to support our products and drive key indications. In 2023, we expect to generate data on IO indications with collaborators including Duke University, BC Cancer, UKE and UCSF. We have also recently partnered with Criterium and the Academic Breast Cancer Consortium to conduct a prospective clinical trial to validate the clinical performance of NeXT Personal to evaluate MRD and subsequent recurrence in patients with early-stage resectable triple-negative breast cancer and aggressive cancer with limited treatment options and we have work underway in lung cancer. We look forward to sharing our milestones as we go through the year. With that, I'll turn it back to Aaron.

Thank you, Chris. I will now provide detail about our financial results for the fourth quarter and full year of 2022 as well as guidance for the first quarter and full year of 2023. Total company revenue for the fourth quarter of 2022 was $16.7 million and decreased 90% compared with the same period of the prior year, which was expected due to the decline in VA MVP revenue. Oncology revenue which includes revenue from pharma tests, enterprise and other customers was $15.8 million and increased 3% over the same period as the prior year. The year-over-year increase in oncology revenue was driven mostly by the volume increase from Natera, which accounted for almost half of our revenue in the quarter. For the full year of 2022, total company revenue was $65 million and was above our previous guidance range of $63 million to $64 million. The total company revenue decreased 24% compared with 2021 due to the expected decline in VA MVP revenue. Revenue from our oncology business increased by 42% for the full year of 2022 compared to 2021, primarily due to the growth in test volume with Natera. Gross margin was 13.8% for the fourth quarter compared with 38.7% of the same period of the prior year. The year-over-year decrease of 24.9% was primarily due to the expected unabsorbed overhead costs from the decrease in revenue volume from the VA MVP, as well as an increase in expenses to support our growing oncology revenue volume and for our new facility. 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 some gross margin variability due to the fluctuating VA MVP volume, investments in capabilities such as automation of our production lines, providing diagnostic tests while we continue to increase our efforts to secure reimbursement, costs for our new facility, and others. Longer term, we expect our gross margins to increase as we achieve scale by growing our oncology revenue. Operating expenses were $34.4 million in the fourth quarter compared to $28.2 million in the same period due to the prior year. R&D expense was $16.6 million in the fourth quarter compared to $14.5 million for the same period last year and SG&A expense was $17.8 million in the fourth quarter compared to $13.7 million for the same period last year. The increase in R&D expense was from product development, building our clinical and medical infrastructure, and sample test expenses for studies in clinical validation work. The increase in SG&A was due to commercial and infrastructure expansion, costs for our new facility, and operations in China, which we are discontinuing. Net loss for the fourth quarter was $31.1 million compared to the net loss of $20.2 million for the same period of the prior year. The net loss per share for the fourth quarter was $0.67 and the weighted average basic and diluted share count was $46.3 million compared with the net loss per share of $0.45 and the weighted average basic and diluted share count of $44.8 million for the same period of the prior year. Net loss for the full year of 2022 was $113.3 million compared with the net loss of $65.2 million for 2021 and was within our previous guidance range of $111 million to $114 million. The net loss per share for the full year was $2.48 and the weighted average basic and diluted share count was $45.7 million compared to the net loss per share of $1.49 and a weighted average basic and diluted share count of 43.9 million for 2021. Now, on the balance sheet, we finished the fourth quarter with a strong balance sheet with cash and short-term investments of $167.7 million. In the fourth quarter, we used $25.1 million in cash due to the net loss, working capital needs, construction of our new headquarters facility, and capital equipment purchases. Our 2022 full-year cash usage was approximately $190 million, and we significantly reduced it from the original estimate of $140 million at the beginning of the year. 2022 was our peak year for cash usage due to the one-time investment in our new facility. Going forward, we expect our cash usage to decline each year as we pursue breakeven and eventually profitability. Now, I'd like to turn to guidance. A couple of months ago, we began rationalizing our biopharma business and pruning areas that were not profitable enough. In some cases, projects we took had very low gross margins and others had negative cash flow. We eliminated resources tied to these areas, including headcount cuts that were included within the 30% workforce reduction. We expect these actions to have an impact on revenue, and we estimate a reduction of approximately $4 million to $6 million in 2023 from removing these small and unprofitable biopharma accounts. However, we expect this decline to be more than offset by revenue growth in 2023 from NeXT personalized cancer vaccine projects and the small amount of NeXT Dx clinical revenue. Our full year guidance reflects these dynamics. For the full year of 2023, we expect total company revenue to be in the range of $68 million to $72 million with oncology revenue from pharma, enterprise sales, and other customers to be in the range of $59 million to $63 million. VA MVP revenue is estimated to be approximately $9 million and expected to be recognized during the first three quarters of the year. Net loss was approximately $103 million and cash usage of approximately $75 million, a reduction of $44 million from 2022. For the first quarter of 2023, we expect total company revenue of approximately $17.5 million. Revenue from pharma tests, enterprise sales, and other customers of approximately $14.5 million, revenue from population sequencing of approximately $3 million. Our revenue volume with Natera has ramped quickly over the last two years and was $26.6 million in 2022. We expect our previous run rates to continue through this year, as Natera has come to rely on our high-quality exome offering. However, as Natera has signaled, we do expect their volume with us to decline in 2024 and beyond, as they bring their laboratories in Austin, Texas online. We do expect that our many growth vectors will create year-over-year growth in 2024 even as Natera moves the business into their own lab. We look forward to updating you on our milestones as the year progresses. These milestones lay the foundation for accelerated growth; it's our key to enabling our vision of powering a new paradigm of cancer management with our technology. Thank you. Now, I will turn the call back over to the operator to begin the Q&A session.

Our first question will come from Tejas Savant with Morgan Stanley. Tejas.

This is Gabby on Tejas. Thanks for taking my question. So firstly, could you elaborate on your announced partnership with Moderna on the personalized cancer vaccine, with Phase 3 expected to start this year because this partnership represents a meaningful contribution for you as early as 2024? And just how are you thinking about this relationship long-term? Thanks.

Sure. Thanks for the question. In terms of our relationship with Moderna, we've been doing business with them now for the last six or seven years. We've been an integral part in their manufacturing process for personalized cancer vaccines. We're really excited about their success in the Phase 2 trial with having 44% efficacy in terms of improvement in patient results. In terms of what we do for Moderna, we basically handle a lot of the upfront genomic testing, provide them with this information so then they can go and customize therapeutics for each individual patient. In terms of when the Phase 3 trials will start, that's up to Moderna to talk about, it's not up to us to mention. In terms of the economics, we're not really allowed to say too much in that regard either. And we have been a great strategic partner for Moderna, and we're really excited about the relationship and where it goes. In terms of some of the additional news that came out recently and Moderna had their earnings release yesterday, they did talk about this breakthrough designation for the first vaccine that they have, and we're really excited about their success in that regard as well. Rich, did you have anything to add on the Moderna relationship?

No, I think that summarizes it well. I think we've had this long-term relationship, as Aaron has mentioned, with our ImmunoID platform, which is one of the best platforms for helping our partners identify new antigens, which are a key part of their personalized cancer vaccines. Our platform does an extraordinary job of identifying things like mutations, expression of those mutations, new antigen prediction, HLA, and other information that is needed for their personalized cancer vaccine process.

And then, could you provide an update on what you're seeing on the sample delivery side since last quarter? Are you still seeing these headwinds? And if so, when do you anticipate these headwinds to subside?

Yes, there are still some headwinds in terms of sample delivery. Our pharma customers are having trouble getting samples from their CROs for a variety of different reasons, like staffing and things of that nature. In addition, a lot of pharma and biotech companies have been watching the spend given the recession that's going on right now. And so, that's been a headwind as well in terms of some of this business.

Our next call will come from the line of Patrick Donnelly with Citi.

You have Lizzie on for Patrick. Thanks for taking my question. I guess, first on China. I was just wondering on the decision to discontinue there. Do you still see China no longer as a presence in the medium term or is this kind of temporary? I'm just wondering how you're thinking about that.

Thanks. Hi, Lizzie. Thank you for the question. In terms of China, so when we set out some three years ago and went out to China to go and expand business there, we had a lot of interest from pharma who wanted us to pursue that type of an opportunity and help support their global clinical trials. With regards to where things stand today, we've had to say no to some good ideas, right? We believe China is a good idea, but in terms of being able to get to breakeven and even profitability longer-term, it's going to be a headwind for us in terms of the costs and the investments required. And so unfortunately, we've had to say no to China. And in terms of the decision, that's pretty much the decision we came to. So at this point in time, we do see it as a permanent end to what we've started in China.

Understood. Thank you. And then just one follow up, I guess, how are you thinking about the cadence for gross margins this year? I think, in the last call you mentioned, it's possible that you were going to receive the NovaSeq X platform this month and Ultima maybe mid this year. I was just wondering how you're thinking about that and the potential impact margins maybe in the back half into 2024. Thank you.

Sure. In terms of gross margins, so the way we view this, 2022 is probably going to be the lowest point for gross margins because of a lot of the investments we've had to make in the severe decline in the VA MVP volume. As we go through 2023, we still have a fair amount of under absorbed labor and overhead, primarily due to bringing our new facility online. But the way we see it, our gross margins should increase as we get to the back half of 2023 as we bring the NovaSeq X plus online. They won't all come online at once. It's going to require us to do some testing and validation before we can move over customer samples onto that platform. So, I would say the savings this year is going to be minimal. We'll see the bulk of the savings in 2024.

Thank you. Our next call will come from the line of Joseph Flanagan with Cowen. Joseph.

This is Joe for Mac. So, your 2023 guide for pharma test enterprise sales and other is $59 million to $63 million. What are you assuming for core biopharma testing revenue excluding Natera partnership, and if not a concrete number, some growth commentary would be really helpful?

Yes. Hi, Joe. So, Natera was almost $27 million for us in 2022. So, in terms of what our guide contemplates for Natera, somewhere between $27 million and $30 million in 2023. So, the rest of it is the core pharma business.

Great. And then, in terms of the strategic review of accounts along with the reduction in workforce, would you consider these actions a result of the leadership change, and therefore sort of changing business model philosophy? And just how is that general search and transition going?

Well, in terms of the strategic review of these accounts, we had to say no to good ideas. And we're in a situation now where we do have to extend our cash runway, primarily because we see that we have the best and the most sensitive MRD tests in the industry. And in order for us to be able to get it to reimbursement and commercialize, we need time, right. And so, from that perspective, we had to go and look at areas where we were maybe not as profitable as we needed to be, and go and do some pruning and streamlining in that regard. Chris, do you have anything to add in that regard in terms of some of the pruning?

We just say, we step back and we said, when we built the milestones that we needed to achieve around publishing data that was pivotal than an MRD assay that was ultra-sensitive could change the paradigm for breast and lung cancer patients and IO therapy monitoring, we realized that 2024 would be a big year of publishing data '24 and '25 and stitching together reimbursement decisions and clinical adoption. And we really felt like we needed to focus on making that happen. And so, we've masked the Company's resources on doing that because we think there are two big opportunities that Personalis, one is changing the paradigm of cancer management met with an ultra-sensitive or MRD assay that has the kind of performance that we have. And we think we are uniquely suited to do that and to win the space. And secondly, we think we have a really unique opportunity to be in the forefront of the adoption of a brand new therapeutic vector and cancer, with these personalized cancer vaccines, and we've been a partner to many of the companies in the space. And clearly, we've announced the Moderna relationship, but you develop a personalized cancer vaccine with starting with the personalized information that our platform can uniquely provide, and so, those two key vectors powering that industry and being a part of that is that comes together and transforms the way cancer is managed. And secondly, being able to provide the data from the biopsy to through the patient's life and being able to define that, especially in these key indications that are massive and the patients are often and clinicians are often flying in the dark. We really decided as a company to focus in on making that happen and amassing our resources and execute. And so that's what we're focused on. And we stepped back from any customer relationships that weren't profitable, and in they weren't driving us towards that core, that core mission of being able to drive and participate in these key industries that are coming together and be at the centerpiece of them, which we think is really going to be profitable over time. That fair? Make sense.

Our next question will come from the lines of Vivian Bais with BTIG. Vivian.

I've been jumping around on calls here. So I apologize if this has already been covered, but I believe we previously indicated that might plan to commercialize any tests via partnerships and opt instead for Salesforce with a smaller footprint. So could you just elaborate on those partnership conversations on that front as well as the expected size of your Salesforce?

Chris, do you want to take it?

Yes, I'll take it. As part of the strategic resetting of the Company, we identified where our MRD assay can truly excel. We believe that in immuno-oncology therapy, our capabilities can significantly aid decision-making for both patients and clinicians. In breast cancer, for instance, the tumor content is often low, and many other methods struggle with the necessary resolution, including ultrasound. We see an opportunity to improve the management of breast cancer patients. Additionally, we are focusing on early lung cancer patients. Our plan is to develop the evidence and sales channels for these indications, and we will appropriately staff to succeed in these areas. We aim to build incrementally as we gain coverage and adoption. Instead of trying to establish evidence across all oncology applications simultaneously, we have chosen to concentrate on these three areas and are exploring partnerships with other indications that could benefit from our test and utilize another company's sales force. So far, these discussions have been positive, and we will keep you updated on our progress. There are several companies in the space focusing on various cancer indications that might not find it feasible to develop an ultra-sensitive MRD assay. Similarly, it doesn't make sense for us to create a sales channel for every one of those indications. By combining our test with those channels, we can approach the market uniquely while targeting the entire market opportunity, which is up to $30 billion. Our strategy focuses on where we can excel and partnering for the rest.

Perfect. Thanks so much for that, Chris. So I think you've also previously talked about a steady cadence of data readouts at ACR, ASCO, and ESMO coming up. So if you could just give us a flavor for what we should be expecting here? And any plans for head-to-head studies with other MRD technologies? Thanks.

Yes. Rich, you probably can jump in and do that.

Yes, thank you for your question. We have a strong pipeline of NeXT Personal studies currently underway with some leading cancer centers. The initial data we've observed strongly supports our claims about NeXT Personal's high sensitivity and its potential impact on patients, particularly in detecting cancer earlier and identifying lower levels of residual cancer compared to other technologies. We plan to start sharing this data at ACR and ASCO in 2023, along with other conferences later this year. As mentioned, many of these studies primarily focus on IO therapy monitoring in breast and lung cancer areas.

Operator, could you queue the final question, please?

Our next question comes from Arthur He with H.C. Wainwright. Your line is open.

This is Arthur on for RK. Thanks for taking my question. I have two questions both are on the diagnostic side of the business. So, one is regarding your MRD diagnostic test. What are other things you guys need to finish before you can launch the product?

Rich, you want to go ahead and take that?

Yes, Rich, you can jump into it.

Yes, we are nearing the launch of that product, which we plan to introduce in the second half of this year. Much of the fundamental technology has already been developed, so the focus now is on validating the platform with a broader range of samples for its intended use. It's a clearly defined process, and we anticipate staying on schedule for the launch later this year.

It sounds great. Could you provide an update on the status of the NeXT Dx reimbursement decision?

Chris, did you want to go ahead and take that?

Yes. We said that we've been committed to getting the test reimbursed this year. We've been stitching together and building that submission to MolDx and making sure all the data is concordant and driving that forward, and we're optimistic that's on that that'll happen and we feel like we're on pace.

So, it's more like first half or back half of the year.

Yes, I think we said by Q3 and as we walk through the guidance, certainly, in the middle-ish part of the year.

Thank you for your participation in today's conference call. This does conclude the program. You may now disconnect.