Earnings Call Transcript - PSNL Q1 2022

Operator, Operator

Good day, ladies and gentlemen. And welcome to the Personalis First 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, that is Caroline Corner, Investor Relations. Please go ahead.

Caroline Corner, Investor Relations

Thank you, Operator. Welcome to Personalis’ first 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 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, 2022 cash use, cash runway, new orders, products, services, technology, milestones, 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, particularly the risk factors described in our 10-Q for the first 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 first 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 p.m. Pacific Time today. Now I’d like to turn the call over to John for his comments and first quarter business highlights.

John West, CEO

Thank you, Caroline. Personalis continues to make progress on our strategic priorities with the aim of becoming a leading provider of the most comprehensive and actionable cancer genomic tests, and ultimately, enabling a new standard of oncology care that could help patients live better and longer lives. In Q1, we grew our oncology revenue by 53% over the same period of the prior year. Customer demand for our NeXT offerings continued to be strong and new orders were again higher than the amount of revenue reported for the quarter. Our pharmaceutical customers are increasingly seeing the value of our platform and incorporating it in their clinical trial designs from the outset, and approximately two-thirds of our backlog is for prospective clinical trials. In addition, we are making great strides in preparing our company for success in the clinical diagnostic market, which I will highlight later. Our customer base continues to broaden as it has over the last year and a half with more than 60 customers that have ordered services for our NeXT Platform, including most of the top 10 global pharmaceutical companies, which we define by their annual revenue level. In Q1, we received and began processing samples for our first customer order for our comprehensively tumor-informed liquid biopsy assay, NeXT Personal, from a large global pharmaceutical customer. As part of that pilot, the analysis of the assay sensitivity, among other capabilities, is very favorable. In addition, we are in discussions with several potential pharmaceutical customers about NeXT Personal’s features and feedback about our offering has been extremely positive. We expect new orders for NeXT Personal to ramp throughout the year, with a few million dollars or so converting to revenue this year, with the potential for a significant acceleration in 2023 and beyond. We believe our NeXT Platform provides biopharmaceutical customers with the most comprehensive analysis of tumor burden and biomarker identification available today, and 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, and 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 and to the immune cells that have infiltrated a 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. NeXT Personal, for example, has been optimized for maximum sensitivity, particularly for when the amount of tumor DNA in the blood plasma is very low, such as in early-stage cancer after surgical resection or in patients with complete response to therapy. The largest segments of this population are those who have or who 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 burdens that they can be difficult to detect. We realized early on that we may be able to overcome this liquid biopsy sensitivity problem by leveraging our considerable high-volume whole genome sequencing experience and to-date we have processed more than 150,000 whole human genomes in our laboratory. 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 tumors known mutations at up to 1,800 positions spread over the genome and being able to select cancer variants that have a low level of background sequencing errors, we gained tremendous sensitivity. Our internal data confirms this approach can result in analytical sensitivity down to approximately a few parts per million. This sensitivity advantage may translate into much earlier detection of a patient’s cancer recurrence. Once residual disease or recurrence is detected, questions may arise about how best to treat a patient. Our objective is to provide oncologists with the 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, and emergent resistance to therapy. We consider this approach not just tumor-informed, but comprehensive tumor-informed. And we have recently been issued a U.S. patent for our novel methods in this area. In addition, we have initiated several study collaborations with one of Europe’s leading cancer research centers to utilize NeXT Personal to better understand treatment response and resistance in patients with ovarian cancer and other cancer indications. Our ultimate goal is not just to detect cancer, but to provide key information over the entire course of the patient’s disease. We believe this can be better for patients, more informative for pharmaceutical customers, and represents a larger business opportunity. Personalis’ technological and scientific leadership has driven strong adoption of our offerings by pharmaceutical companies that use our services 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 that the combined market potential of these opportunities may become approximately $30 billion in the U.S. over time. I would now like to comment on our recent progress and some of our planned milestones regarding our clinical diagnostic efforts. First, we are continuing to build our regulatory, clinical, and reimbursement capabilities. We have been hiring employees with clinical and medical experience within a diagnostic setting and we will continue to hire and invest in this area. In support of our new Diagnostic business, we will incorporate FDA-compliant protocols within our new facility, and we remain on target to begin moving in during Q3 of this year. Second, we are making progress to complete a validation study for our NeXT Dx Test, which is our tissue-based diagnostic offering based on our NeXT Platform to apply for New York State regulatory approval. We are also on track to submit data to the Palmetto MolDx Technology Assessment Process and hope to receive a favorable reimbursement ruling from MolDx later in the second half of 2022. Third, we believe that it’s essential to work with world-class medical institutions. We have begun to test clinical patient samples using our NeXT Dx Test and are very excited about the opportunity to work with these renowned cancer centers, including the Mayo Clinic and the Moores Cancer Center at UC San Diego Health. If we achieve a favorable reimbursement decision for our NeXT Dx Test from MolDx, as discussed earlier, we may also recognize revenue in the future from some of these collaborations. Given the advanced nature of our NeXT Dx Test, we believe it is a good fit for high-end cancer centers, which have a dual mandate for both clinical care and research. We believe these collaborations will also provide us with access to a large number of cancer patients, which could be approximately 20% of the U.S. market. If these key opinion leaders have a positive experience using our tests, we are optimistic that this will create an intended halo effect, motivating broader use of our platform by other clinicians in the future. Fourth, we hired James Azzaro to lead our clinical commercial efforts to pursue business with healthcare systems and oncologists in the United States, which is our initial market focus. James has more than 20 years of successful commercial experience with companies selling oncology genomic tests to clinics, including Myriad Genetics and Guardant Health. Over the next 12 months, he will focus on growing our clinical test volume as we also work to secure reimbursement for both NeXT Dx this year and NeXT Personal in 2023. In addition, Personalis was recently accepted into the BLOODPAC Consortium, which indicates additional support for our ability to help lead and accelerate the development of liquid biopsy assays that can help cancer patients. Although we still have work to do, we believe that we will be well positioned for entry into the clinical diagnostic market using our comprehensive tissue-based NeXT Dx Test in Q3 of this year. In addition, we are also planning a laboratory-developed test version of our liquid biopsy-based NeXT Personal Test. We expect clinicians to begin using our NeXT Dx Test and they 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. We will continue to provide updates on our clinical diagnostic progress as we go forward. In summary, our team has done a terrific job executing on our strategic priorities and growing our oncology business despite the challenges from the ongoing pandemic. Customer adoption of our NeXT products has been excellent and we continue to drive further adoption and increased penetration with existing customers. We have compelling products for both the biopharma and clinical diagnostic test markets. We have a strong balance sheet, with capital to invest in our growth initiatives, and believe this puts 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.

Aaron Tachibana, CFO

Thank you, John, and good afternoon, everyone. In my remarks, I will cover our financial results for the first quarter of 2022 and our guidance for the year. Our total revenue for the first quarter was $15.2 million. Revenue from Biopharma and other customers reached $11.7 million, reflecting a 53% increase from the same period last year. This growth in oncology revenue can be attributed to the ongoing adoption of our NeXT Platform, which comprised more than 65% of our oncology revenue for the quarter. We exceeded reported revenue levels with customer orders by more than 50%, indicating a strong backlog. Additionally, we are seeing more orders for prospective clinical trials compared to retrospective ones. In the first quarter, revenue from the VA MVP was $3.5 million, down 73% from $13.2 million in the same period last year, which aligned with our expectations. By the end of the first quarter, unfulfilled orders for the VA MVP were $4.1 million, and we anticipate these will convert to revenue in the second quarter. Our gross margin for the first quarter was 28.1%, down from 35.6% last year, mainly due to under-absorbed overhead costs stemming from the significant decline in VA MVP revenue. Over the next 12 to 18 months, we expect some variability in gross margin due to lower VA MVP volume and investments in new capabilities, including dedicated production lines for FDA-approved offerings, diagnostic tests, and our expansion in China. However, we foresee gross margins increasing long-term through growth in our oncology revenue, which has a higher margin profile. Operating expenses were $32.6 million in the first quarter compared to $19.9 million last year. Research and development expenses rose to $17.1 million from $9.5 million, and selling, general and administrative expenses increased to $15.5 million from $10.4 million. The rise in R&D expenses reflects investments in new product development, hiring for our clinical and medical teams, and clinical validation work. The increase in SG&A expenses is driven by commercial expansion and infrastructure enhancement. Our net loss for the first quarter was $28.2 million, a decline from a net loss of $12.4 million in the same quarter last year. The net loss per share was $0.63, with a weighted average share count of 45 million, compared to a loss of $0.29 per share last year with a share count of 42.3 million. Now, regarding our balance sheet, we ended the first quarter with cash and short-term investments totaling $266.5 million. We used $20.5 million in cash due to the net loss, working capital needs, and capital equipment purchases. We have reduced our expected cash usage for 2022 by approximately $10 million, now estimating around $130 million, which includes a one-time investment of about $45 million for our new facility construction, net of $15 million for tenant improvements. We are managing our cash carefully and have nearly two and a half years of runway. While we have several growth initiatives in mind, we are prioritizing investments to extend our cash runway in the current economic climate. We also have available borrowing capacity since we carry no debt. Turning to guidance, we've noticed a slowdown in customer sample shipments since early January, and we continue to experience delays in sample flow this quarter. The ongoing spread of COVID variants has resulted in slower patient enrollment for clinical trials. As more than half of our biopharma work is now focused on prospective clinical trial projects, these delays are impacting our near-term revenue more significantly than before when our business was primarily retrospective. It remains uncertain when we will see an acceleration in patient sample shipments, but we are cautiously optimistic that our revenue from biopharma and other customers may start to grow sequentially in the second half of 2022. For the full year, we anticipate total revenue in the range of $62 million to $67 million, with oncology revenue from biopharma and other customers between $55 million and $60 million, predominantly in the latter half of the year. We expect our net loss to fall between $110 million to $115 million.

Operator, Operator

Thank you. Our first question comes from Derik de Bruin with Bank of America.

Unidentified Analyst, Analyst

Hi. Good afternoon. This is John on for Derik. First of all, I wanted to ask about the hiring. You mentioned that you are hiring those with regulatory and clinical expertise. In addition to the extra headcount, what sort of wage pressure are you seeing?

John West, CEO

This is John. It’s a very important area for us to invest in, and we see it as a very competitive market for hiring. There is certainly wage pressure associated with that. This is a challenge that organizations across the country are experiencing, and Personalis is no exception; in fact, it might be facing more competition than many other businesses.

Unidentified Analyst, Analyst

Got you. And regarding the second half sales ramp, could you speak to the dynamics of what’s giving you the confidence to bring the sales back on in the second half? And if you could also speak on the biopharma lab activity in the U.S. versus OUS, and how the Shanghai Lab is progressing, that would be great?

Aaron Tachibana, CFO

Thanks for the question, John. This is Aaron. In terms of what’s giving us confidence about the second half of the year, the revenue is not going to be lost; it’s just pushed out in time due to patient enrollment for clinical trials being slower or reduced. We see that with our backlog increasing and customer order demand being strong. We know customers want to sequence the samples and get the data so they can get on with their work with these clinical trials. It’s just going to take a little bit of time, and so things are moving out to the right a few months. That’s what’s giving us the confidence; it’s really the demand environment, the orders are strong. In terms of the lab environment here, most of the sequencing we are doing today or processing tests are done in Menlo Park in our lab. We are building up the capability in Shanghai, China, and that’s going really, really well. The challenge right now for the last 10 weeks or so has been that Shanghai has been on lockdown. Our employees have been instructed to stay home. We haven’t been able to operate inside of the lab. But if all goes well over the next couple of months, we anticipate that we will qualify the lab with our first customers and hopefully be able to process samples later this year and realize revenue, maybe a small amount this year and into 2023.

John West, CEO

I would say on the topic of Shanghai, just that it’s been, I think our original business hypothesis there has proven out that this would be particularly attractive to international pharmaceutical companies. We are seeing a lot of interest in it from major pharma, but many of them operate worldwide and it’s not unusual for them to have clinical trials where they are recruiting in many different countries, and China might just be one of them. If we couldn’t handle those samples in China, we might not get any of that business. We see a halo effect where we see orders and revenue in the United States because we essentially qualify as a fully international vendor with the capability in China. So I think that is working. COVID is delaying the conversion of that into revenue, but the business thesis is working, and I think we can continue to be very optimistic about that potential.

Unidentified Analyst, Analyst

Great, and thank you for that. If I could just squeeze in one more, with that backlog growing, how is the wait time for the clients? Has there been an increase in that as well?

John West, CEO

In the past, our business relied more on analyzing samples from retrospective clinical trials, where the samples were already available. The wait time from when we received a purchase order to when the samples were delivered for sequencing was relatively short. Now, as we are increasingly integrated into clinical trials from the outset, we have a continuous flow of samples coming in. However, this has led to a longer duration from purchase order to revenue recognition, primarily due to delays from several pharmaceutical companies regarding enrollment in their clinical trials. These delays are largely because hospitals are often preoccupied with COVID-19. While this slow enrollment affects the timeline for prospective clinical trials, we anticipate that the samples will eventually be collected, albeit with an increased wait time.

Unidentified Analyst, Analyst

Got you. Thank you. I will jump back in the queue.

John West, CEO

Thanks, John.

Patrick Donnelly, Analyst

Hey, guys. How are you? Maybe just on the NeXT Personal side, you talked a little bit about the progress there. Can you just talk about milestones we should keep an eye out for over the next few quarters, and then maybe just a little deeper dive on the progress on that front?

John West, CEO

What we are finding is that many of the people who have been developing MRD tests talk about how sensitive they are. We look at the numbers a lot and we are a mile ahead of most folks in this space. When we talk with customers, there’s this almost incredulity, but when we show them the data we have, people get it. That’s why we have completed a pilot project with a major pharmaceutical company recently, and I think they are pretty impressed with that. My expectation is that we will begin to see this turn into larger scale orders. We have some that we are talking about with customers now. So I think that will still take time for samples to arrive, but I think you could see significant revenue from that later this year and certainly next year. We don’t currently break that out, but in time, I think that’s a major growth driver for us. We are also initiating a number of collaborations, including one in Europe, and as those make progress, we will talk more about the results of those and there will be conference posters and publications coming out with that data. Some of those projects leverage samples from clinical studies that already happened, making our ability to generate that data faster, while others will require new studies and that will take some time. You can expect announcements coming later this year or next year regarding our LDT version of that product, and I think that will be an important step for us.

Aaron Tachibana, CFO

Additionally, the launch of NeXT Personal was initially directed towards pharma and engagement has been really strong thus far. The expectation is that orders will ramp throughout the back half of this year. Revenue might be minimal in 2022, but in 2023, we expect to ramp revenue with biopharma as well from NeXT Personal.

Patrick Donnelly, Analyst

That’s really helpful. And maybe just in terms of the COVID impact in Q1. I know you guys have guided for a bit of a headwind there. Can you just talk about how that came in relative to expectations, and are you still seeing delays on the sample side related to COVID? How should we think about that progressing as the year goes?

Aaron Tachibana, CFO

In terms of Q1 with the Omicron variant spreading, we saw a slowdown in sample shipments to us. Our customers wanted to get samples to us, but the problem with the supply chain and people being able to get the work done created challenges, and we are seeing the same things now in the current quarter. That’s why in terms of the guide, we have been a little more cautious than we may have been a few months ago regarding what we see going forward.

Patrick Donnelly, Analyst

Right. Yeah. And I guess on the guide, I mean, clearly, you guys have a strong backlog. The backlog is continuing to build, but is it just the ability to execute and convert that into revenue given the current conditions that's causing more caution in the outlook, versus actual demand side?

John West, CEO

Exactly. The backlog today is more for prospective clinical trial work versus retrospective. We are reliant upon trials opening up and patient enrollment accelerating, and it’s going to take a few months before that picks up again. But the backlog has been growing nicely and customer orders have not slowed down at all, and that’s why we have some confidence that we could get back to accelerated growth in the back half of this year.

Aaron Tachibana, CFO

Competitively, we are doing quite well. I think the order side is strong, it’s just a question of revenue timing.

Max Masucci, Analyst

Hi. Good afternoon. John, curious if you had a chance to review the draft guidance the FDA issued on Monday related to the circulating tumor DNA for early-stage solid tumor drug development. It would be great to hear the initial thoughts you have on the draft and how you see it factoring into the pace of biopharma demand over the next couple of quarters?

John West, CEO

We did look at that draft guidance. It’s an updated version from last year, so there are incremental updates. We see circulating tumor DNA as being a major opportunity and part of the reason we built NeXT Personal to be so comprehensive is that it gives us more opportunities in the pharma space. We think we have the most sensitive MRD test. We built into that the ability to look for emerging resistance mutations and second primaries. We think this will provide much more detailed data on patients in clinical trials. You don’t have to send two separate sets of blood plasma to different testing companies; you can do it all with one integrated test, which we believe will be a great opportunity for pharma.

Max Masucci, Analyst

We are seeing accelerating advancements in spatial, single-cell platforms and advanced imaging that reveal insights related to the tumor microenvironment and metabolism. How do you see these breakthroughs translating into demand for NeXT Personal?

John West, CEO

Regarding spatial analysis, while scientifically very interesting, they are also low throughput platforms compared to what we are doing. We use transcriptome sequencing and deconvolution methods to sort out different types of immune cells infiltrating a tumor. We believe that our approach allows us to gather much more information over time about patient responses to drug therapies, which will be of great interest to pharma. There’s a lot of new information to be gleaned with our technology, rather than conventional tests.

Max Masucci, Analyst

Great. A quick two-parter: First for Aaron, are there regions where you see the biggest impact in terms of delayed enrollment for prospective trials? And what about your year-end guide?

Aaron Tachibana, CFO

In terms of geography, we have seen some impact from Eastern Europe and there has been a little bit of slowdown here in the U.S. as well. The year-end guide is conservative now, accounting for the slowness we’ve seen. Our customers have strong demand; we just need the samples to flow to us. Once things pick up over the next couple of quarters, we believe we’ll be in a good position for a strong second half.

John West, CEO

You asked if NeXT Personal would be used for identifying MRD-positive enrollees or for monitoring ctDNA clearance rates. We believe it's helping in both areas, and the sensitivity allows earlier identification. Our platform helps oncologists track patient responses and manage their treatments effectively.

Max Masucci, Analyst

Thanks for taking the questions.

John West, CEO

Okay. Thank you.

Aaron Tachibana, CFO

Thanks, Max.

Mark Massaro, Analyst

Hey, guys. Thank you for the questions. My first one is a three-parter regarding the initial pharma customer for NeXT Personal. Can you walk us through the funnel you have with pharma and how many sales or biz dev people you have calling on pharma? The second part is, as it relates to analytical validity, clinical validity, and clinical utility, where are you in putting that data together for NeXT Personal? And the final one is regarding the promising data for NeXT Personal shown at AACR; can you speak to when we might see sensitivity and specificity data for NeXT Personal and if you have anything planned for ASCO or later this year or early next year?

John West, CEO

We will have more data as we go forward, with studies happening at various conferences. Initially, the fastest data to generate is from retrospective samples already banked. Our engagement with key opinion leaders is leading to a lot of interest in generating data using NeXT Personal, and we expect to bring those results to conferences or publications as quickly as we can. Clinical utility will require interventional studies, which take longer, but we are working towards that. Sensitivity data is available in the range of one to three parts per million, and we are continuously exploring opportunities to improve that further as we progress.

Mark Massaro, Analyst

Okay, thanks for the color. I will hop back in the queue.

John West, CEO

Great, thank you.

Mike Matson, Analyst

I guess just as a follow-up, can you talk about how your commercial presence is growing in oncology, and how will you ensure your tests are reimbursed? What is your approach to market the clinical diagnostic tests, and are you planning to build a sales force that will call on actual oncologists?

John West, CEO

We have engaged key opinion leaders in high-end cancer centers. These centers don’t typically pay for the tests; instead, it’s usually the patient’s insurance that covers it. Our reimbursement process through MolDx is crucial for early on, especially for Medicare patients. We expect to have a U.S. sales team focusing on oncologists, and our aim is to build those relationships that lead to test orders and put us in a position for broader market adoption in the future.

Aaron Tachibana, CFO

We have our new facility under construction, with plans to begin the move late Q3 or early Q4, and this will introduce additional overhead costs affecting gross margins. However, we expect improved absorption as we scale.

John West, CEO

The operational impact of the Shanghai lab is boosting our profile, driving demand domestically, and creating new opportunities for revenue growth.

Kevin DeGeeter, Analyst

Thanks for taking my questions. Can you remind us of the level of activity from Natera in Q1 2021? As we think about 2022 guidance, how much visibility do you have on trends from Natera, and how should we think about that as part of your revenue model?

Aaron Tachibana, CFO

Natera contributed approximately 27% of our total revenue in Q1, a little over $4 million. We have forecasts and projections from them for purchase orders to build backlog, but we haven’t disclosed specifics in our guidance. The majority of our growth is coming from our pharmaceutical customers, and we see the potential growth as we gain traction with NeXT Personal and our own products. We haven’t guided a specific number for revenue contribution from China. My expectation is that we will qualify customers this year, with pilot revenue, and we believe we can ramp significantly in 2023 due to the large patient sample volume in China.

John West, CEO

As we qualify our operations in China, we’re discovering local pharmaceutical interest, enhancing our global capacity, and expect that can complement our revenue trajectories significantly.

Sean Lee, Analyst

In the prepared remarks, you mentioned that you expect to see some diagnostic efforts enter the market in Q3 of this year. What are some of the key milestones during now and then before you start marketing them?

John West, CEO

We are working to hire sales teams and build relationships with institutions like the Mayo Clinic to start flowing patient samples through those channels. Once we obtain reimbursement results, that will lead to revenue. We are excited to move forward with this substantial revenue opportunity.

Operator, Operator

I’m not showing any further questions. 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.

John West, CEO

Thank you.

Caroline Corner, Investor Relations

Goodbye.