Personalis, Inc.

particularly the risk factors described in our 10-Q for the third quarter of fiscal year 2021 to be filed today and our 10-K for fiscal year 2020. Personnelist undertakes no obligation to update these statements except as required by applicable law. Our press release of our third quarter 2021 results is available on our website, www.personnelist.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. Our recording of today's call will be available on our website by 11 a.m. Pacific time today. Now I'd like to turn the call over to John for his comments on third quarter business highlights.

Thank you, Carolyn. Personalist continues to grow, driven particularly by our oncology business. In Q3, revenue from our oncology business grew 50% over the same period of the prior year. It has increased sequentially over each of the last eight quarters. New orders received in Q3 were more than three times the amount of revenue for the quarter. In addition, more than half of the orders are for prospective clinical trials. Our pharmaceutical customers are increasingly seeing the value of our platform and incorporating it in their clinical trial designs right from the start. We expect our oncology revenue to become the largest part of our revenue in Q4 of this year, and based upon the midpoint of our updated guidance, a sequential increase of 57%. Our pharmaceutical customer base has broadened substantially over the last year, and that contributed meaningfully to the record orders we received in Q3. Our partnership with Natera has also continued to grow, and in Q3, it was 10% of our total revenue. Natera's adoption of our next exome gives them access to its relatively large footprint for identifying somatic variants for their Signatera MRD test. It also lets Personalis participate in a part of the MRD market, which is complementary to our own product, Next Personal, which we plan to launch next month. We see a lot of opportunity in the MRD market and are pleased with our progress to date. We also continue to make progress in Asia. Our plans to establish a lab and commercial operations in China are continuing well. We have now hired about 10 employees, and our team has begun to qualify our laboratory in Shanghai. We have received significant pharmaceutical customer orders, and those customers are now pursuing local regulatory approvals. We expect to begin working with customers within a few months and be in a position to recognize revenue in 2022. In Japan, we have also – we also have several major international pharmaceutical companies that are now ordering NEXT, further supporting our efforts to expand in China and Asia. Our NEXT platform provides biopharmaceutical customers a better understanding of each cancer patient's genetic profile. Both tissue and liquid biopsies together can provide the most comprehensive view, leading to the optimal therapy and treatment decisions. Both our tissue and and liquid biopsy-based offerings provide data on all of the approximately 20,000 human genes. Tissue samples give us access to RNA and to the immune cells which have infiltrated a patient's tumor. By analyzing liquid biopsy samples, we're able to provide information about a patient's tumor across multiple time points from small blood samples. When used together, we believe our oncology platforms provide our customers with the most comprehensive analysis of tumor burden and biomarker identification available today. At Personalis, we actually plan two liquid biopsy products for two different applications. 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 complete response to therapy. The largest segments of this population are those who have or have survived breast and prostate cancer. To detect potential cancer recurrence, we can look in a patient's blood plasma for the mutational signature of their tumor. But these two cancer types have such low mutational burden that they can be difficult to detect. We realized early on that we would be able to overcome this liquid biopsy sensitivity problem by leveraging our considerable high volume whole genome sequencing experience. Using tissue whole genome sequencing, we can identify 20 times more somatic variants to serve as the basis for personalized cancer assays. By looking for a tumor's fingerprint at over 1,000 loci and being able to select cancer variants which have a low level of background sequencing errors, we gain tremendous sensitivity. Our internal data now confirms this approach can result in sensitivity down to a few parts per million. This sensitivity advantage may translate into much earlier detection of a patient's cancer recurrence. We believe this can be a leading technology for some very large market opportunities, and we'll have more to say about that when we formally launch the product next month. Next, liquid biopsy. Our whole exome liquid biopsy product is optimized for late-stage cancers, where the amount of tumor DNA in the blood is higher and tumors may be increasingly complex. For that application, the rich information from an exome can provide much more insight. We continue to make encouraging commercial progress with Next Liquid Biopsy. Notably, in Q3... We received a multimillion-dollar order for the use of our tissue and liquid biopsy full exome products together, each at multiple time points. Personalis has also filed patents related to liquid biopsy methods for many years, and in Q3, we received two new patents in this area. We believe that our liquid biopsy-based products will contribute increasingly to revenue in 2022. Personnel's technological and scientific leadership has led to strong adoption by pharmaceutical companies who use it 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 is approximately $30 billion in size in the United States. I would now like to comment on our recent progress. First, we are continuing to build our regulatory, clinical, and reimbursement capabilities. We have been hiring employees with clinical and medical experience within a diagnostic setting, and we will continue to hire and invest in this area. Recently, we announced the hiring of Bob Bruce as Vice President, Reimbursement Strategy and Execution. Bob has extensive experience with reimbursement and he brings over 25 years of experience, including since 2015 as VP of Reimbursement at Clinical Genomics, where he was instrumental in obtaining reimbursement for their MRD test, which will be particularly relevant as we launch our next personal LDT offering. Also, in support of our new diagnostic business, we will be incorporating FDA-compliant protocols within our new facility, which we plan to move into within a year or so. To build a strong clinical diagnostic business, we believe that it is important to work with world-class medical institutions. To that end, we recently announced a collaboration with the Mayo Clinic. This collaboration establishes us as a preferred provider to the Mayo Clinic for clinical diagnostic and research sequencing and analysis services using our NextDx test, particularly in the area of immuno-oncology. the Mayo Clinic will be able to use aggregated, de-identified patient data for research that may lead to development of new and improved treatments and systems that will ultimately benefit cancer patients. We're excited about the opportunity to work with the renowned Mayo Clinic to focus on helping cancer patients live better and longer lives, a mission and vision that we both share. 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 NextDx test and a planned LDT version of our next personal test. I'd now like to update you on the population sequencing part of our business. In September, we received a task order from the VA MVP of approximately $10 million. Although this is less than in pre-COVID-19 years, we believe that the VA MVP remains committed to the program which has been underway since at least 2011. Since early 2020, the VA has cared for a tidal wave of COVID cases, been a major contributor to COVID vaccine clinical trials, vaccinated millions of veterans, and launched research initiatives related to COVID. We believe that this contributed to them deferring an expected 2021 sequencing RFP and extending our work for them with the task order we just received. I am proud to say that we have continued our strong execution during the last year and a half during the COVID pandemic. Since it began, we have needed to deal with some consumable shortages, but we have been nimble and also implemented more rigor and focus around our supply chain, which has kept us in a good position to continue driving revenue growth. In summary, we continue to execute extremely well in growing our oncology revenue. Customer adoption of Next has been excellent, and our pipeline of compelling new products is rich. We believe we have the capital required 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.

Thank you, John, and good morning, everyone. We had another great quarter and achieved a new record revenue level for oncology. During my prepared remarks, I will provide detail about our financial results for the third quarter of 2021 and our guidance for the fourth quarter and the full year. Total revenues for the third quarter of 2021 were $22.3 million, up 3% from $21.7 million for the prior quarter, and up 12% from $19.8 million for the same period of the prior year. Aside from the VA MVP, BioPharma and all other customers accounted for revenues of $8.6 million in the third quarter, representing a 5% sequential increase and a 50% increase over the same period of the prior year. This was our fourth consecutive quarter with a year-over-year increase of more than 50% in non-MVP revenue and highlights a couple of key points. Customer orders that we have won over the past year and a half are converting to revenue. Second, the new order amounts continue to exceed revenue reported each quarter and increases our backlog. This provides us with confidence that our biopharma revenue will continue to increase in the future. Also, our current biopharma revenue is mostly from tissue samples. As we ramp our liquid biopsy offerings, we expect this to accelerate growth due to the multiple time points, or in other words, the number of tests per patient. For the third quarter, the VAMVP revenue of $13.7 million was higher by 1% from last quarter and was 3% lower compared with $14.1 million for the same period of the prior year. The VAMVP unfulfilled orders were $12.9 million at the end of the third quarter and based upon current estimates, we expect the unfulfilled orders to convert to revenue during Q4 of this year and Q1 of 2022. Gross margin was 36.2% for the third quarter compared with 37.7% for the prior quarter and 26.9% for the same period of the prior year. The year-over-year increase of 930 basis points was primarily due to operating leverage from the 50% increase in biopharma and non-MVP volume, customer mix, and lab efficiency improvement. Over the next couple of years, we do expect some gross margin variability due to headwinds from investments in new capabilities such as dedicated production lines for FDA-approved offerings, running diagnostic tests while we work to increasingly secure reimbursement, adding more capacity, expanding in China, and others. And longer term, we expect our gross margins to increase as we achieve scale and with our oncology revenue becoming a larger portion of total revenue. Operating expenses were $25.8 million in the third quarter compared with $15 million for the same period of the prior year. R&D expense was $13.6 million in the third quarter compared with $7.2 million for the same period last year, and SG&A expense was $12.2 million in the third quarter compared with $7.8 million for the same period last year. The increase in R&D expense was for new product development and continuing to build our clinical and medical infrastructure. The increase in SG&A was due to commercial expansion, continuing to enhance our infrastructure, and public company costs. Net loss for the third quarter was $17.7 million, compared with the net loss of $9.5 million for the same period of the prior year. The net loss per share for the third quarter was 40 cents, and the weighted average basic and diluted share count was $44.5 million compared with the net loss per share of 27 cents and a weighted average basic and diluted share count of $35.5 million for the same period of the prior year. Now on to the balance sheet. We finished the third quarter with a strong balance sheet with cash and short-term investments of $305.2 million. In the third quarter, we used approximately $23.7 million of cash due to the net loss, working capital needs, and capital equipment purchases. We expect our full year 2021 cash usage to increase from the mid $40 million range in 2020 up to a level of approximately $85 million due to investing in many growth initiatives. Now, I'd like to turn to guidance. We continue to drive oncology revenue growth through our pharma partnerships and the adoption of our next platform. Our backlog in this area has increased significantly and gives us confidence about our future potential growth. For the fourth quarter of 2021, we expect total company revenues to be in the range of $20.2 to $20.4 million, and we expect BioPharma and all other customer revenues, excluding the VAMVP, to be in the range of $12.5 to $14.5 million, representing a year-over-year growth rate of approximately 77% at the midpoint. Net loss is expected to be in the range of 22 to 23 million, and the weighted average basic and diluted share count is expected to be approximately 45 million. For the full year of 2021, we expect total company revenues to be approximately 85 million, and we expect Biopharma and all other customer revenues, excluding the VAMVP, to be in the range of 37 to 39 million, up from our prior guidance of 34 to 35 million, representing an annual growth rate of 69% at the midpoint. Net loss is expected to be in the range of 67 to 68 million due to the increase in expenses, and the weighted average basic and diluted share count is expected to be approximately 45 million. We plan to provide 2022 full-year revenue guidance during our next earnings call when we report our fourth quarter and full-year 2021 results. Now, I will turn the call back over to the operator to begin the Q&A session. Operator?

Thank you. Ladies and gentlemen, if you have a question at this time, please press star, then the number one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. We ask that you please limit yourself to one question and one follow-up. One moment for your first question. Your first question comes from the line of Teja Savant with Morgan Stanley.

Hi, this is Neil Ram on for Teja Savant. I just had one question on the MVP. So now that you're out of the procurement period, has there been any recent dialogue with the VA on the potential for another task order looking at March 2022?

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

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

So this is Sean. I think we've commented that in prior quarters, actually starting back in early 2020, when we started to see the pandemic sort of beginning to ramp up, we actually invested a fair amount in additional inventory. And it wasn't necessarily a huge dollar amount, but it was a lot of physical material because we know that many of the things that can slow you down or be a problem are small, low-cost items like plastic pipette tips. So we had, frankly, a wall of boxes of pipette tips and other items like that to make sure we didn't run out. And we've been able to continue to We have seen issues where this issue of shortage of lab-qualified plastic has led to delays from some of our reagent suppliers because they have the reagent, but they don't have a bottle to put it in. We've been navigating around that. In general, we've increased our safety stocks substantially, and we've been very active from a purchasing standpoint. So we've been able to stay on track, but it's certainly been something we've had to spend a lot more time and effort on So far, fingers crossed, it's in fact been going well. We've been able to keep up production each quarter, but it's definitely a very active area for us. Got it. That's it for me. Thank you. Great. Thanks.

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

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

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

And can you provide an update on the company's China lab expansion and XQS, you know, biopharma? I guess, you know, if you want to comment on PopSeq as well, but, you know, specifically, you know, the China lab, how's that build-out going?

Yeah, so I think the lab build-out has gone well. We have a good team there now. We're now beginning to process non-customer samples just to show that we can get the exact same results in Shanghai as we do in Menlo Park. I think the key thing to understand about the China area is that we've ended up receiving some orders from large international pharmaceutical companies where something like 95% of the value of the order will be processed in our lab in California and perhaps 5% will be processed in Shanghai. But the fact that we were able to do the part and sign up to deliver the identical product in Shanghai is has been instrumental in us actually receiving those orders. And so if you look at revenue actually run in the Shanghai lab, that will take some time to grow and will be probably relatively modest in the early period of time, but that doesn't mean it isn't having a material impact on our overall results because it helps us win these international clinical trials where some of the recruiting sites have to be in China. So I don't know if that helps you there, but we are seeing a lot of... positive feedback from our, particularly the larger pharmaceutical companies that do operate in many countries in parallel and where China is important for them. Great. Thanks for taking my questions. Great. Thank you.

Again, if you have a question, please press star, then the number one on your touchtone telephone. Your next question goes for the line of Patrick Donnelly with the city.

Hey guys, thanks for taking the questions. Um, maybe one of the oncology orders, you know, obviously encouraging traction there. You know, I know when you talked about the VA, you know, a couple of months ago, you talked about what growth we could expect for 22, you know, has the momentum increased since then? I mean, again, clearly the numbers came in really strong for Q. It doesn't feel like you need a whole lot of orders to hit the numbers you talked about, but we'd love to just talk through the setup there and how you're feeling about the numbers.

I'd say we're feeling great about Q4. I mean, you saw us predicting now with the new guidance at the midpoint that quarter-on-quarter growth in our oncology business would be 57%, so that's a pretty strong ramp, 77% year-on-year, so I think we're feeling great about that. Many of these are things that have been coming together for some time. We have a number of large pharmaceutical companies that have really been scaling up pretty rapidly for us there, so I think we had expected over time that the oncology business would become the largest part of our business for the long term relative to the population sequencing. And to some extent, with the way that this has played out with orders, the order we received from the VA was lower than I think we had thought was possible for this year. On the other hand, the orders from the pharma side have been almost a tidal wave. And I think that's been, you know, the two of those offset each other to some extent. So I think we're basically just turning that corner now. sooner than we thought we would. And actually, that's a good place to be. So we're excited about the growth of the cancer business. That's the, you know, the biggest part of our company for the future and an enormous available market.

Just to elaborate on that a little bit, Patrick. So what John just went through, if you go back a year and a half to two years ago, you know, a large order for us was a couple hundred thousand dollars. And we had a significant concentration with just a couple of large pharmaceutical partners. If you look at the third quarter, we had three times the new orders come in compared to revenue we reported. And if you look at the mixture of those orders, we had several customers that were multi-millions of dollars of orders in that batch. In addition, we had several customers who had hundreds of thousands of dollars of orders. So in terms of the penetration that we've been after over the last couple of years with the adoption of the next platform, it's working. And we've got most of the large top 10 pharmaceutical companies as our customers today. And we're focused now on deeper penetration with all of them. And we believe we have a long ways to go. And we're really excited about where we're at today and going into the fourth quarter and then into next year. We're not providing guidance for 2022 just yet, but we're very confident that we can grow at least 50% in 2022 because of all the order traction we've seen to date.

That's really helpful. Thanks, Aaron. And maybe kind of following up on that, you talked about the VA. It sounds like your expectation, given where the backlog is, basically we should assume it's kind of fully done by 1Q, and then beyond that, should we just model essentially nothing? Is that kind of the message going out? Just want to make sure we're thinking about the model right for next year.

Yeah, so in terms of the VAMVP, we've got enough backlog right now that'll be fulfilled here in Q4 and then into Q1. The RFP process, like John had alluded to, would come out in the summertime. And so, you know, the second, third, and fourth quarter right now, I think from a modeling standpoint, it's safe to model, you know, zero basically. And we'll know more you know, if we win the next contract in the summertime. And, you know, we've been a partner, a good partner, for the last nine years or so, and we're very confident that when an RFP process comes out, we'll be able to win, but we just don't know the size or scale of that. And so right now I think it's prudent to be conservative. Very helpful. Thank you, guys. Sure. Thanks, Patrick.

Your next question comes from the line of Arthur He with HC Wayne White.

Good morning, everyone. This is Arthur for InfoArchie. Thank you for taking my question. So I believe if I report correctly, Erin mentioned for the oncology business, about 50% are from the tissue biopsy. Could you give us more color on the coming new order in terms of mix of tissue and liquid biopsy? And how is your internal thinking driving more that they create a tissue biopsy business. Go ahead.

Arthur, I was just going to clarify. We didn't say 50% has come from liquid biopsy. I think what we've said is in terms of the growth that we've seen, it's been substantial. Most of the business we've had to date has been from tissue. We have done a great job here in the third quarter and the last couple of quarters with orders for liquid biopsy, our exome scale liquid biopsy, but we believe that going forward is really the great opportunity for us to scale with liquid biopsy, our exome product as well as our MRD next personal that's going to be coming out next month. So very little liquid biopsy to date.

Okay, I see. So is there any trend you guys see through the new order for the mixer?

This is John. I guess one of the things I might want to highlight is that we actually see customers ordering both of them together. I think in some other companies, because they don't have a tissue product, they'll sometimes portray liquid biopsy as just being an alternative to tissue biopsy. But actually, you get different information from liquid biopsy compared to what you get with tissue, and they're both valuable. So we've seen – I think we highlighted one of our customers ordered – for a set of clinical trials that they're running, they're combining both the liquid biopsy and the tissue biopsy at multiple time points each through the clinical trial. So you can see with the tissue biopsy, you see things like RNA, and you can see the immune cells that have infiltrated the tumor. So those are things you can't see with a liquid biopsy. But the liquid biopsy is obviously an easier way to get multiple time points. So we find that and I think we encourage this, that customers use the two of them together. Each one complements the other. And so I think you'll see, since we actually have both, that the capability to use them together actually is a real advantage for customers. And so we think we'll see somewhat more of that.

Okay. Thank you. Thank you for the color.

Thank you.

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