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spk04: Greetings ladies and gentlemen and welcome to PersonAlla's first quarter of 2023 earnings conference call. At this time all participants are in listen-only mode. There will be a question and answer session following the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Caroline Corner of Investor Relations.
spk02: Thank you, Operator. Welcome to Personnel's First Quarter 2023 Earnings Call. Joining me on today's call are Chris Hall, Chief Executive Officer and President, and Erin Tashibana, Chief Financial Officer and Chief Operating Officer, and Rich Shen, Chief Medical Officer and EVP R&D. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements within the meaning of the 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, size and booking of orders, products, services, technology, clinical milestones, the outcome and timing of reimbursement decisions, expectations for existing and future collaboration activities, cost expectations, and our market opportunity 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 of the SEC, including the risk factors described in our most recent annual report on Form 10-K. Personnel also undertakes no obligation to update these statements except as required by applicable law. Our press release of the first quarter 2023 results is available on our website, www.personnel.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 Chris for his comments and first quarter business highlights.
spk10: Thank you, Caroline. Good afternoon, everyone, and thank you for joining us.
spk09: Since I was appointed CEO in March, I've only become more convinced that personnel is uniquely positioned for its technology to power the two most important developments occurring in oncology. One is creating personalized diagnostic assays to monitor patients with cancer, and the second is delivering personalized therapies to patients. Both of these developments in the management of patients require discriminating technology that is able to illuminate the uniqueness of each patient's tumor and provide actionable information that can change the arc of the disease. It's been a few months since we laid out our strategy to win in MRD and go after what we estimate to be a $25 billion MRD market. Our product addressing this phase is a tumor-informed personalized liquid biopsy test called Next Personal. Our focus strategy involves pursuing three cancer indications, early stage breast cancer, early stage lung cancer, and immunotherapy monitoring, and finding partners for other cancer indications. We picked early-stage breast cancer, lung cancer, and immunotherapy monitoring because we believe our technology is uniquely suited to guide treatment decisions and those indications based on its ultra-high sensitivity. At the heart of our WIN and MRD strategy are aggressive product performance goals which we call ultra-high sensitivity. We aim to achieve cancer detection at levels down to one part per million. What we mean by that is the next personal may find residual or recurring disease when there is only as few as one circulating cancer DNA fragment among a million normal DNA fragments in the blood, and can do this not just for a few patients, but consistently for most patients across many different cancer types and stages. We believe Next Personal can find cancer before other technologies, and importantly, can provide confidence that, one, when we don't see cancer, the patient will likely remain disease-free and may not need additional therapy. And two, when we do see cancer, we see it earlier, at a time when patient management can be changed to make a difference. This quarter, we had exciting early data demonstrating NextPersonal's performance for sensitivity, and we expect this to continue as additional study data is published through the year. First, we were chosen by AstraZeneca and TracerExpert MRD studies. We extended our partnership with AstraZeneca so that they will use NextPersonal to explore ultrasensitive MRD measurements for clinical research and drug development. We were also selected by Dr. Charles Swanton and the TRACERx study, one of the world's most major initiatives to determine treatment options and effectiveness for patients with early stage lung cancer. We will work with the TRACERx samples and leadership group to determine the value of an ultrasensitive assay such as next personal and lung cancer patients. I'll add more color to the TRACERx relationship in a minute, but it is important to point out that high-end collaborations are important validations of our technology and performance claims. Put another way, these global leaders are choosing to work with us because of our ultra-sensitive MRD capability. Second, a few weeks ago at the American Association for Cancer Research annual meeting, initial findings from our UK eCollaboration were presented. Liquid biopsy pioneer Dr. Klaus Puntel is using Next Personal to track tumor response to immunotherapy, and he highlighted results from late-stage melanoma patients. This study, although early, showed extremely promising results. First, the next personal detected ctDNA levels down to the ultra-sensitive level of one part per million consistently across patients. that ultra-high sensitivity was needed to accurately classify the MRD status. Nearly a third of the patient time points analyzed, and the MRD status would have been incorrectly called as negative with less sensitive methods. The third, 100% of positive ctDNA detection, even at the lowest level, had confirmed tumor findings on imaging. And similarly, 100% of the negative ctDNA detections were complete responders via RASIS criteria. And fourth, the patients that were ctDNA negative had significantly increased overall survival compared to ctDNA positive patients. Now, having data come together that is demonstrating that we can execute on our WIN and MRT strategy was very gratifying. Equally important is that we made exciting progress this quarter on our goal to have reimbursement for next personal and one indication by the end of 2024. While that's an aggressive timeline, we have already made progress by announcing key collaborations this quarter and studies in each of our focused clinical indications. First, the TracerX collaboration jumpstarted our efforts in lung cancer. The TracerX consortium is led by lung cancer expert Dr. Charles Swan, and teams at Cancer Research UK, the Francis Crick Institute, and University College London. The study will deploy NexPersonal to provide even more sensitive MRD detection for the groundbreaking lung cancer initiative, along with insights about how tumor biology changes over time. As mentioned, the tracerX consortium selected NexPersonal because of its ultra sensitivity as well as its ability to scan for both common cancer and patient-specific mutations. Prior research findings from TracerX have shown that MRD testing was able to identify recurrent tumors in patients with non-small cell lung cancer well before they were detectable using CT scans, but there remains significant opportunity for detection improvement. We believe our collaboration with TracerX and other collaborations like it ultimately enable more informed decisions about patient care much earlier in a patient's journey. Second, we announced a collaboration in melanoma and IO therapy monitoring with the University Medical Center Hamburg-Eppendorf, also known as UKE. That collaboration, along with the previously announced Duke and UCSF relationships, provide a strong foundation for us to be able to show the efficacy of Next Personal for IO therapy monitoring. Third, we engage with the Academic Breast Cancer Consortium and Criterium to establish a clinical trial that is expected to enroll approximately 900 patients at up to 30 U.S. sites. The trial will be carried out in two stages. In the first stage, samples will be collected from each patient for both pathological complete response path CR and MRD analysis to assess whether MRD using NexPersonal correlates with standard of care past CR measurements. The second stage will involve a five-year follow-up to further establish clinical validity and performance of NexPersonal at early stage triple negative breast cancer. We're expecting these studies and trials to showcase NexPersonal's ultra-sensitivity and ability to provide insights important for patient therapy decisions. And we're not done. In all three indications, we are laser-focused on engaging leading collaborators in the world and accessing rich sample biobanks for accelerating studies, and we look forward to sharing additional announcements as we continue to make progress through the year. Lastly, in terms of our March to Establish Next personnel as the market leader in MRD, we remain on track to launch Next Personal for clinical use by the fourth quarter of this year. There's a strong sense of energy and optimism at Personalis that we are on the cusp of doing something profound in the cancer market. We believe Next Personal represents a substantial leap in MRD sensitivity and brings the field closer to the next standard of care in oncology. Beyond the possibility of catching cancer recurrence many months or even years earlier than imaging, beyond enabling ongoing monitoring for patients on targeted therapies, Next Personal was designed to change the paradigm for how cancer is actively managed. Its ultra sensitivity is the key to providing patients the confidence that they don't have minimal residual disease. And this will enable physicians and patients to make the best decisions from escalating treatment when needed to eliminating procedures or therapies when unnecessary. In order to enable the smarter and more inexpensive care model, Incremental improvements are not enough. The next personal supersensitive performance numbers will usher in a new paradigm that we believe will be better for patients, better for physicians, and better for the healthcare system. The personalized technology is key to enabling the next personal product to transform the cancer diagnostic market. And the same technology is also powering the next generation of oncology biopharma products. As announced earlier this year, we are a key partner for Moderna's clinical trial work as they pursue regulatory approval of their personalized cancer vaccine. Over the years, Personalysis worked with several companies by providing genomic test information about the patient's cancer so that a personalized vaccine could be developed specifically for each individual patient. Each patient's cancer is different. And we believe that customizing the therapies for each patient is an extremely good idea. And with the recent success of mRNA technology for COVID, there's a new focus on the opportunity for cancer vaccines. There are thousands of new cancer patients each year in the US alone, and our aspirations are for personal analysis technology to power the development of next generation vaccines and therapies. E2 enabling our vision for next personal transform the lives of cancer patients and for our technology to power new ways of treating cancer patients is a focus on blocking and tackling execution by the company, by what I believe is one of the most talented teams in the industry. We executed in Q1. We delivered over 24% year-over-year growth, and we exceeded our forecast. We submitted our data to Moldex for coverage of our next DX product, and we completed our efforts to reduce our cash burn and extend our runway. into 2025. It's an exciting time of personnel and we appreciate our investors being a part of our journey. I'll now turn it over to Aaron to review our financial results.
spk11: Thank you, Chris. We executed well in the first quarter and although it's still early, we are beginning to see the benefits of our strategy to focus on areas where we expect to win, as Chris mentioned earlier. I will now provide detail about our first quarter financial results and guidance for the second quarter and full year. Total company revenue for the first quarter of 2023 was 18.9 million and increased 24% compared with the same period of the prior year, primarily due to strong oncology revenue performance. Our oncology revenue, which includes revenue from pharma tests, enterprise, and other customers, was 15.9 million and increased by 35% over the same period of the prior year. The year-over-year increase of oncology revenue was driven mostly by the increase in volume from the Tera, which accounted for half of our total revenue in the quarter. First quarter revenue from population sequencing, which includes the VAMVP, was 3 million. Gross margin was 25.1% for the first quarter compared with 28.1% for the same period of the prior year. The year-over-year decrease of 3% was primarily due to under-absorbed overhead costs. Our lab expenses have increased over the last year and a half to support our growing oncology revenue volume. And for background, testing cancer samples requires more labor and overhead compared with testing samples for the VAMVP. Over the next couple of years, we expect some gross margin variability due to fluctuating test volume, operating at lower utilization rates, providing diagnostic tests while we continue to increase our efforts to secure reimbursement, costs for a 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 $34.6 million in the first quarter and included a one-time non-recurring restructuring charge of $3.9 million associated with the reduction in force and closure of our China lab operation compared with $32.6 million for the same period of prior year. Excluding the restructuring charge of $3.9 million, our operating expenses were $30.7 million and decreased 1.9 million from the same period last year. R&D expense was 16.6 million in the first quarter compared with 17.1 million for the same period last year. And SG&A expense was 14.1 million in the first quarter compared with 15.5 million for the same period last year. Net loss for the first quarter was 28.7 million compared with a net loss of 28.2 million for the same period of the prior year. The net loss per share for the first quarter was $0.61, and the weighted average basic and diluted share count was $46.7 million, compared with the net loss per share of $0.63 and a weighted average basic and diluted share count of $45 million for the same period of the prior year. Now on to the balance sheet. We finished the first quarter with a strong balance sheet with cash and short-term investments of $148.9 million. In the first quarter, we used $18.7 million of cash due to the net loss, working capital needs, and capital equipment purchases. We remain on track to reduce our 2023 cash usage down to approximately $75 million for the full year, which is significantly lower compared with $119 million used during the prior year.
spk10: Now, I'd like to turn to guidance.
spk11: For the second quarter of 2023, we expect total company revenue to be 16 to 17 million, revenue from pharma tests, enterprise sales, and other customers to be 13 to 14 million, which is lower than the first quarter, primarily due to reduced sample volume from Natera, and revenue from population sequencing of approximately 3 million.
spk10: For the full year of 2023,
spk11: There is no change to our guidance, and we expect total company revenue to be 68 to 72 million with oncology revenue from pharma, enterprise sales, and other customers to be 59 to 63 million. Population sequencing revenue to be approximately 9 million and expected to be recognized during the first three quarters. Net loss of approximately 103 million. and cash usage of approximately $75 million, a reduction of $44 million from 2022. We look forward to updating you on our milestones as we make progress throughout the year. This includes obtaining reimbursement for NextDx, showcasing evidence for Next Personal, and completing the Next Personal clinical lab diagnostic test for commercial launch. Please stay tuned for future updates. And with that, I will turn the call back over to the operator to begin the Q&A session. Operator?
spk04: Thank you very much, sir. Ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question, please press star then 1 on your telephone keypad. The confirmation turn will indicate that a line is in the question queue. You may press star 2 to leave the queue. We ask that you please limit your questions to one and one follow-up. For participants using speaker equipment, it may be necessary to pick up a handset before pressing the star keys. Our first question comes from Tejas Savant of Morgan Stanley.
spk05: Hi, this is Gabby on for Tejas. Thanks for taking my question. So just to start, so your pharma and biosegment saw a lot of strength this quarter, but the guide remained the same. So just kind of curious if some conservatism is baked in the guide there.
spk11: Hi, Gabby. This is Darren. In terms of the guide, so it did not change from last quarter. In terms of what we did say in the prepared remarks, so our guide for Q2, in terms of Natera is going down. The Natera volume is going down, which is going to be offset by increased revenue from personalized cancer vaccine and biopharma, which will offset that.
spk10: So that's why the guide is the same as what we had last time. Does that make sense? Okay.
spk05: Yeah, yeah. That makes sense. Thank you. And then on Natera, are there any updated thoughts on how revenue might tail off in 24? Is that remaining the same?
spk11: Yeah, so in terms of what we've said, so the Natera volume will start to tail off from Q2 this year through the end of the year. It's our expectation that there might be a little bit that shows up in terms of samples in early 2024. But from a modeling standpoint, we're not assuming
spk10: much revenue in 2024 at all.
spk05: Okay, great, thanks. And then on pharma and biotech customers, are you still seeing some headwinds with sample delivery from your pharma customers? And just given some of the commentary from some companies as of late, are you still seeing cautious spending from pharma and biotech customers? And if so, how is this dynamic change from last quarter? And do you anticipate these dynamics to continue throughout the remainder of 23?
spk11: Yes, obviously with the recession here, you know, pharma is being prudent on their spending. So we are seeing some things being a little bit tighter there from that perspective. In terms of sample flow from pharma, it always can be a little bit variable or lumpy, so to speak, in terms of the timing of when samples come in. But for the most part, you know, we're beyond the the COVID situation where, you know, trials and patient enrollment were a lot slower. So we're beyond, you know, that at this point in time.
spk10: But, you know, there is some variability in terms of when samples do show up. Okay, great. Thank you. That's it for me. Thanks, Gabby.
spk04: The next question comes from the line of Dan Brennan of Cohen and Cummins.
spk07: Hey, this is Joe. I'm for Dan. Thanks for taking the questions. This first gross margins came in well ahead of our model at around 25% in Q1. Was there some one-time benefits in the quarter that we should be cognizant of, or was this more a result of the pruning unprofitable biopharma revenue?
spk11: Yeah, so in terms of the benefits here in Q1, there were some one-time benefits in terms of some favorable mix. We had more volume from the VAMVP that showed up in Q1 compared to prior quarters or last year. In terms of the way forward, though, you know, gross margins, we expect it to be in the low 20% range, primarily because of more costs coming online from our new facility.
spk10: Great. Thanks.
spk07: And then just on the 6.3 million of pharma tested service revenue, is there any way to think about that in terms of oncology testing versus revenue associated with personalized cancer vaccines? And then maybe, if possible, same goes for the 30 million-ish that I think is implied for pharma testing service for 2023.
spk11: Yeah, so we haven't broken that out specifically in terms of the personalized cancer vaccines, but we're very excited about where it's headed to the back half of this year and into 2024. In terms of, again, You know, we haven't really disclosed the dollar amounts. You know, personalized cancer vaccine revenue has been roughly, you know, somewhere between 4 and 5% of our total cancer revenue. So that's kind of the way to look at it. Over time, we believe it's going to, or we expect to increase as a percent of the total oncology revenue, primarily because of the success we've had here with a large project with Moderna.
spk10: Great. Thanks. Thank you, Joe.
spk04: Thank you. The next question comes from the line of Patrick Donnelly of Citi. Hi.
spk03: You got Lizzie on for Patrick. So I was just wondering on the next personal LDT launch that's supposed to happen in the fourth quarter, you mentioned that you're submitting your first indication for Medicare coverage in 2024. I guess what's your line of sight into the eventual commercialization of this test? I know thinking way down the line, but just some more color therapy helpful. Thank you.
spk09: Yeah, no, thanks. It's Chris. We're planning to launch it by the end of this year into a few key select clinics, and we will grow the adoption through 2024. We're focusing on three indications, early stage breast cancer, early-stage lung cancer, and therapy monitoring or IO therapy monitoring. And we're building data around each one of those three now, and we plan to submit for coverage going through the end of 2024 and gunning that way. We will grow the footprint as we go, probably with early collaborators in particular in 2024 that can deepen the evidence set. Now, that could be prospective registry trials. And or that could be working with academic medical institutions starting to use it in their clinics. And we expect it, as we get coverage, to ramp quickly post-coverage, and we'll have a field force in place. We're getting a lot of positive feedback around the strategy of having NextDx, which is our cancer genomic profiling product, to have that ordered at the same time so a clinician can send us a sample for that test and send us a sample personal at the same time from one set of samples cut from the tissue block. So we think that products will work synergistically. And we expect the revenue to grow quickly there. That's a $25 billion market overall. So you can imagine just as we chip away at that, we expect the growth rates to pick up dramatically as we move that more aggressively into launch post-coverage.
spk03: Understood. Thank you. And then just on margins in the second half of the year, given that there's the one-time cost, the one-time benefit, excuse me, that you had this quarter, should we think of them sequentially increasing off of the TQ base? Just wondering the right way to think about that. Thank you. That's it for me.
spk11: Sure. So Lizzie, in terms of the way to think about the expenses as we go forward, So we called out the one-time expenditures of restructuring, and that was primarily from the reduction of headcount of 30% and the closure of our China lab. So if you remove that and take the expenses pretty much flat through the rest of the year, that'll get you to what we expect.
spk10: Thank you.
spk04: Thank you. The next question comes from the line of Mark Martin of Needham & Co.
spk08: Yeah, thanks. I hate to keep going back to Natera, but it's kind of important from a modeling perspective. I think you had said on the last call that you expected $27 to $30 million this year from Natera. I didn't hear you reiterate that. Is that still the case, or has the number come down from that?
spk11: It's going to come down a little bit from 27 to 30, Mike. It could be a couple million dollars less than that, primarily because of, you know, some of the information we've got that's more current with where Natera wants to go. So we can see that it's going to decline a little bit quicker than what we thought. And then into 2024, you know, not exactly sure what that volume will look like early 2024, but we're assuming, you know, very little. In the first part of 2024, it's going away after that.
spk08: Okay. And I think last call you also said that you felt that you could continue to grow even in 2024 because that's going to be a pretty significant headwind as that kind of goes away. Do you think you can continue to grow your revenue to find offsets for that completely or –
spk11: We do, Mike. We're very optimistic about the project we've won and personalized cancer vaccine. We're way under-penetrated as well in terms of biopharma. We're highly focused on landing more projects with Next Personal into pharma. And as you saw in one of our recent press releases, we have a great relationship with AstraZeneca, and we're looking to continue to deepen that relationship and further penetrate other large pharmaceutical companies that we've been doing business with that are on the next platform and, you know, taking a look at next personal now as well. So we believe we have a few other growth drivers that are going to offset the hole that the Natera department will fill.
spk09: We also expect that the clinical laboratory revenue will be growing more significantly in 24 also. Obviously, it's coming from a smaller base, but it'll start to be. become more meaningful in 24 because we plan to be on the back side of the next DX reimbursement, and we'll have a nice built-in base of business from ordering doctors at that point in time, which we're building now. That'll be getting reimbursed, and then we'll be in the launch of the next personal. And while the revenue will be low, we expect there'll still be some revenue there starting to come through.
spk10: So we're optimistic about where we'll be next year in revenue.
spk08: Okay, great. And then just with NextDX, I mean, that's going to be potentially – you could have reimbursement, I guess, later this year. That's correct. I mean, is that – I mean, what's the revenue opportunity there? I mean, I heard you mention that, you know, it's going to be kind of used together with the personal, you know, MRD test, but is there a real revenue opportunity with that as kind of a standalone, or do you really need to get kind of personal going before you can generate meaningful revenue? Sure.
spk09: Well, there is. I think there is, and we believe we have the most discriminating way to baseline cancer therapy in the market. And we think that we're well ahead of what other people are doing, especially in particular with fusions and the exome measured TMB provides a more discriminating way to front the therapy. And we think we have the most comprehensive way to approach the targeted therapies. But the market is, you know, there's a lot of competition there. And we're being careful relative to sales and marketing spend. So we're gating it in a way that is thoughtful about the revenue slash cost burn, sales marketing versus revenue expense. And so we think it's a standalone business. It's a great business. A lot of companies have been built on the back of it. We believe we'll be able to get a toehold in it. We could throw a huge field force at it. But in this climate, we're being really thoughtful about how we do it and moving in an incremental way that leverages learnings that we go and builds the business rationally.
spk08: Okay, got it. And then it was good to hear the detail on all the trials that you're involved with, particularly for personal. But I was curious if You know, is personnel bearing any of the cost of those trials? Are those all being funded by, you know, outside groups, either companies or academic facilities?
spk11: So we're funding those studies and the collaborations, Mike. In terms of the need to do that, you know, we understand it's something that is relatively expensive, but that's why we've chosen to do business with a lot of the higher-end KOLs that we've landed.
spk09: But I would note that, like, the beauty of these collaborations is that you don't have to pay for a prospective clinical trial and the time involved to get the samples. So you're accessing, you know, samples and work that was done previously, and while you're funding the development of the data around it, it's significantly less expensive than prospectively doing what we're doing in our Be Stronger trial, that we announced a few days ago where we are going out and doing that. And it's important to do that, too, because you've got to be able to build ever deeper data and clinical utility, you know, data sets around these tests. So you have to do that. But getting going with data sets with some of the top folks in the world with some of the better annotated data sets is really a way to jump started. And I would argue really inexpensively. So that's the approach that we're going at.
spk06: Rich, do you have anything to add to that? Yeah, everything Chris said is absolutely true. And also, the other thing is that it helps us accelerate the data generation. So the fact that we have these retrospective data sets, very large data sets that we're going to be looking at, like TracerX, outcomes have been accumulated over many, many years. And so we know what happened with these patients is going to really allow us to accelerate the data generation.
spk10: Okay, great. Thank you.
spk04: Thanks, Mike. Thank you. Ladies and gentlemen, just a reminder, if you have asked a question, you're welcome to press star and then one to place yourself in the question queue. The next question comes from Sean Lee of HC Wainwright.
spk01: Good afternoon, guys, and thanks for taking my questions. I just have a quick question. If you could provide some additional color regarding the timelines of the expected studies. For example, for the first stage where you're comparing the MRD analysis with neck personal versus PCR, how long would that take before you move on to the expected stage of the five-year follow-up?
spk06: This is Rich. Hi, Sean. So for the Be Stronger study, which is I think the one you're referring to, this is our prospective multi-year, multicenter trial for early stage triple negative breast cancer that we're doing with the Academic Breast Cancer Consortium and Criterium. It's split into two phases. The first phase where we're doing the correlation, we're looking at, you know, performance in the neoadjuvant phase of treatment for these patients. we expect that, you know, we'll start getting some data out of that in kind of the year to year and a half timeframe. And then we'll be moving on to the second phase. And obviously in second phase, we'll be following the patients out through their adjuvant therapy and looking at outcomes, you know, five, six years out.
spk10: Okay, great. Thanks for that. That's all I have. Thank you.
spk04: Thank you, sir. Ladies and gentlemen, we have no further questions in the queue and we have reached the end of a question and answer session. Please note that this does conclude today's event. Thank you for attending and you may now disconnect your lines.
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