Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Personalis Earnings Conference Call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. After the speakers’ presentation, there will be a question-and-answer session.

[Operator Instructions] I would now like to hand the conference over to your first speaker for today, Caroline Corner. Thank you. Please go ahead..

Thank you, operator. Welcome to Personalis' Third Quarter 2020 Earnings Call. Joining me on today's call are John West, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer.

This call will include forward-looking statements, including statements regarding the markets in which we operate, including potential market sizes; trends and expectations for products, services and technology; trends and demand for our products; Personalis' expected financial performance, expenses and position in the market; and the impact of the COVID-19 pandemic on our operations and our customers' operations.

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-K filing for the fiscal year 2019 and in our 10-Q filing for our third quarter ended September 30, 2020.

The forward-looking statements we provide during this call, including expectations for future performance, are based on our reasonable beliefs and expectations as of today. Personalis undertakes no obligation to update these statements, except as required by applicable law.

Our press release with our third quarter 2020 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 5:00 p.m.

Pacific Time today. Now I'd like to turn the call over to John for his comments on third quarter 2020 business highlights..

Thank you, Caroline. Personalis achieved record revenue during Q3 and our 17th consecutive quarter of revenue growth. In spite of the pandemic, our revenue from biopharma and all other non-VA customers increased 21% from last quarter and 35% from the same period of the prior year.

Orders from this group of customers have also continued well above our revenue level. We believe we are winning pharma business based on the value proposition of our NeXT platform.

Our technology allows us to identify biomarkers, including neoantigens across all types of cancer, providing comprehensive data from all 20,000 human genes, all from a small tissue or liquid biopsy sample.

In September, we received our annual task order from the VA MVP with an approximate value of up to $31 million, increasing the cumulative to-date contracted value to approximately $175 million. Our population sequencing business continues to be an important part of our growth.

If we combine our latest VA MVP order with our biopharma customer orders, received through Q3 year-to-date, our 2020 order value amounts are already larger than the full year of 2019.

Our performance over the last several months highlights our ability to execute and also the somewhat resilient nature of our business resulting from our ability so far to shift our focus and capacity between our biopharma and population sequencing customers who are using our platform.

Although, we remain cautious due to the ongoing uncertainty from the pandemic, Q4 is off to a good start from a sample and order flow perspective. Based on the flow of pharma orders, we continue to expect our oncology business to become a larger part of our revenue mix in the future.

In addition, the VA's lab has resumed sample shipments, which gives us additional visibility. As we now have enough VA samples in-house to process over the next two to three quarters.

Also, I'd like to mention that in Q3, we successfully executed a common stock offering and the gross amount of $125 million to provide us with the capital needed to pursue many of the growth initiatives in front of us. Now, I would like to give you an update about our progress during the quarter and how we have been executing on our commercial plan.

In August, we launched our exome-scale liquid biopsy product for biopharma customers that complements our tissue-based offering. Early discussions with our existing and potential new customers are going well. And we recently received our first pilot order from an existing tissue customer.

You may recall that both our tissue and liquid biopsy based products have been designed specifically to meet the needs of our pharmaceutical customers and provide data on all 20,000 human genes. Monitoring is rapidly becoming a key facet of long-term cancer care.

Our first liquid biopsy product tracks the evolution of what can be hundreds or even thousands of cancer mutations in a single tumor and can detect new mutations as they emerge under therapeutic pressure. Many new cancer drugs extend the lives of patients but do not eradicate the disease.

So a growing segment of the cancer survivor population consists of patients who are still undergoing active disease management. We continue to expect initial sales of our liquid biopsy product to predominantly be to customers using our tissue-based testing, who also want to monitor patients over time.

And indeed that is where our current conversations are focused. We believe that our capability to offer both tissue and liquid biopsy based products and to leverage the synergy between them, positions us favorably relative to companies who only offer one or the other. And we think our customers have seen the potential value in this.

In the future, we plan to broaden our liquid biopsy product line to include a personalized test, designed for each patient's specific tumor. And we currently expect to launch this product in 2021.

Our NeXT Personal test will enhance tumor tracking for each patient due to the high sensitivity of our test and the ability to identify thousands of mutations compared with many existing panels that can identify and track only hundreds.

Our biopharma customers will be able to use NeXT Personal for multiple time point monitoring, which will compliment our comprehensive, full exome, NeXT Tissue, and NeXT Liquid Biopsy offerings that are already in the marketplace. We believe that NeXT Personal will also be applicable for the diagnostic market in the future.

In Q3, we continue to gain traction with biopharma customers and realize strong order levels once again. Year-to-date at the end of Q3 2020, our biopharma orders received were almost twice the amount as the year-to-date at the end of Q3 2019.

As we've explained before, it takes time for orders to convert to revenue and actual revenue recognized from an order maybe less than expected but this growth in orders over the last few quarters underscores our confidence in future revenue growth.

Our customer base has broadened substantially over the last year, while we can't disclose all of our customer's names. I can tell you that we have now received orders from a majority of the top 10 oncology focused pharma companies.

Since we introduced NeXT, the NeXT platform in 2019, as of the end of Q3, we have received orders from 39 different customers up from 32 at the end of Q2. In addition, you may recall that new customers typically will evaluate or run a small pilot before growing into larger contracts.

Up until the last few quarters, a pilot order could be around $50,000. But with our recent progress, we've been receiving initial orders that can be several hundred thousands of dollars. And sometimes even between $500,000 and $1 million. In Q3, we received a large initial order from a global pharmaceutical company.

We believe that this growing adoption of NeXT further highlights the power of our platform and the comprehensiveness from our platform is important to our customers. You may recall that in June, we announced a research collaboration with Sarepta Therapeutics, a leader in precision genetic medicine for rare disease.

As part of the collaboration, Sarepta has been working with us to characterize immune response to precision genetic therapeutics, utilizing our advanced proprietary neoantigen analytics. During Q3, we completed this initial project.

We were excited that the value of our platform is now being recognized in areas beyond cancer, which we believe provides us with future opportunities to expand our market. Last quarter, we detailed some of our initial plans to establish a lab and commercial operations in the People’s Republic of China and partnered with Berry Genomics.

Our team is currently working to build out our laboratory in Shanghai, and we hired our first employee in China and have plans to hire additional employees in the coming months.

We are just beginning the process of understanding how customer and collaborator projects using our exome, transcriptome or genome scale data will be viewed under China's regulations on human genetic resources, which went into effect last year. And we continue to expect that our operations in China will begin in 2021 with moderate revenues.

And we expect to ramp up in 2022. While this project will take some time to meaningfully contribute to our top line, we believe that this is an important investment. We look forward to updating you on our progress in the future.

I’d now like to update you on the population sequencing part of our business, which is sometimes referred to in the field as population genomics. In September, we announced that Kevin Dunne, joined as the Head of our population sequencing efforts.

Prior to joining Personalis, he was VP, Head of Clinical Partnerships at Genomics Medicine Ireland, a division of WuXi NextCODE that was founded the sequence genomes of 400,000 people in Ireland.

Subsequently, he moved into the role of VP, Head of Cohort Commercialization, where he actively engaged with pharmaceutical companies in the drug discovery space, including leading GMI’s collaboration with AbbVie. Kevin's near-term focus is on helping us penetrate new population sequencing customer accounts.

And we are thrilled to have him join us at the forefront of population genetics. Our work with the VA MVP represents the largest population sequencing effort within the United States. The VA now targets enrollment of 2 million veterans, and over 825,000 veterans have enrolled so far.

Personalis has been contracted so far to sequence over 146,000 VA MVP samples, with approximately 55,000 remaining to be sequenced under the current contract, which again lasts through September of next year. By the end of Q3, we had sequenced more than 90,000 whole human genomes.

This puts us on track to reach our stated goal of 100,000 before the end of this calendar year. Notably, we believe that this would make Personalis the first for-profit company ever to sequence 100,000 whole human genomes in the United States.

We expect our unparalleled experience and scale with the VA MVP program to position us well for new opportunities in population sequencing. Given our clinical experience and work with pharma, we also see an opportunity to transition population research to population health and to involve pharma in the future.

Our population sequencing and biopharma businesses share a unifying theme in the comprehensive and large-scale genomic characterization of human samples. Both our whole genome sequencing and our NeXT platform cover all 20,000 human genes.

Because of their shared underlying technologies and operational implementation, we achieved considerable synergy between the two businesses. I would now like to expand on the synergy between the population sequencing and oncology parts of our business, in particular, those that go beyond the more obvious operational and cost synergies.

Our extensive experience with whole genome sequencing, combined with our deep expertise in cancer, has allowed us to launch whole genome sequencing from cancer samples. We believe that this will be increasingly important in the future, particularly in cancers such as breast and prostate, which have relatively low mutational burdens.

Using our cancer whole genome technology, we'll identify up to 20x more somatic variants to serve as the basis for personalized cancer assays. We believe this will let us achieve high sensitivity even in cancers which have low mutation rates, which have been surgically resected or which shed relatively low amounts of cell-free DNA into the blood.

We believe this can be a leading technology and some very large market opportunities, and we'll have more to say about this as these product developments progress. Before I wrap up, I'd like to give you an update on another new product that we plan to launch in Q4.

As we mentioned on our last conference call, we have been working for over three on a combined laboratory and informatics project to advance our neoantigen characterization capabilities. We believe that neoantigens are the crucial centerpiece of a new generation of companion diagnostic biomarkers.

We expect our biopharma customers will apply this capability to mainstream cancer drugs such as checkpoint inhibitors and also to experimental personalized cancer therapies which explicitly target neoantigens.

This project has required multiple proprietary technologies, including genetic engineering of proprietary human cell lines, mass spectrometry to identify and quantify peptides binding to HLA, and the training of novel machine learning algorithms.

This new feature will be included as a module within our NeXT platform, and we believe it will enhance the stickiness of our offering. In summary, I'm very proud that our business has continued to show strong resilience throughout the pandemic so far and across our multiple revenue streams.

Customer interest and adoption of NeXT has been excellent, and our pipeline of compelling new products is rich, putting 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 afternoon, everyone. Revenues for the third quarter of 2020 were $19.8 million, up 2% from $19.5 million for the prior quarter and up 16% from $17.2 million for the same period of the prior year. The $19.8 million was a new record high for quarterly revenues.

The quarter-on-quarter revenue growth was driven by an increase in volume for genomic testing services provided to biopharma customers. Aside from the VA MVP biopharma and all of their customers accounted for revenues of $5.7 million for the third quarter, an increase of 21% from last quarter and a 35% increase for the same period of the prior year.

In the third quarter, biopharma revenues included approximately $0.5 million from one customer outside of cancer. And this amount does not expect it to repeat in the near-term.

If we exclude the $0.5 million of noncancer business, biopharma revenues would have been $5.2 million for the third quarter, an increase of 11% from last quarter and an increase of 24% over the same period of the prior year. Similar to the last quarter, third quarter revenues were negatively impacted by the pandemic.

Volume from our biobank customer was below previous expectations due to their sample and shipment delays and some biotech customers continued to be impacted by the slowdown of clinical trials.

For the third quarter, the VA MVP revenue of $14.1 million was lower by 4% from last quarter and was 9% higher compared with $12.9 million for the same period of the prior year.

If you recall, we do not have specific testing turnaround times for the VA MVP, therefore we have the ability to modulate volume up or down to compliment the biopharma sample testing volume, which is not linear.

In the third quarter, we did have more biopharma samples on hand, and therefore, we processed fewer VA MVP samples than in the prior quarter.

The VA MVP unfulfilled orders at the end of the third quarter were approximately $56 million, and based upon fulfilled orders at the end of the third quarter were approximately $56 million, and based upon current estimates, we expect the unfulfilled orders to convert to revenue over approximately the next four quarters.

Gross margin was 26.9% for the third quarter, compared with 24% for the prior quarter and 32.8% for the same period of the prior year. The VA MVP gross margins continue to be solid and once again were higher than the overall gross margin reported for the third quarter.

The VA MVP being higher volume and a single service offering has been automated and does not require a significant amount of labor and has a very efficient sample test process. The 290 basis points sequential improvement was primarily due to favorable customer and project mix.

As a reminder, we may see gross margin variability in the future as there are a few moving parts, such as sample receipt linearity from customers, the mix of customer projects and capacity utilization of labor and equipment.

During our last conference call, we mentioned our initiative to build out a lab operation in China this year, which will add startup expenses beginning in 2020. And these expenses will be classified as SG&A this year. We expect modest revenue from China in 2021, and begin ramping a bit more in 2022.

During this early ramp up period, we expect to have some gross margin headwinds from the under absorbed labor and overhead. Operating expenses were $15 million in the third quarter, compared with $11.4 million for the same period of the prior year.

R&D expense was $7.2 million in the third quarter, compared with $5.3 million for the same period last year. And the SG&A expense was $7.8 million in the third quarter, compared with $6.1 million for the same period last year.

The increase in R&D expense was for product development and the increase in SG&A was for public company costs and continuing to enhance our infrastructure. Net loss for the third quarter was $9.5 million compared with a net loss of $6.9 million for the same period of the prior year.

The net loss per share for the third quarter was $0.27 cents and the weighted average basic and diluted share count was 35.5 million compared with a net loss per share of $0.22 and a weighted average basic and diluted share count of 31.1 million for the same period of the prior year. Now under the balance sheet.

We exited the third quarter with a strong balance sheet with cash and short-term investments of $206.1 million. Third quarter cash flow from operations was a usage of approximately $16 million, primarily due to the net loss and working capital needs.

During the quarter we raised approximately $117 million net of discounts, fees and expenses from a follow-on public equity offering to further strengthen our balance sheet and allow us to pursue many of the growth initiatives in front of us, such as our liquid biopsy, NeXT Personal test, investing in China, product development and operational capability for future FDA approved or cleared tests, future capacity expansion and several more.

Given the number of initiatives we are pursuing, we expect R&D and other expenses to increase going forward. Now I'd like to turn to guidance. During our last conference call, we did not provide any 2020 revenue guidance due to the uncertainty from the pandemic.

And although we had another solid quarter of execution uncertainty still remains about whether or not work conditions for us, our customers and suppliers will remain the same as today or change in the near future.

In the third quarter, we did see some supply chain shortages of items used in our laboratory, such as consumable products, which are used by many labs, including those focused on COVID-19 testing.

We therefore remain somewhat cautious in our future outlook, given this continuing uncertainty from the pandemic, especially as COVID-19 cases have surged recently. Potential changes could have an adverse effect on our financial results, and therefore, we are not providing revenue guidance for fiscal 2020 at this time.

We plan to provide an update to this information during our next earnings call. Now I will turn the call back over to the operator to begin the Q&A session..

Thank you so much. [Operator Instructions] Our first question will come from the line of Derik De Bruin from Bank of America. The line is now open..

Hi, this is Ivy on for Derik today. Thank you for taking my question and congrats on a good quarter. So first question on the COVID recoveries, since that's still top of mind.

Do you see any significant impact on oncology volumes due to the resurgence of COVID right now? And I appreciate the details on supply chain shortages, just would appreciate any additional color..

This is John. Hi, thanks very much for the questions. So in terms of oncology volumes, you may recall, most of our oncology business is in retrospective analysis of samples. And so I think we're perhaps impacted less than people who would be worth more on prospective testing.

We do have some prospective testing, and some of that has been slowed down some. We also have some customers that have difficulty collecting samples. We have a biobank customer that we commented in prior quarters has been really quite substantially reduced because of problems due to COVID.

So the growth that we've experienced has really been in spite of those slowdowns; it hasn't caused us to have a dip in any of that net revenue. And then I'd say in terms of the – in terms of supply shortages, at this point, we've been able to manage through that, but the coronavirus is an RNA virus.

And so many of the reagents that are used for testing of the coronavirus are specific to RNA. And because we also process RNA as part of our platform, we have to make sure that we have sufficient supply of those. So far, that hasn't been a major problem for us, but it is something we're keeping an eye on..

Great. Thank you, John. And another question on the liquid biopsy pipeline. So I appreciate the detail there, but I'm wondering if you could give us an update on potentially time line for taking that pipeline into the clinic since that – we've been getting a lot of investor questions on that. Thank you..

Sure. Great. So on the liquid biopsy side, our current liquid biopsies product was really a design for work with pharmaceutical companies and is not currently a clinical diagnostic product. It's really comprehensively understanding how the tumors are changing over time in pharmaceutical clinical trials.

And so we do anticipate that we will be analyzing samples from clinical trials. Most likely, most of them will be retrospective to start with, although, in time, that probably will also include a prospective analysis of clinical trial samples.

We have not announced any time line for the liquid biopsy test to be a clinical diagnostics test outside of pharma at this point..

Great. Thank you for the color..

Thank you..

Thank you. Our next question will come from the line of Doug Schenkel from Cowen. Your line is now open..

Hey, good afternoon guys. First, just a quick one on MVP and then, I guess, broader pop gen programs.

First, is the VA kind of open for business when it comes to blood collection? And then more broadly, have discussions with other pop gen programs started to kind of normalize or pick up again? Or is that still a bit hampered by what's going on with COVID-19?.

Great. Great. So this is John. As far as the MVP VA is concerned, the VA is actually currently not collecting samples except for people who are set up for the program online in general and other blood samples coming in. On the other hand, the VA has already collected blood samples from over 825,000 U.S. veterans.

And the total of all the orders we've ever received is about 146,000. So there's over 700,000 samples that they've received that they haven't contracted with anybody yet. So sample collections at the VA are not at all limiting in terms of the scale of the business there. I would say the operation of their lab has continued well….

Sorry, I think John’s line get disconnected. Caroline, can you please take over..

Yes, we can move on to the next question, and Aaron can take over until rejoins..

I will – I'll give it a try, although, Aaron, it may be more of a John question. So if we want to wait until John comes back and maybe revisit this later in the queue, that's fine.

But I really wanted to talk a little bit about the proteomic opportunity, keeping in mind that Personalis was an early leader in providing multiomic solutions to pharmaceutical partners.

There are a number of emerging technologies that should enable biopharma companies and academic researchers to do more in proteomics and eventually advanced multiomic assessment, given the ability to integrate these tools and use unique bioinformatic solutions, such as those developed by Personalis to kind of advance drug development.

I'm just wondering if the company has a view on whether some of these emerging tools are complementary or competitive. Or maybe it's both? And ultimately, given advancements in the space are still at an early stage, what's good for the class is good for Personalis. I'd love to get any thoughts.

Again, Aaron, it may – this may be a more appropriate question for John, in which case we can just circle out..

And Doug, this is Caroline again. Unfortunately, I think Aaron has dropped as well..

We lost everybody, okay..

Sorry. Yes. He is dialing back in right now. I'm so sorry, and I'm sure that John does have an opinion on the question you just asked, but if you could just give us 20 seconds, we should get to that. Apologies for this..

Of course. Yes, of course. No, I think we all understand in this – given what's going on, these things happen. So we'll hang tight..

Hello..

Hi, Aaron..

This is John West..

Hi, John..

Hi, I just – I was happily through answering a question and the line disconnected. I don't know if we still have people on the line..

Yes, we do. Doug, if you could just reask your question. You now have John. Thank you..

Yes. Hey, John. No problem at all. As I was saying, I think we all understand, given kind of we're all doing this from different areas. So I actually just wanted to talk about something that was specifically directed at you, just given your unique experience and perspective on this. And it's really just on the topic of proteomics and multiomics, really.

You guys were an early leader in providing multiomic solutions to pharmaceutical partners and biotechs.

As I'm sure you appreciate, there's a number of emerging and exciting technologies that should enable biopharmaceutical companies as well as academic researchers to do more in proteomics in a way they haven't in the past, and hopefully and eventually advanced multiomic assessment, both for drug development as well as research purposes.

I'm just wondering if you view these as complementary or competitive or again, maybe it's a bit of both. And ultimately, just given how early stage it is, maybe it's just ultimately good for the category, which is good for Personalis. I just wanted to get your thoughts on all of this..

Yes. So Personalis has been making our platform more and more comprehensive as we've gone along the way. It began with DNA. We've added RNA. We've added T cell repertoire, B-cell repertoire and so forth. We've added oncoviruses. So we've added on additional elements of biology over time.

We – if that uses additional tools, whether those are different kinds of sample prep or different kinds of instruments, those are all sensible for us. So we would look at even straightforward kinds of proteomics with immunohistochemistry as being sensible add-ons for us.

To the extent that there are more advanced technologies in those areas that leverage mass spectrometry or other things, those are certainly things we're comfortable with. Our own neoantigen developments have leveraged very high-end mass spectrometry. So it's an area we're familiar with.

We don't currently offer that and we haven't announced plans in that direction, but Personalis is really interested in the most comprehensive characterization that we can provide for our pharmaceutical customers.

And so as we look at these additional technologies, there certainly is the potential for Personalis broadening out further to include other types of omics..

Got it. Super interesting. And then, John, I feel like I've already taken up way too much airtime, so I'll ask this quick. But just going back to my first question, because I think we did miss the back half of it. You talked about the VA being – kind of the status of the VA. And while they're not collecting, there's a ton of samples there already.

I just was wondering if you could provide an update on just other pop gen programs. And recognizing the world we live in right now, are things picking up anything – in any ways in terms of discussions with those programs that are looking for partners like Personalis? Or are those discussions still pretty limited given the pandemic? Thank you..

Yes. I'd say it's actually interesting. I mean there are many countries of the world are being pretty severely impacted by the pandemic. But it doesn't mean that – other groups also have samples that they've already collected, just like the VA does, and there are groups that are interested in moving forward.

In general, it will take some time before there are new projects that were contracted under that would lead meaningfully to revenue. But I would say that as we've been reaching out to people, there definitely is interest in this idea of population sequencing as a service.

And the idea that Personalis can help people ramp up rather than having to do it all themselves is an interest in having these programs implemented in the countries that are sponsoring them, which is fine by us, but then to be able to leverage the experience that we have and the processes that we have, not only from a throughput standpoint, but from a quality control standpoint.

So yes, I think it's kind of an exciting time for us..

Okay. Thanks again..

Thank you..

Our next question will come from the line of Tejas Savant from Morgan Stanley. The line is now open..

Hey guys, this is Edmund again for Tejas. Thank you for the time, and taking the questions.

Apologies again if you've talked about this earlier, but I've been hopping around on calls and missed a bit at the beginning, but can you provide us with some early color on traction for your next liquid biopsy? I think – like can you tell us like what some of your initial orders are looking like in size? And I guess is there any way for us to parse out like the impact of having this new capabilities, such as like maybe new business wins driven by the offering? And of the customers who have ordered it, like what percent are current customers versus new customers.

Yes. So this is John. So as you would expect, some of the people who are engaging with us most rapidly on that are existing customers. They tend to be people who are already using our NeXT platform for tissue samples and then they often want to follow that up with analysis of liquid biopsy samples at additional time points.

I think they're – it's kind of a new offering because of the comprehensiveness of it. Most other liquid biopsy products that are offered today cover perhaps less than 100 genes or perhaps a few more genes.

So the fact that we're looking at all 20,000 genes is really quite new for people, and they're beginning to look at what kinds of samples would they learn the most from to have that.

Certainly, we've seen customers – these are all pharmaceutical customers who you can see people really appreciate the fact that instead of essentially looking for your keys under the lamppost, where you've already been looking for a long time, have an unbiased view across the whole set of human genes to understand what biology is changing as tumors evolve.

And so I think there is an appreciation for that. Because it's somewhat new, we anticipate that this will be started with a set of pilot studies, and that's the kind of engagement we've seen so far. But I think as people start working with the technology and seeing what's possible with it, we anticipate that the scale may grow as we go through 2021.

So I think of 2021 as being kind of the trying it on and piloting year, and probably the larger ramp will be in the 2022 time frame, but there's definitely interest in the platform..

Got it. Thank you. That’s very helpful.

In terms of the piloting phase that you mentioned, have we thought about it as maybe the same trajectory or the cadence of your ACE to NeXT platform transition? Would it be fair to say it should take about the same amount of time? Or maybe it will be even a little faster this time around?.

I'd say it is a little hard to say. It's probably more different. The platform we had before NeXT also looked at 20,000 genes on tissue, although it did not have the capability to add in the immune system. I think that looking at this from a liquid biopsy standpoint is a more significant change for people.

And so it wouldn’t surprise me, if it didn't take some time. I think this is what we've said all along, is that we expect 2021 to be the period of time when people are doing pilots and testing and so forth. And perhaps in late 2021 into 2022 is when we might think about seeing larger scale projects.

We could be surprised by that because there has been quite a bit of interest. But I think we're just being careful to make sure that we represent properly what the product can do and get data into people's hands so they can assess that and decide what's the best place to use it..

Got it. Thank you. And turning to your development efforts in China really quickly. Can you provide us with a little bit of color on how that is progressing? And I know you guys have mentioned that the reason for starting this out was because of the high demand for global pharma customers.

That makes me think that you guys will have some sort of visibility into order placements or capacity utilization. Like can you help us frame that? And on similar thoughts, you guys have mentioned, I guess, costs ramping from starting up and stuff and I guess, the geo headwinds in 2021.

So how should we think about that?.

So I’d say, I'm happy with how it's progressing. We do have our first employee there. We're building out the laboratory. We're in the process of doing recruiting, so that will lead to a broader group of employees there.

We've also been engaging with a fair number of pharmaceutical companies who are the people who actually initially asked us to expand into China, and there's definitely interest in that.

The pharmaceutical companies themselves have to go through the regulatory process, not only with the Chinese FDA, but also there's a regulatory agency called HGRAC, H-G-R-A-C, and this is still a bit of a new process.

So we're working side-by-side with them on what the best way to go about that is and how to be respectful of the rules that exist in China and to work well there. So I think there's a – we see this as something where our first revenues will happen in 2021 in China, with the real ramp-up there being in 2022.

But it is – I would say that we probably have a second benefit from this, is that the large pharmaceutical companies we work with, who typically are working literally around the globe, as they've seen the seriousness of us taking this on, people have been really engaged in that.

And I think that's also helped us to win business outside of China because people can see that Personalis, ultimately, will be in a position to process samples from anywhere in the world. And so that's not that common of a capability, and particularly with the kind of platform we have.

So we think it's going to help us not only from revenue that we see from China itself, but also with revenue from outside China..

Got it. Thank you very much..

Well, thank you..

Our next question will come from the line of Kevin DeGeeter from Oppenheimer. Your line is now open..

Hey, great. Thanks for taking my questions..

Hi, Kevin..

How are you? Thanks for taking the questions. On I guess population, can you just talk to us a little bit on how you think about the current sales funnel? You kind of have described your range here of ways to going at that market from kind of larger contracts to kind of more service models.

Can you help us kind of characterize what the totality of that sales funnel looks like and what it may take to mature a bit?.

Yes. So this is John. I think the – we have identified a pretty substantial number of projects, over 100 different projects that have been announced one way or another, and not all of them will be applicable for us.

But I would say that in addition to broadening out to additional projects, which are perhaps in the same mold as the Genome England and programs like that, the sort of country-based research style projects, we do see that as we're having these initial discussions with folks that there is an interest in involving pharma, and there's definitely an interest in having this be clinical sooner rather than later.

And the clinical aspect is interesting because it's not only the diagnostic angle on it, but it's also the oncology angle. So whereas in the past, population sequencing mostly was whole genome sequencing of germline genomes from blood samples.

As you start saying, this really needs to be genomics being implemented in the health care systems of these countries, then you say, well, what are the biggest applications for genomics like that, and actually cancer is one of them. And so people don't want to start with essentially a backwards-looking approach.

Whether it's just looking at targeted therapies, I think there's a lot of understanding of the importance of immunotherapy.

And if you're going to build a genomics infrastructure for the future in your country, you want it to be forward-looking in saying, what are the biomarkers we're going to need to be able to look at in the future, not just sort of what have we used in the past.

And so the 20,000 gene platform, from a diagnostic standpoint, where it's comprehensive and is looking not only at the tumor but also the immune system, I think people see the value in that. And so that's a component of these discussions as well. I think it will take time to evolve that.

In a way, there haven't really been many other companies pursuing population sequencing other than just as a pure sequencing effort.

And so I think we'll be working with these customers to say, what do you really want this to be in the future? And as I say, I think it will shift from being purely researched to something that involves clinical diagnostics and through that oncology..

That's very helpful. And then as sort of a separate question. Earlier this year, really before the onset of COVID, we talked a bit more about the opportunities with regard to pharma companies to expand the applicability of NeXT and other capabilities outside of oncology, where many of us have thought about the primary customer base currently being.

Can you just provide us some more current updated thought on opportunities outside of oncology with pharma and any thought process as to whether the expansion or the sort of adaptation of current functionality, you'll be constructive in expanding that portion of the addressable market?.

It’s a great question. So we've always had a certain amount of our business that's been outside of oncology. Generally, the products have been designed focused on oncology needs, but the capabilities sometimes are unique enough that people say, I really would like to use this in another study I have that's outside that.

And so generally, this has come up with pharma by working with folks in the oncology side of a pharmaceutical company and having them be aware of some other needs and other places in their company. So it's mostly on the pharma side. We do see additional interest and additional orders coming in like that.

I think the one we highlighted really was Sarepta, and that was unique because it really leveraged our neoantigen capabilities outside of oncology. And that was definitely a first. I think they're kind of at the leading edge of that. I think that's an interesting area for the future. It will take time for others to adopt that as well.

I think we see so much opportunity for us inside oncology at this point that we're – that's really where the majority of our effort is going..

No. Great. And then maybe one housekeeping question for me, and that's – you did kind of call out, we've heard this elsewhere, a little bit more of a measured pace of clinical trial enrollment and the impact of that has on your business.

My question is, as the pace of clinical trial enrollment reaccelerates at some point, how do we think about the lag between when patients – the rate of patients entering studies begins to reaccelerate and when revenue are actually, would typically hit the P&L of Personalis?.

Yes, so I think the – what we see is that are the uptake in our orders has been more substantial than the uptake in revenue, not the revenue hasn't been going badly, but I think there's room for that to grow further, given the orders that we've seen.

So I think we sort of have the orders in hand and then as things free up as we come out of COVID and hard for me to know exactly when that's going to be, I think we actually have a lot of orders on the books that can turn into revenue at that time.

So we're seeing some of that now, the growth in orders that we've had over the last, let's say, five quarters or so. We're definitely beginning to see more samples now coming from that. And so I think that in time, if we get to a point where enrollment in trials, so where the country is expanding more I think that'll happen even more.

Some of it is that the samples already exist, but it's a question of not only having enrollment in trials opened up, but having biobanks be opened up so that they can ship us the samples that in many cases, they already have..

Super helpful. Thanks so much for taking my questions..

Great. Okay. Thanks for your time today..

Our next question will come from the line of Mark Massaro from BTIG. The line is now open..

Hi, Mark..

Hi, guys. This is Vidyun on for Mark. Congrats on the quarter..

Hi..

Hi, so my first question, how do you feel transitioning neoantigen characterization from biopharma to more of a clinical setting? And how do you anticipate kind of bending down the cost curve to make that more accessible?.

Okay. So let's see, in terms of the managing characterization, moving towards a more clinical setting, I think the key there will be having biomarkers that are specifically tied to outcomes with specific drugs.

We've already shown and work that we've been talking about at conferences with some of our collaborators that we can be, have a lot more statistical certainty using a neoantigen based biomarker to look at checkpoint inhibitor response, for example, then just using a simpler biomarker like tumor mutational burden or something that you could do with a small panel.

So I think as the capabilities are used in clinical trials and particularly as companion diagnostics, which is part of what we're pursuing now, you think that will lead to increasing the visibility of the clinical utility.

And we have the platform available now as a clinical diagnostic, but to have the reimbursement for these kinds of neoantigen based biomarkers will require proof of clinical utility.

So I think that's going to be coming that that will take sometime from – in terms of the cost curve, in our pricing to pharma on our NeXT platform is actually similar to the pricing of much, much smaller clinical diagnostic panels that already exist that are reimbursed.

I think that we're in pretty good shape from a cost point of view, as certainly as the cost of sequencing continues to come down and so we’ll benefit from that. But I think we're in a position that we already are pricing in the range, which is comparable to what diagnostic customers are used to paying for much smaller panels as diagnostic tests..

Okay. That's helpful. Thank you. So my next question would be more on what kind of activities drove biopharma if you could just provide a little more color on that.

And if you could give a ballpark of the amount that NeXT revenue contributed as a percentage of total biopharma?.

I guess in terms of those numbers, I don't know if Aaron is back on the line after the interruption, if you want to take that one..

Sure. I'm back on the line. Hi, Vidyun, in terms of what drove biopharma. So most of our business is retrospective in nature so we have a lot of pharmaceutical companies or customers that we do business with today, we're doing business with most of the top 10 customers. And then we also have some smaller biotechs that we're doing business with as well.

Again, so the biopharma revenue of $5.7 million, most of that was retrospective in nature. In terms of the other component that was in this quarter’s revenue, we did have $0.5 million that came from one customer outside of oncology. It's not expected to repeat in the near-term.

And that basically was for use of our NeXT platform, but outside of oncology was using the neoantigen prediction capability that we have. In terms of the mixture of revenue, so biopharma and all other customers was roughly 29% of total revenues today. So if you look back the last couple of quarters, we were in the 24% to 25% range of total mix.

As we go forward, we expect the biopharma and all other customer mix percentage of the total to continue to increase over time. We've had great traction from an order standpoint over the last four to five quarters and it's beginning to convert to revenue now in terms of those orders..

Okay, great. That's helpful. Thank you.

And so for my last question, a bit broader, how would you sense that the market is understanding that both tissue and blood testing should be used as a more complimentary method?.

So I would say, most pharmaceutical companies who are primary customers, people completely get it, they're coming at it, they're scientists, and they are trying to understand what's happening and the biology of the tumors, patients in their clinical trials.

And so, in general, people who have bought into our NeXT platform already appreciate the comprehensive approach we've taken. So it's comprehensive all 20,000 chains, DNA, RNA, the immune system, and so forth.

And so I think that the kinds of people we're working with have the scientific understanding and frankly they bought into that comprehensive approach. So, yes, I think they understand that there are certain things you can only see with a liquid biopsy. It's certainly a certain time points are much more accessible that way.

On the other hand, they also understand there are certain things you can only see with a tissue biopsy. So from tissue, we see RNA, which is enormously informative and you wouldn't normally have in a cell-free DNA assay. And we can also see the immune cells that are actually inside the tumor.

They tend to be different from the immune cells that you’d see in the bloodstream. And so the scientists we work with generally understand that. And so that's a part of what they get from the tissue side of what we're doing. And then the liquid biopsy part gives them the ability to see some of the dynamics over time.

So I think it's scientifically is actually fairly distinct. And because of the kinds of customers we have, who are often very advanced from a scientific point of view, people understand it right away and are generally quite bought into that..

Okay, thanks for taking the question, congrats again..

Great, thank you..

Thank you, Vidyun..

Our next question will come from the line of Steve Unger from Needham. The line is now open..

Hi, thanks. Just a couple quick ones for me. As far as the neoantigen model or module, excuse me.

What's the revenue model for that? Is that incrementally priced into NeXT or like a bigger collaboration type relationship?.

I would say that our – the neoantigen ranking that the new capability that we'll be adding will just be an additional capability of the NeXT platform. The current plan is that the pricing is the same as our existing NeXT platform.

We've said from the beginning that one of the goals of the NeXT platform was this comprehensive understanding of the underlying mechanisms of action of immuno-oncology and neoantigens are absolutely central to that. So this is now putting us in a position where although, we've had ranking in the past.

This is much more precise than we've had before, and it really differentiates the product.

So we think that we'll see this financially in increased uptake of the product has it's more and more differentiated in terms of its capabilities compared to somebody just let's say, running more standard sequencing and using just academic algorithms for neoantigen ranking..

Great. That's super helpful. And then in the MVP task order announcement, you did mention that there were opportunities for additional task orders over the coming 12 months.

And I was just curious as to what would be – what that would be contingent upon, or what would open up the opportunity for additional tasks orders? Is it the election or proposed budget changes associated with perhaps stimulus, just curious?.

Yes, I think that from our standpoint, there's – we'd be happy to just add things up if the VA could do that. And from what we know, the people who were inside the Million Veterans Program, they just want to go as fast as they can. I think it's really comes down to budget matters.

Obviously, the VA is one of the largest healthcare systems in the United States. And so it also has a large number of COVID patients. And so this is a very serious issue inside of the VA as a medical system. So I think this has led to a certain, let me say, siphoning off of human capital and also to some extent financial capital towards that.

If we get to a point that they were beginning to make progress against the coronavirus and the case load starts to come down and there's more clarity around some of that.

Then I think people will be, not be as worried that they may have to even more funds set aside for the coronavirus and be able to get to a point where they can get back to some of the kinds of research goals they had with the Million Veterans Program..

Okay..

So I think that could happen, it could also be that – it may be that the next order we received comes in with the new contract that we expect to negotiate in the summer of next year..

Got it. Okay. And then finally, is there any update on FDA approval timelines for either tissue or liquid? I can't remember where we're at as far as progress there..

Yes. So let's say, the first product that we're taking through the FDA is our ImmunoID NeXT Platform. So this is our tissue based product that we already have in place. And we've had our first pre-submission meeting with the FDA on that. I think it was very well received.

That's a little hard to put a timeline on it because it is one of the most comprehensive platforms ever to go through the FDA. And so we're working through with them, what kinds of studies will be required and so forth.

I'd say the response has generally been that this should be doable, we have to do our homework, but there's no reason that a product like this can't get through the FDA. And, I would say that even something like there was some enthusiasm for taking on something that was more forward-looking like this.

And so I think we're optimistic about it, but we haven't laid out a timeline publicly, usually these things can take a few years..

Okay. Got it. Thank you. Appreciate it..

Okay, great. Thank you..

Thanks, Steve..

Our next question will come from the line of Swayampakula Ram from H.C. Wainwright. The line is now open..

Thank you. This is RK from H.C. Wainwright. Good evening, John..

Hi..

A couple of quick questions, in terms of, I'm just trying to understand what sort of customer base would you be targeting when you're looking at your new personalized liquid biopsy product versus the liquid biopsy product itself that you previously had introduced to the market.

I’m just trying to see is some of it going to be more like the traditional biopharma customers versus, I got to make that folks or how, I'm just trying to say, if you're going to expand your customer base by doing this personalized liquid biopsy product?.

Yes, it's great. I think the answer is, obviously our first customers are likely to be in large pharmaceutical companies, the kinds of folks we've worked with before. But I think the kinds of studies they'll be involved in maybe different.

Certainly, we see a lot of interest at pharmaceutical companies now to investigate the use of cancer drugs in earlier stages. And so these are typically cases where the patient may have a certain amount of surgical resection potentially even complete surgical resection. So then the question is in theory, the tumor should be gone.

That the question is, is the tumor in fact going to be coming back, perhaps because the surgical resection turns out that it wasn't really a complete. And there've been some great studies on with some drugs showing that adjuvant therapy at that time can lead to a dramatic reduction in cancer recurrence.

And so that's kind of what the clinical trials tend to be about. But then if you're trying to detect cancer that hasn't come back yet, you're trying to detect it earlier and earlier, the sensitivity limits you need to be thinking about, or not down as a fraction of a percent, but they ended up being more down in the part per millions kind of range.

And at this point I'm not aware of other products that target the part per million kind of range, but that's the kind of thing that we hope to enable with our NeXT Personal, particularly given the potential to be able to look at large numbers of variant low side, right..

Great, the next question and the last question from me is, I know you made some comments regarding your collaboration with Sarepta and how it could be an example of market expansion into other therapeutic areas outside of oncology.

Could you comment on what other therapeutic areas could be utilizing your services or products?.

I'd say over the years, we’ve worked with people who are working on drug development in a variety of different medical settings, including all different kinds of elements of medicine, because the products tend to be focused on the features required for cancer, the vast majority of the business has been from cancer.

I think the interesting aspect for us in this recent Sarepta Therapeutics work was that this was really coming about because of genetically engineered therapeutic products. And we see there being more and more genetically engineered therapeutic products, particularly when people think about cell therapies.

And so as you engineer cells, particularly maybe cells that come from the patient's own body originally, if you engineer them, you are effectively mutating them. You don't tend to think of it as mutating them, but that's essentially what's being done.

And so if you put mutations into the genome of a cell and then put it back into the body, you may be generating neoantigens that you may not have anticipated.

And so our ability to assess neoantigens and to think about whether for a particular patient, those could elicit an immune response that you maybe didn't want is part of what we think could open up an opportunity here. So I think its early days, but it could be an interesting market expansion opportunity for us, for sure..

Thank you. Thank you, John. Talk to you soon..

Okay, great. Thank you..

Thank you. [Operator Instructions] Our last question on the queue is coming from Patrick Donnelly from Citi. The line is now open..

Thanks guys. John, maybe one for you, I appreciate the color on terms and number of necks that were placed. I was just wondering if you could break out a little further for us just in terms of what the orders look like, what they're covering.

I know typically it's kind of retrospective from pharma companies covering a large number of samples they have in a trial.

So just wondering kind of what those looked like this quarter, and if that composition of order size has changed much for you over the past quarter, a couple quarters?.

I'd say, we've always worked with pharma in a variety of different trials. Sometimes they're early stage trials, Phase 1s and Phase 2s where people are doing things that are experimental, but really for years, we've worked with people also on later stage trials.

So even a large Phase 3 where things may have gone well or maybe they didn't go as well as the pharma intended. They want to understand what happened here. We can end up being brought in on those to help provide a more comprehensive picture of what happened with the patients who were involved. So I think the mix is perhaps not that different.

Now in terms of the types of trials, what we are seeing is a more substantial buy-in across a larger number of pharmaceutical companies. I think the NeXT platform in particular has capabilities that we never had before NeXT, bringing the immune system into the equation, all from a single sample. And so that's part of what's led to the uptake.

We're now working with pharmaceutical companies that a year ago we'd never been able to get into. So I think the NeXT platform is really opening doors for us on that and broadening out our customer base. So that's been – that's really helped with a ramp up in orders that we've been recording..

That's helpful. And then maybe another one on the NeXT platform. Just – can you just talk about your sales force ability to engage customers at the moment, given obviously the virtual setting for the most part, how that's been trending? And then just the general feedback from customers in terms of that engagement level would be helpful..

Yes, I'd say at the beginning of the coronavirus period of time, and with transitioning to our group working from home, I think we had a lot of trepidation about what that would be like, not being able to go visit customers in person and not being able to meet with them in person at conferences.

What's been interesting is that we've actually found that in some ways, it's made it easier to interact with customers because customers, almost all of our customers are still working full time. They're just working full-time from home, that because they're traveling a lot less, they're actually more accessible.

And so the idea in the past, if we wanted to have a meeting at a large pharmaceutical company with 20 different people involved, it could be hard to find a single day when all 20 people would be there and somebody wouldn't be away traveling or some other meeting what we find is that it still takes scheduling, but because there's less travel, people often have more accessible schedules.

So getting our group has worked quite hard to make sure that we continue to stay in touch and being active in terms of these meetings.

I do think it's not the same as being in person, but the video meetings we use the Zoom system can be remarkably effective and you spend more time connecting with the customer and less time trying to make your way through airports. So there is actually an increased efficiency that's happened.

And I think we look forward to a day when we can, in fact, go back into this customer's in person but it has actually been working remarkably well. I mean, we've talked about the scale of orders that we've seen in the pharma side of our business being almost 100% up.

And I think that's an indication of our group continuing to be able to be effective, even inside of the – both our company and also our customers operating in a work from home mode..

That's great. Thanks, John..

Okay. Well, thank you for your time and interest. Thanks..

There are no further questions. John, please continue..

This is John West. Thank you all very much for your attention today. And I think with that, we'll conclude the conference..

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..