Good day, ladies and gentlemen, and welcome to the Personalis Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Late we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder this call will be recorded.

I would now like to hand the conference over to your first speaker today that is Caroline Corner, Investor Relations. Please go ahead..

Thank you, operator. Welcome to Personalis’ second quarter 2021 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 our products, services and technology; the timing and pace of new orders from customers including from the U.S.

Department of Veterans Affair's Million Veteran Program; market adoption of our new products; and Personalis' expected financial performance, expenses and position in the market including our expectations for revenues and net loss for the third quarter and full year of 2021.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the second quarter of fiscal year 2021 to be filed today and our 10-K for fiscal year 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.

Please note that in these prepared remarks, Personalis management will refer to the company's oncology business. This represents the category of customers. It reflects all biopharma and all other customers, excluding the VA MVP, most of whom use personnel services for applications in oncology.

And when referring to population sequencing, we are referring to the VA MVP, or other potential customers within this market. Our press release with our second quarter 2021 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 and second quarter business highlights..

Thank you, Caroline. Personalis continues to grow. For Q2, we achieved another overall record revenue level and it was our 20th consecutive quarter of growth. Note that this growth is not a recovery from a pandemic induced dip a year ago as many other companies have reported.

Although we have seen a variety of delays due to the pandemic, Personalis revenue has grown without interruption all the way through it. This has been driven in particular by our oncology business, which has received orders well above revenue levels since Q3 of 2019. We have increasingly seen the resulting backlog convert to revenue.

In Q2, our revenue from this business grew 72% over the same period of the prior year. It has increased sequentially over the last seven consecutive quarters and Q2 was a new record for us. In Q2, new orders exceeded revenue once again. And so far in Q3, new orders received are already significantly higher than in all of Q2.

So far in Q3, over half of our orders are for prospective clinical trials. We see it as a great endorsement of our platform that our pharmaceutical customers are incorporating it in their clinical trial designs, right from the start. We also believe that the increasing value of our backlog bodes well for future revenue growth.

The strategy of our oncology business has been to support drug development at the leading edge of cancer biology. We believe our strategy is working. Our mission is to help cancer patients live better and longer lives and we developed our ImmunoID NeXT Platform with this objective in mind.

The NeXT Platform provides our biopharmaceutical customers with the capability to better understand the cancer patient's genetic profile, which can help with drug development, therapy selection, and ongoing monitoring of the tumor to help detect recurrence.

We believe that in order to better understand a cancer patient's tumor; both tissue and liquid biopsies together can provide the most comprehensive view leading to the optimal therapy and treatment decisions being made.

Both tissue and liquid biopsy based offerings have been designed specifically to meet the needs of our biopharmaceutical customers and provide data on all of the approximately 20,000 human genes.

We expect our oncology revenue to become a larger part of our total mix of revenue going forward, as we leverage our ability to analyze both tissue and liquid biopsy samples with these platforms. Tissue samples give us access to RNA and to the immune cells which have infiltrated a patient's tumor.

Also, by analyzing liquid biopsy samples, we are able to provide information about a patient's tumor across multiple time points from small blood sample. When used together, we believe our oncology platforms provide our customers with the most comprehensive analysis for tumor burden and biomarker identification available today.

We continue to execute well to our strategy and later this year, we plan to expand our liquid biopsy offering with the launch of NeXT Personal, our Minimal Residual Disease, or MRD offering that will be designed to track changes in a specific patient's tumor.

We have been processing customer provided samples to ensure our product development meets customer requirements and we’re very encouraged by those initial results and by initial feedback from our customers.

We believe that with the ability to monitor over thousand mutations, NeXT Personal will compare favorably in terms of sensitivity and information contents, with smaller panels on the marketplace today, they can identify and track only dozens or hundreds of mutations.

We also believe that NeXT Personal will be applicable to both pharmaceutical research and clinical diagnostic markets in the future. Now, I would like to provide some recent highlights and commentary on our growth drivers from Q2 and thus far in Q3. First, we continue to make encouraging progress with our exome scale NeXT Liquid Biopsy product.

As you recall, we launched less than a year ago and began with pilot scale customer orders. We have now begun to see additional orders following initial data delivery from those pilot projects.

Recently in Q3, we received a multi-million-dollar order from a customer for the use of our tissue and liquid biopsy, full exome products together, each at multiple time points.

We have also jointly authored a publication with another one of our customers showing the utility of our next liquid biopsy together with our ImmunoID NeXT analysis of tissue from the same patients.

We are very pleased about the customer adoption thus far, and we believe that NeXT Liquid Biopsy will also work synergistically with NeXT Personal when it is released and that our liquid biopsy-based products will contribute increasingly to revenue as we enter 2022. Second, our customer base has broadened substantially over the last year.

We have now received orders from a majority of the top 10 oncology-focused pharmaceutical companies. Since we introduced the NeXT Platform in 2019, we have received NeXT orders from more than 50 different customers.

Third, earlier this week we announced publication of an important study we conducted, showing the advantage of our platform in predicting patient response to checkpoint inhibitors. Checkpoint inhibitors are a new class of cancer drugs, which do not attack a tumor directly, but which instead enable a patient's immune system to attack it.

The most successful of these drugs were first FDA approved in late 2014. And they have now been approved in and are widely used to treat many types of cancer. In 2015, just after these drugs began to be adopted, we recognized that they represent a completely different mechanism of action based on what are called neoantigens.

These are proteins created based on mutated DNA sequences, which can trigger an immune response to a tumor. Not all patients respond to checkpoint inhibitors. So, there's a need for new biomarkers, which can accurately predict that. Tumor mutational burden or TMB has been proposed for that.

But implemented on small, traditional cancer panels, it is just an approximation and it has not been as successful as desired. Personalis has been developing and now clinically testing, increasingly sophisticated technology to identify and rank neoantigens and associated escape mechanisms since 2015.

In our new publication, we show the substantial advantage of our NEOPS biomarker over TMB for response to checkpoint inhibitor therapy in two independent cohorts of late-stage melanoma patients. This peer reviewed paper appeared in clinical cancer research. The journal published by the American Association for Cancer Research.

This publication provides additional evidence supporting our belief that this biomarker can become an important input to clinical diagnostic decisions in the future. Our ImmunoID NeXT and our clinical NeXT Dx Test make our advanced capability, including NEOPS available to pharmaceutical researchers and clinicians for investigational use today.

Fourth, we continue building our regulatory and clinical capability in order to pursue business in the cancer diagnostics market for therapy selection and monitoring. We believe that the combined market potential of these opportunities is approximately $30 billion in size in the U.S.

we have been hiring employees with clinical and medical experience within a diagnostic setting, and we will continue to hire and invest in this area. Recent additions are in medical affairs, clinical development and genetic counseling.

We believe that our comprehensive NeXT Dx Test, including our proprietary NEOPS biomarker for immunotherapy and our upcoming next personal test, create a powerful product line for our entry into the clinical diagnostic market.

This opens up a tremendous opportunity for Personalis and we expect to begin recognizing additional revenue from a laboratory diagnostic test in 2022. Over the past few quarters, we highlighted some of our initial plans to establish a lab and commercial operations and the People's Republic of China.

And to partner with Berry Genomics, we have now hired several employees and have a team to begin qualifying our laboratory in Shanghai. And we expect to begin working with customers before the end of this year. Customer engagement is very good and they are excited about the services we will offer in China.

We have already received multimillion dollar orders from customers to process samples for international clinical trials using our NeXT platform. And the samples related to China are expected to be additive in the future.

Also we're in discussions with a number of Chinese pharmaceutical companies about their potential use of our NeXT platform and their clinical trials in China. We continue to expect that our operations in China will begin in the second half of 2021 with revenues beginning in 2022.

While this project will take some time to meaningfully contribute to our top line, we believe this is an important investment. We look forward to updating you on our progress. I'd now like to update you on the population sequencing part of our business.

We have received all the samples required to complete our current orders, putting us in a great position through Q3. We expect to receive a further order under our existing contract with the VA MVP by the end of September. We anticipate that our work on that order will begin in Q4 and continue into 2022.

The VA has recently reopened VA MVP enrollment to veterans, which had been closed during the pandemic with over 825,000 in MVP already continued enrollment will advance them to engagement of their first million patients. Our work with the VA MVP represents the largest population sequencing efforts within the United States.

The VA now targets enrollment of $2 million veterans, at the pre-pandemic enrollment rate of about 100,000 veterans per year. This goal could take another 10 to 12 years to achieve, but based on our conversations, we believe that the VA is determined to get there.

This belief is also supported by recent news about the VA’s budget in June more detail about the proposed fiscal year 2022 top level budget plans became available and showed that $802 million was planned for medical and prosthetic research and $84 million for whole health initiatives, which we believe is a positive sign relative to continued funding for the VA MVP, as it represents a year-over-year increase of more than 13%.

In June, we announced that we became the first for-profit company to sequence more than 125,000 whole human genomes in the United States, which was an important milestone for us. We remain on track to sequence more than 150,000 whole human genomes by the end of 2021. Some will be for population sequencing and others will be cancer genomes.

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

We continue to build up a funnel of commercial opportunities and we're in early discussions with several of these prospects. We expect that we will have additional customers and revenue from these new commercial opportunities in 2022. I would now like to expand on the synergy between our population sequencing and oncology businesses.

The American Cancer Society has estimated that there are over 17 million cancer survivors in the United States today. The largest segments of this population are those who have survived breast and prostate cancer.

To detect potential cancer recurrence, we could look in a patient's blood plasma for the mutational signature of their tumor, but these two cancer types have such low mutational burden that they can be difficult to detect. We realized early on that we might overcome this difficulty by leveraging our whole genome sequencing experience.

Combined with our deep expertise in cancer, it has allowed us to launch whole genome sequencing from cancer samples. With this technology, we can identify up to 20 times more somatic variants to serve as the basis for personalized cancer assays.

We believe that this will let us achieve high sensitivity for recurrence detection, even in cancers like breast and prostate, which have low mutation rates, which have been surgically resected and which shed relatively low amounts of cell free DNA into the blood. We believe this can be a leading technology in some very large market opportunities.

And we'll have more to say about this as these product developments progress. In summary, I'm very proud we have continued to show strong growth, particularly in our oncology business. Customer interest and adoption of NeXT has been excellent, and our pipeline of compelling new products is rich.

We have the capital required to invest in our growth initiatives, such as new products like NeXT Personal, enhancing our clinical and regulatory capabilities, expanding collaborations that further highlight the utility of our NeXT platform, expanding our operations geographically, and expanding capacity to support our revenue growth.

We believe this puts us in a strong position for both near- and long-term growth. With that, I will now hand it over to Aaron for our financial results..

Thank you, John, and good afternoon, everyone. We had another great quarter and achieved a new record revenue level once again from our strong execution. During my prepared remarks, I will provide detail about our financial results for the second quarter of 2021 and our guidance for the third quarter and the full year.

Total revenues for the second quarter of 2021 were $21.7 million, up 4% from $20.9 million for the prior quarter and up 11% from $19.5 million for the same period of the prior year.

The $21.7 million was a new record high for quarterly revenues, and the growth was primarily driven by an increase in genomic testing services provided to biopharma customers.

Aside from the VA MVP, biopharma and all other customers accounted for revenues of $8.2 million in the second quarter, representing a 6% sequential increase and a 72% increase over the same period of the prior year.

This was our third consecutive quarter with a year-over-year increase of more than 70% and our seventh consecutive quarter of sequential increase, which highlights a couple of key points. First, customer orders that we have won over the past year and a half are converting to revenue.

Second, the new order amounts continue to exceed revenue reported each quarter and increases our backlog. This provides us with confidence that our biopharma revenue will continue to grow in the future. Also, our current biopharma revenue is mostly from tissue samples.

As we ramp our liquid biopsy offerings, we expect this to accelerate due to the multiple time points or another words, the number of tests per patient. For the second quarter, the VA MVP revenue of $13.5 million was higher by 2% from last quarter and was 8% lower compared with $14.8 million for the same period of the prior year.

The VA MVP unfulfilled orders were $16.8 million at the end of the second quarter. And based upon current estimates, we expect the unfulfilled orders to convert to revenue through the first month of the fourth quarter.

Gross margin was 37.7% for the second quarter, compared with 35.6% for the prior quarter and 24% for the same period of the prior year. The sequential increase of 2.1 percentage points was primarily due to operating leverage from the 6% increase in biopharma volume and lab efficiency improvement.

The year-over-year increase of 13.7 percentage points was primarily due to operating leverage from the 72% increase in biopharma volume customer mix, lab efficiency improvement, and cost reduction.

Over the next couple of years, we do expect some gross margin variability due to the headwinds from investments in new capabilities such as dedicated production lines for FDA approved offerings, adding more capacity, expanding in China and others.

Longer-term, we expect our gross margins to increase as we achieve scale and our oncology revenue becomes a larger portion of total revenue. Operating expenses were $23.1 million in the second quarter, compared with $14.2 million for the same period of the prior year.

R&D expense was $11.7 million in the second quarter, compared with $6.5 million for the same period last year. And SG&A expense was $11.4 million in the second quarter, compared with $7.7 million for the same period last year.

The increase in R&D expense was for new product development and continuing to build our clinical infrastructure and the increase in SG&A was due to commercial expansion, continuing to enhance our infrastructure and public company costs.

Net loss for the second quarter was $15 million compared with the net loss of $9.3 million for the same period of time prior year.

The net loss per share for the second quarter was $0.34 and the weighted average basic and diluted share count was $44 million compared with a net loss per share of $0.29 and the weighted average basic and diluted share count of 31.7 million for the same period of the prior year.

Now, onto the balance sheet, we finished the second quarter with a strong balance sheet with cash and short-term investments of $328.9 million. In the second quarter, we used $24.5 million of cash due to the net loss, working capital needs and capital equipment purchases.

As mentioned during our last earnings call, we expect our cash usage to increase from the mid $40 million range in 2020 up to a level of approximately $90 million in 2021 due to investing in the many growth initiatives in front of us.

Now, I’d like to turn to guidance, our business has performed really well over the last year and a half due to customers adopting our next platform. And with new orders, continuing to grow faster than revenue we report, we are confident about the outlook for the second half of 2021.

For the third quarter, we expect total company revenues to be approximately $22.2 million. And we expect biopharma and all of the customer revenues excluding the VA MVP to be in the range of $7.5 million to $8.5 million representing a year-over-year growth rate of 40% at the midpoint.

Net loss is expected to be in the range of $17 million to $18 million and the weighted average basic and diluted share count is expected to be approximately 44 million.

For the full year of 2021, we expect total company revenues to be approximately $85 million, and we expect biopharma and all other customer revenues excluding the VA MVP to be in the range of $33 million to $34 million up from last quarters’ guidance of $30 million to $32 million representing an annual growth rate of 49% at the midpoint.

Net loss is expected to be in the range of $65 million to $70 million due to the increase in expenses and weighted average basic and diluted share count is expected to be approximately 44 million. 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.

Operator?.

Thank you. [Operator Instructions] Your first question is from Derik de Bruin of Bank of America. Your line is now open..

Hi, good afternoon. This is John on for Derik. I wanted to ask about, so one, like, how's the China expansion going. And two, on another note, like, are there any updates on population sequencing programs beyond the VA? I know you guys alluded to it a little. Thank you..

Great. Happy to answer that. So I'd say we're really happy with the ramp up in China from an operational standpoint, we've been able to hire employees. We’ve been able to begin to get into the lab set up. We have equipment going over there, computers going over there. I think the difficulty of course is we can't travel over there right now.

So that limits what we can do. I think the key thing is that, since we've been pursuing that and clear about our intentions, the interest from our pharma customers has been terrific. And we think it's helped us win orders that are outside of China as well.

Because there are a lot of pharmaceutical companies that operate both inside and outside of China, because they need to run clinical trials for their drugs in China as well to get the drugs approved in China.

And so having a partner like Personalis that can provide state-of-the-art genetic analysis, both outside of China and the same exact analysis inside China is really valuable to them. So I'd say so far, we're pretty excited about it. Revenue is probably mostly next year, but I think we're pretty positive about that.

And then you had asked about population sequencing efforts other than the VA. We are continuing to talk with a number of those groups. There's some pretty interesting leads there. I think we'd probably defer anymore commentary until we have something more definitive, but we continue to think that's a pretty interesting area for us.

And again, I think we have capabilities that are unmatched in that area..

Great. Thank you..

Your next question is from Kevin DeGeeter of Oppenheimer. Your line is now open..

Hey, thanks for taking my questions. I guess maybe two perhaps, three perhaps, starting off, can you comment about relative growth rate within the biopharma group? What I think we traditionally described as retrospective samples partly, preclinical nature versus ongoing clinical trials.

Specifically, for the clinical piece is that generally growing at a rate faster than a roughly in line or that's the last then the overall biopharma group..

This is John. Hi, Kevin. So what we see is that we're continuing to get strong orders in area of retrospective clinical trials, but the prospective aspect, which takes a certain amount of commitment from the part of the customers to say, they're going to run this all the way through their trial. That's the part that's really been growing a lot.

So when you see, we've been talking about our orders going up and Q3 has been phenomenal as far as that's concerned. A lot of that increase in orders has been the additional layer of prospective trials on top of the retrospect. So it's not kind of one instead of the other, it's the perspective building on top of the retrospective.

And I think that sets us up for revenue for years to come from those trials as they enroll..

And maybe as a follow-up on that, as we think about the levers to drive adoption for liquid biopsy, I guess, sort of the two part question is or is it practice to you think about those prospective studies as being a primary area for early adoption in liquid biopsy and then just kind of more generally.

How should we think about – how much visibility do you have into specific customers that really could help jumpstart that liquid biopsy demand and kind of pull through from a revenue perspective?.

Yes, great question. So I'd say that the – when we launched the product to start with, we were clear that since we're looking at 20,000 genes, it was pretty different from the liquid biopsy products that were on the market actually much more expensive.

And that would be something that customers would likely run pilot studies in order to see what they could see and understand the value of that. So we've been going through that process this year. We're beginning to see some, I think, pretty encouraging feedback from that, including the orders that we talked about.

So, it is a newer category of liquid biopsy. We think it’s potentially a pretty large one. And at this point, it’s my knowledge there’s really almost no competition in that space. I think we’re the only ones who have gone that far out to do whole exome-scale, liquid biopsy. But actually we’re finding that it can be remarkably informative.

And so I think we’re optimistic about it. Again, it will take time to build, but I think that liquid biopsy will be at an increasingly large section of our revenue as we go through next year..

Thanks for taking my questions. I’ll get back in the queue..

Thanks..

Your next question is from Swayampakula Ramakanth of H.C. Wainwright. Your line is now open..

Thank you. John, you always think about what’s the next big project and talk – stop talking about things that you want to do it in oncology space. And it was very interesting to hear from you about the stuff that you’re doing with the survivors of breast and prostate cancer.

So can you elaborate a little bit more as to how you plan to link that data into, I’m guessing, more into prediction? How has that lingering happened and what sort of a product will this be? Again, is this product going to be more for developers or for more at the preclinical level or at the clinical level?.

Yes. Great question. So this is really connected to our NeXT Personal product development. In general there are a number of tumor informed assays that have been developed by a variety of companies in this space. Many of them look at a dozen or a few dozen genetic mutations.

But we understand, you can be a lot more sensitive looking for recurrence, if you can look at much larger numbers of mutations. There’s just much more signal to look for.

And so when we looked at the market to do a cancer recurrence, we looked at the segments and we saw the different types of cancer breast and prostate cancer survivors are a really large fraction of the overall cancer recurrence monitoring market.

And they – and yet those are cancers where there’s not a lot of mutations, it’s not zero, but it’s just a much lower mutational burden and those cancers than something like melanoma or lung cancer. And so, there tends to be not as much signals to look at if you only sequence with a smaller panel upfront.

But we realized several years ago that we could actually get around that by using whole genome sequencing from the cancer, there are a number of fairly serious technical challenges in that. But we think we’re largely overcoming those now. All of the experience we have with doing whole genome sequencing with the VA certainly helped us think about that.

And so by leveraging whole genome sequencing from the tumor, we would expect to be able to identify typically over 1,000 mutations from – even from a breast or prostate cancer.

So with that large number of mutations, it gives us a lot of signals to look for in the cell-free DNA after surgical resection or after a patient has had a complete response to drug therapy.

And so the NeXT Personal product will be intended to look for that large signature and to be able to identify that signal and to be really sensitive because of that.

We also think that in the monitoring space, it’s important not just to tell whether a cancer is coming back or not, that’s a really important application, but for many of the people being monitored, the cancer is back. There isn’t a question of whether it is – people know it is, and the cancer is being actively managed.

In that case you really needed to know how the cancer is changing. And so the ability to see new escape mutations or things like that in the tumor when those begin to happen, that’s all part of the monitoring aspect. And so we think NeXT Personal will be pretty comprehensive across the board with those.

And it will leverage this capability with whole genome sequencing as the front end..

A quick one, just a corollary to what you’re just talking about is, as I would think is the paper that you – that was recently published with the checkpoint inhibitor treatment.

So how is the – how can you develop that market? Because obviously, there's a lot of people out there who are trying to understand how to treat some of these patients who cannot respond to checkpoint inhibitors, that population keeps increasing.

So is this segment of the market that you're going after, or do you already have certain orders in place from such folks?.

Yes. So certainly many of the customers we have in the pharmaceutical world are people who have been developing checkpoint inhibitors. We work with many of the companies in that space. So and a lot of them adopt our platform because of our ability to look at all the genes, which is what's really required to be able to see neoantigens.

And now with this new biomarker, and our ability to tell which mutations maybe antigenic, that's a really differentiated capability. In theory, other people can generate an exome scale cancer assay, but they won't be able to tell which of the mutations actually could generate an immune response. And that's something we've worked on since 2015.

And this NEOPS, SHERPA is a great example of the real clinical testing of that..

Thank you, John. Thanks for taking my questions..

Your next question is from Mark Massaro of BTIG. Your line is now open..

Hey guys, thanks for taking my question and apologize I'm hopping on different calls tonight.

So I may have missed some of the earlier comments, but can you give us a thought process on your reimbursement framework? So obviously, as you're starting to sort of transition from a research more into the clinical side of diagnostics, can you give us a framework for whether or not you plan to sort of effectively crosswalk to existing codes in the market or any commentary you can make about discussions that you might've had with Palmetto MolDX would be helpful?.

Yes. So this is John here.

I didn’t – we're not able to talk about specific conversations like that yet, but I would say the concept is that we've developed our next platform so that it can both look at new state-of-the-art biomarkers, like NEOPS, which nobody else has, but it can also be well validated for the known biomarkers they're already reimbursed.

And so we would expect to be able to be reimbursed for use of the NeXT Dx Test based on those conventional biomarkers, because NeXT has been designed specifically to be able to see them really well. As you may know, the NeXT platform is, does not have the same sequencing coverage everywhere. It's over 300x sequencing coverage across the whole exome.

But then in the genes that capture the sort of traditional targeted therapy targets we boost the sequencing coverage up, it ends up at over a 1000x step. So we're really sensitive and those chains. And so that gives us a clinical utility that aligns with the kind of reimbursement that's already been well-established by others.

So that gives us a baseline of reimbursement. And then we can leverage the additional broader capabilities we have both to attract customers who may be interested in that combined research and clinical aspect, and also ultimately who are interested in leveraging novel biomarkers, like NEOPS but nobody else may be able to offer..

Okay. And then I'm just curious for any additional clarity on the VA. So I believe you said earlier that you do expect a further order by the end of September that hasn't come in yet. Yet you still maintain the guide for the year.

So is it safe to say that your degree of competence is high that you expect another order to come in for Q4? And then as we think about beyond Q4 and into 2022, what is your degree of confidence in the VAs desire to continue the program at similar levels?.

Sure. Let's see. I can say that we've been working with the VA now. I think we've received orders every year since 2012. I think the only time we didn't receive an order in September was one year, it was actually dated in September. We didn't receive it until October.

I think this year, officially the order would probably come in by the end of August, but again, there could be delays and there’s paperwork going through at us receiving yet. So that's why we're confident about September. The VA is always looking at its spending on a variety of different areas.

And I think we benefit both from the budget, which has been specifically set aside for the Million Veterans Program, but actually there’s a lot of enthusiasm for the program inside the VA.

And so to the extent that there are funds that were set aside for other things that maybe didn’t get completely spent, if they’re able to repurpose that towards MVP, in the past, we’ve seen that they’ve done that kind of thing. And so that’s part of the reason that the orders tend to come at the end of the government fiscal year.

So, yes, I would think it would be a completely normal for us to see it in kind of late August or even into September this year. That’s sort of – that’s how it’s always worked with them. I think we’re very confident that will happen based on the conversations we’ve had.

And then in terms of the commitment to the program going forward is, I think I might’ve mentioned in the remarks, we see this as being a long-term commitment at the VA. When we talk with people, they’re talking about their March to the first million and their goal is to have two million.

And so that’ll probably take a decade at the current rate of acquiring new veterans being enrolled in the program. But we get a sense they’re headed for that. That’s the goal. Many of them started working on this. The early planning started back in 2006, 2007 people have been working on this for 15 years.

They’re almost to the first million collected, we’ve sequenced over a 100,000 or 125,000 genomes. So, I think they’re saying it’s working, they’re the number one population sequencing project in the U.S. and I think they feel like that’s taken a lot of work and they’re going to – if they’re going to keep at it and do that.

So, we have every indication that they’ll do that. Certainly the budget process we see happening with the budget authorization for the VA. That’s going through Congress now for FY 2022.

They – by the administration proposed a 13% increase in the research budget at the VA, and the White House, specifically in their announcement about this highlighted the fact that this was the largest percentage increase in the VA’s research budget in recent memory. And we’ve looked back almost 20 years and not seen anything of that scale.

So, I think there is a strong support, not only for the VA, but for research in the VA, because I think they see that the VA has a unique ability to do certain kinds of research that you really can’t – there is no other place you can do that kind of research..

That’s super helpful. And so I noticed another emerging genetic testing company recently hired two or three people out of Illumina to fortify, I guess, if you want to call it their population sequencing initiatives.

So, can you maybe just talk about any changes to the sizing of the market, the number of opportunities, or maybe even just competitive dynamics as maybe more than one company starts bidding on some of these global contracts?.

Yes. So it’s a good question that there’s – there’ve been a number of people competing on these kinds of contracts over the years. And that includes in Europe, there has been some bidding on that kind of thing at this happened in the Middle East as well.

So, I think there are opportunities like that, but for some of these large projects, these are very large amounts of money they’re going to be spending and they’ve spent years collecting these samples. So, they often want to be really confident in the quality of the data that it’s going to match.

What’s considered the standard in the industry today, and to have somebody that has the experience that’s actually done it, that isn’t just talking about it for the future. And I think Personalis has more experience in that category than anybody in the world.

And so from that standpoint, I think we’re in a good position to compete for those kinds of things. We will continue to be cognizant of anybody who could be a competitor, but we’ve had competitors in the past and at least in the VA business, in spite of the fact that there were other bidders Personalis won in every single case.

So we intend to continue being aggressive in that space, but we think we have a great, we've been working on it for enough years and have enough experience now that I think we really are by far the most experienced company in that space..

That's really helpful. Thanks very much..

I would say maybe one more item on that is, is that because these groups are looking for, there's a lot of value in the statistics, having very large numbers of patients, you see the VA trying to go for 2 million, 3 million patients and so forth. The cost of the sequencing matters a lot in that.

And so there are other groups that have proposed various things. I think it's important to be able to be not only to advocate the quality, but it is important to be able to compete on the cost and so.

Personalis has worked a lot with Illumina over the years, all of the sequencing we've done for the VA has been using the Illumina platform and I think that's held us in good stead. So if others are going to enter the space and there have been others that have entered this space using like the Oxford Nanopore platform.

It's not clear that all those other competitors can match in terms of both quality of sequence and costs. So I think those will be – those will be challenges for the future for those companies..

Your next question is from Doug Schenkel of Cowen. Your line is now open..

Good afternoon guys. And thank you for taking my questions. My first is actually a question on China. Yeah. There's been some recent changes in regulations recently in various industries, such as technology and food.

As we've talked to others in our industry and more broadly across healthcare, it does seem like there are some concerns that similar types of changes could occur in our field that maybe put Western firms at a bit of a disadvantage. I'm just wondering how you're thinking about these things.

And then, specifically to the partnership with Berry, do you feel that that puts you in a position where you're better positioned than maybe some others, based on that partnership and being able to navigate any regulation changes?.

Yeah. Thanks, Doug. It's definitely an area that we look at carefully and I think the partnership with Berry definitely helps us in that regard.

I'd say, another aspect of this is that, if we were only going to do clinical diagnostic testing, I'd say there are going to be Chinese companies, that there are Chinese companies that provide that kind of next gen sequencing based clinical diagnostic testing inside China.

And so the Chinese government could have an incentive to tilt the playing field in favor of the home players. This is a little different case, because our business there is really aimed at this point at working with international pharmaceutical companies.

And in those cases, the vast majority of the clinical trials that are being run is actually being run outside of China. And what pharma is looking for is somebody who can provide the same technology both outside China and inside China.

And so a laboratory that only operated inside China, for example, could – in principle try to compete for the business, but it largely wouldn't be able to have, they unless there was a lab like that, that had capabilities in the U.S. and Europe, and so forth as well. It wouldn't really be able to provide that other part.

So I do think that Personalis positioning as a company where we've been focusing on genetic and also specifically for pharma and that's been the target customer for us. And China is a major hub and the Chinese Government has a real incentive for there to be international pharmaceutical companies, having their drugs approved in China.

And so I think there's a different incentive that may help us through this kind of potential.

They call it regulatory/protectionist, worry that there might be, that is different from the situation you might have if this was purely a genetic diagnostic business, where we're also, if you're a diagnostic business, you could be a diagnostic business only inside China and that could be fine.

There's not as much benefit to also having the business outside China..

Thanks for that John. And just completely unrelated follow-up regarding NeXT Personal and NeXT Liquid Biopsy. Product development efforts you've been talking about for awhile and they're very Personalis like, more markers, more content for not a whole lot money – if not a whole lot more money, if anything at the same price.

As you move into clinical with these products over time, I know you appreciate this, but you're going to need to do more than just include more content, right? You need to demonstrate equal or better performance. The content arguably matters less than how the assets perform and the utility in a clinical context. You guys know that as well as anyone.

And then commercially you're going to need to be as good if not better than the incumbents, especially as you're playing catch up.

So again, nothing controversial there, I'm just curious, assuming you don't disagree, when do we see more clinical data and how do you envision differentiating and being better than others when it comes to test performance in terms of utility, not just breadth. Thank you..

Yes. So I guess I'd say that they won't let me speak to NeXT Personal in particular. We think that that'll be a product that has substantially better performance in a dimension that matters a lot on the clinical side, which is sensitivity for detection.

So we see other groups publishing clinical results and detecting a cancer when it's coming back at a 10th of a percent allele frequency, or maybe a fraction of that. We're aiming at a part per million kind of level. So this is hundreds of times more sensitive than the other products that we see on the market.

And it directly impacts how early can you see whether the cancer is coming back or not. And so we think that's a very differentiating, very clinical feature. So it's in a sense, not just about more content in a sense for – from a research perspective, but it directly ties into a metric that our clinical customers we think will care a lot about.

You're right that we will need to have the other elements of this from a commercial standpoint, the salesforce, the reimbursement, all the other elements. And that's absolutely front of mine now. And I think we'll have more to say about that as we go through the year and into next year.

But we're very aware of the – of those other challenges, not only the technical performance..

Thank you..

Great. Thank you..

Your next question is from Mike Matson of Needham. Your line is now open..

Yes. Good afternoon. Thanks for taking my questions. So I had one about this recent data on the NEOPS biomarker.

So here was PD-L1 use to compare against the predictability of the immunotherapy response and if not as their plans to study that?.

Not sure I fully understand the question. I understand you're talking about PD-L1 immunohistochemistry as a biomarker, but then it may be, if you could restate the question, it would be helpful..

Yes, sure.

So I guess you looked at how it compared to TMB, but I was wondering if you also looked at how your biomarker compared to PD-L1 in terms of predicting immunotherapy response?.

Alright. So that the study that we published was specifically comparing against other direct genetic biomarkers, as opposed to a protein biomarker, like PD-L1, and I think that they're a little bit orthogonal and so they could complement each other.

In general, we have cases where customers are interested in PD-L1 IHC testing along with our next platform. So we see the two working together and in a way it's an example of the thing we've been talking about the individual bio, excuse me, individual biomarkers often are not as predictive as a, what we would call a composite biomarker.

And so the composite biomarker that we have in NEOPS combines both the neoantigen burden, but also the immune escape elements of the tumor, but that you could see how that could also be further combined with things like the PD-L1 staining.

We do see that the PD-L1 standing, although it's indicative in some cancer types, it's not required for a physician to use the drug. I think it's – it tends to be mildly indicative, but it's a bit challenging.

There's a different PD-L1 marker for almost every checkpoint inhibitor and so I think that, that's considered to be a fairly unsatisfactory biomarker at this point.

And it doesn't really reflect the core mechanism of action of these drugs, which has to do with the neoantigens and so that's what we've been aiming at all this time has been to get at what's the real underlying mechanism of action of these drugs.

And so if that – if you can see the details of that mechanism of action, it really lets you be more definitive about whether a patient will respond or not.

And we also expect that NEOPS will do something that will change over time as the patient evolves, the tumor evolves, there'll be more mutations, which would be more neoantigens, but there can also be more loss if HLA, which is a different kind of escape mechanism.

So we see this, we're bringing this out to start with on our tissue platform, but you can imagine wanting to look at that from a liquid biopsies standpoint over time, too..

Okay. Thanks.

And then, you as far as NEOPS goes, I mean, it's just something that would be used for your pharma customers or would it – would you also offer it for clinical use?.

Yes. So the answer is yes to both. The – it's actually available to our pharmaceutical customers now, and they can use it both in their research studies and if appropriate, they could use it with us on a companion diagnostic development. It would be inappropriate biomarker for that kind of thing.

There are – the low hanging fruit has largely been taken now in the checkpoint inhibitor space. And the challenges now are in, there's a number of cancer types for which checkpoint inhibitors are either have not been approved or they're not first-line therapy.

And so biomarker that's a bit discriminatory on the patients might help advance and let those checkpoint inhibitors get approved in places where there otherwise have not been. So I'd say from a pharma standpoint, that's a – that would be either attractive opportunity for them.

And then from a clinical standpoint, we report out NEOPS as an investigational biomarker already today on our next NeXT test. And as we ramp up the diagnostic volume on that test, I think we'll see more and more people using that. And I think that'll – we'll begin to see interest in it.

It's one of the things that will really differentiate the platform because so many patients today are getting checkpoint inhibitor drugs, and many of who received those drugs don't benefit from them.

So I think physicians are very aware of that problem and are looking for something that might at least give them an indication about, which patients really look like they're the best candidates for those therapies..

Okay, great. Thanks..

Your next question is from Patrick Donnelly of Citi. Your line is now open..

Thanks for taking the questions guys. I was just hoping to talk a little bit about, I know you mentioned a little bit, but on the POPSEQ pipeline outside VA.

Can you talk about, I guess, how active the pipeline is, and also just timing, I think you've always talked about, starting to have some relationships in 2022 but just in terms of some actual award decisions, things like that, just what – how we should be thinking about that opportunity and even the magnitude, if you want to talk about that a bit?.

Yes. So I would say that they, in general the programs we talked to or, people looking at many, many thousands of patients, so they end up being, multimillion dollar programs can be larger than that in some cases. The number of the groups are exploring, how they're going to go forward. Some groups already have samples that they've collected.

Some groups are just beginning to collect samples. So those different countries are at kind of different stages. I would say that the advance of COVID has not helped in that regard because as much as COVID is a challenge in the United States, it's even more of a challenge in some of the other countries.

And some of the countries that have interesting population, sequencing projects from our point of view have also had very serious COVID outbreaks. And so I think they, those discussions are ongoing, but, people are trying to work through it in the midst of a challenging pandemic.

And so I think the timing of that, we do see it as a 2022 kind of opportunity. There are programs that are interested in moving forward on this kind of thing that are collecting samples and, we'll have to compete for that kind of thing.

But I do think it's a something where as we go through 2022, I wouldn't be surprised to be able to see, to announce, some awards in that area. Some of them will be competitive bids. We'll have to go through that kind of thing, but we've been pretty competitive on that kind of thing in the U.S. in the past.

So we would certainly aim to be competitive internationally as well..

That's helpful. And then just circling back on the VA, and I know you've obviously talked about a lot, but it seems like a majority investor focuses on that given the time of year.

Can you just kind of talk through the mechanics of getting a new agreement in place? Is it just kind of all, wait and see any discussions get, I mean, if you could bring us behind the curtain for a minute just to kind of get your conference level and what timing, how would you expect this all progress over the next few weeks or couple months? And again, I know you talked a bit about it, but the more clarity the better on this one..

Yes, that'd be great. I mean, we have a relationship with people in the VA who worked on this program, and many of the people we work with today are the same people, we've been working with since back in 2012, when we started. So it's a pretty long lasting relationship and you get to know the people pretty well.

And, they're only able to say so much until there actually is an award, but in terms of the mechanics, there is no competitive bid this year. This would be a new task order that would be issued on the contract that we already have. There are no milestones they need to clear, we could get an email tomorrow that says here's your new order.

And that would be the whole thing. So we don't think there were any additional steps we needed to take on that. We have had discussions with the VA abroad, a variety of ways in which we could advance the service we provide to them. That could be that they could leverage on the existing contract. There's quite a bit of interest in some of those.

And so, I think we'll have to see what they end up deciding they want to fund. But I'd say the overwhelming sense is, that this has been an effort they've been working on since collecting samples, since 2011. So it's been a decade already collecting samples. They have something like 300 people working on the project.

It's sort of the shining star in some elements of the VA research arena. And so, we've got every sense that they intend to continue this until they get through the – to at least 2 million patients.

And I'd say, if anything, there is an interest in seeing more clinical content to this, and eventually transitioning this into something that's used on an ongoing basis with all veterans. So that's perhaps maybe more aspirational than funded at this point, but we do see strong funding support.

And when we speak with people on the political side of the world, we also see that there is strong support for this program amongst both democrats and republicans.

And so, it's not a controversial program politically, it's been something that's been was well supported under the Trump administration and is now well supported under the Biden administration.

So I think there is a great sense of – this is an important national program, it's a – probably be 20 years in the process of building the whole thing, we're about halfway through that now. And I think everybody has their heads down and intends to continue driving forward..

That’s really helpful. Is there – in terms of timing, is there a certain date where if a day passes you start to get a little concerned.

If you don't hear you'll get that email, like you said just so we can kind of keep an eye on the timing and all that?.

I mean, I'd say our expectation is that the order probably would be signed in August, it could be in September. I think August, but sometimes there is we have seen, what I've described as sort of a paperwork delay between when things are signed inside by whoever's – the appropriate person is inside the VA.

And when we actually get that news and can share it with the world. So I think it's probably fair to say, we’re thinking about September. If we got to the end of September, it didn't have something, we would certainly want to think about that. But we're in touch with people at the VA on a fairly ongoing basis.

So if there was some big changes or some kind of a major issue, I would expect that people would pick up the phone and we'd be talking about it. It's not just waiting, I think there is an ongoing – we’re still delivering 1,000s of 1,000s of genomes to the VA, and there is all kinds of just the ongoing operational discussion there.

So we're in contact with those folks and every indication we have is everything is sort of continuing at this point and they I think will see how it goes with time, it is – obviously we don't like to just know what the results are and move forward. But I think in a month or two here, we'll have that answer..

Very helpful. Thank you..

Okay. Thanks..

[Operator Instructions] I’m not showing any further questions. I would now like to turn the call back to Aaron for any further remarks..

We'd like to thank everyone for joining us today and looking forward to speaking with you again in a few months. Thank you very much..

Thank you..

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today's program, you may all disconnect. Everyone have a great day..