Greetings ladies and gentlemen. And welcome to Personalis’ First Quarter 2023 Earnings Conference Call. [Operator instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Caroline Corner of Investor Relations..

Thank you, operator. Welcome to Personalis' first quarter 2023 earnings call. Joining me on today's call are Chris Hall, Chief Executive Officer and President; and Aaron Tachibana, Chief Financial Officer and Chief Operating Officer; and Rich Chen, Chief Medical Officer and EVP R&D.

All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements within the meaning of U.S. securities laws.

For example, any statements regarding trends and expectations for our financial performance this year and longer term, cash runway, revenue expectations and timing, size and booking of orders, products, services, technology, clinical milestones, the outcome and timing of reimbursement decisions, expectations for our existing and future collaboration activities, cost expectations and our market opportunities, business outlook.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, including the risk factors described in our recent Annual Report on Form 10-Q.

Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release for the first quarter 2023 results is available on our website, www.personalis.com, under the Investors section and includes additional details about our financial results.

Our website also has our latest SEC filings, which we encourage you to review. A recording of today’s call will be available on our website by 5 p.m. Pacific Time today. Now, I’d like to turn the call over to Chris for his comments and first quarter business highlights..

one, when we don't see cancer, the patient will likely remain disease free and may not need additional therapy; and two, when we do see cancer, we see it earlier at a time when patient management can be changed to make a difference. This quarter we had exciting early data demonstrating NeXT Personal's performance for sensitivity.

And we expect this to continue as additional study data published through the year. First, we were chosen by AstraZeneca and TRACERx for MRD studies. We extended our partnership with AstraZeneca so that they will use NeXT Personal to explore ultra-sensitive MRD measurements for clinical research and drug development. We were also selected by Dr.

Charles Swanton and the TRACERx study, one of the world's most major initiatives to determine treatment options and effectiveness for patients with early stage lung cancer. We'll work with the TRACERx samples and leadership group to determine the value of an ultra-sensitive assay such as NeXT Personal in lung cancer patients.

I'll add more color to the TRACERx relationship in a minute, but it is important to point out that high-end collaborations are important validations of our technology and performance claims. But in other way these global leaders are choosing to work with us because of our ultrasensitive MRD capability.

Second, a few weeks ago at the American Association for Cancer Research annual meeting, initial findings from our UKE collaboration were presented. Liquid biopsy pioneer Dr. Klaus Pantel is using NeXT Personal to track tumor response to immunotherapy, and he highlighted results from late-stage melanoma patients.

This study, although early showed extremely promising results. First, the NeXT Personal detected ctDNA levels down to the ultra-sensitive level of one part per million consistently across patients.

Second, that ultra-high sensitivity was needed to accurately classify the MRD status nearly a third of the patient time points analyzed and the MRD status would have been incorrectly called as negative with less sensitive methods.

The third, 100% of positive ctDNA detection, even at the lowest levels had confirmed tumor findings on imaging and similarly, 100% of the negative ctDNA detections were complete responders via resist criteria. And fourth, the patients that were ctDNA negative had significantly increased overall survival compared to ctDNA positive patients.

Now having data come together that is demonstrating that we can execute on our win in MRD strategy was very gratifying. Equally important is that we made exciting progress this quarter on our goal to have reimbursement for NeXT Personal and one indication by the end of 2024.

While that's an aggressive timeline, we have already made progress by announcing key collaborations this quarter and studies in each of our focused clinical indications. First, the TRACERx collaboration jumpstarted our efforts in lung cancer. The TRACERx consortium is led by lung cancer expert Dr.

Charles Swanton and teams at Cancer Research UK, the Francis Crick Institute and University College London. The study will deploy NeXT Personal to provide even more sensitive MRD detection for the groundbreaking lung cancer initiative, along with insights about how tumor biology changes over time.

As mentioned, the TRACERx consortium selected NeXT Personal because of its ultra-sensitivity as well as its ability to scan for both common cancer and patient-specific mutations.

Prior research findings from TRACERx have shown that MRD testing was able to identify recurrent tumors in patients with non-small cell lung cancer well before they were detectable using CT scan, but there remained significant opportunity for detection improvement.

We believe our collaboration with TRACERx and other collaborations like it will ultimately enable more informed decisions about patient care much earlier in a patient's journey. Second, we announced a collaboration in melanoma and IO therapy monitoring with the University Medical Center Hamburg-Eppendorf also known as UKE.

That collaboration along with the previously announced Duke and UCSF relationships provide a strong foundation for us to be able to show the efficacy of NeXT Personal for IO therapy monitoring.

Third, we engage with the Academic Breast Cancer Consortium and Criterium to establish a clinical trial that is expected to enroll approximately 900 patients at up to 30 U.S. sites. The trial will be carried out in two stages.

In the first stage, samples will be collected from each patient for both pathological complete response, path CR, and MRD analysis to assess whether MRD using NeXT Personal correlates with standard of care path CR measurements.

The second stage one involve a five-year follow-up to further establish clinical validity and performance of NeXT Personal in early-stage triple negative breast cancer. We're expecting these studies and trials to showcase NeXT Personal's ultra sensitivity and ability to provide insights important for patient therapy decisions. And we're not done.

In all three indications, we are laser focused on engaging leading collaborators in the world and accessing rich sample biobanks for accelerating studies and we look forward to sharing additional announcements as we continue to make progress through the year.

Lastly, in terms of our March to establish NeXT Personal is the market leader in MRD, we remain on track to launch NeXT Personal for clinical use by the fourth quarter of this year. There's a strong sense of energy and optimism at Personalis that we are on the cusp of doing something profound in the cancer market.

We believe NeXT Personal represents a substantial leap in MRD sensitivity and brings the field closer to the next standard of care oncology. Beyond the possibility of catching cancer recurrence many months or even years earlier than imaging beyond enabling ongoing monitoring for patients on targeted therapies.

NeXT Personal was designed to change the paradigm for how cancer is actively managed. It's ultra-sensitivity is the key to providing patients with confidence that they don't have minimal residual disease.

And this will enable physicians and patients to make the best decisions from escalating treatment when needed to eliminating procedures or therapies when unnecessary, in order to enable the smarter and more inexpensive care model, incremental improvements are not enough.

The NeXT Personal super-sensitive performance numbers will usher in a new paradigm that we believe will be better for patients, better for physicians, and better for the healthcare system. The Personalis technology is key to enabling the NeXT Personal product to transform the cancer diagnostic market.

And the same technology is also powering the next-generation of oncology biopharma products. As announced earlier this year, we are a key partner for Moderna's clinical trial work as they pursue regulatory approval of their personalized cancer vaccine.

Over the years, Personalis has worked with several companies by providing genomic test information about the patient's cancer so that a personalized vaccine could be developed specifically for each individual patient. Each patient's cancer is different and we believe that customizing the therapy for each patient is an extremely good idea.

And with the recent success of mRNA technology for COVID, there's a new focus on the opportunity for cancer vaccines. There are thousands of new cancer patients each year in the U.S. alone, and our aspirations are for Personalis technology to power the development of next-generation vaccines and therapies.

Key to enabling our vision for NeXT Personal transform the lives of cancer patients and for our technology to power new ways of treating cancer patients is a focus on blocking and tackling execution by the company, by what I believe is one of the most talented teams in the industry.

We executed in Q1, we delivered over 24% year-over-year growth and we exceeded our forecast. We submitted our data to MolDx for coverage of our NeXT Dx product, and we completed our efforts to reduce our cash burn and extend our runway into 2025. It's an exciting time of Personalis and we appreciate our investors being a part of our journey.

I'll now turn it over to Aaron to review our financial results..

Thank you, Chris. We executed well in the first quarter and although it's still early, we are beginning to see the benefits of our strategy to focus on areas where we expect to win as Chris mentioned earlier. So I'll now provide detail about our first quarter financial results and guidance for the second quarter and full year.

Total company revenue for the first quarter of 2023 was $18.9 million and increased 24% compared with the same period of the prior year, primarily due to strong oncology revenue performance.

Our oncology revenue, which includes revenue from pharma tests, enterprise and other customers was $15.9 million and increased by 35% over the same period of the prior year. The year-over-year increase of oncology revenue was driven mostly by the increase in volume from Natera, which accounted for half of our total revenue in the quarter.

First quarter revenue from population sequencing, which includes the VA MVP was $3 million. Gross margin was 25.1% for the first quarter, compared to 28.1% for the same period of the prior year. The year-over-year decrease of 3% was primarily due to under absorbed overhead costs.

Our lab expenses have increased over the last year and a half to support our growing oncology revenue volume and for background, testing cancer samples requires more labor and overhead compared with testing samples for the VA MVP.

Over the next couple of years, we expect some gross margin variability due to fluctuating test volume, operating at lower utilization rates, providing diagnostic tests while we continue to increase our efforts to secure reimbursement, lost for our new facility and others.

Longer term, we expect our gross margins to increase as we achieve scale by growing our oncology revenue.

Operating expenses were $34.6 million in the first quarter and included a one-time non-recurring restructuring charge of $3.9 million associated with the reduction in force and closure of our China lab operation compared to $32.6 million for the same period of prior year.

Excluding the restructuring charge of $3.9 million, our operating expenses were $30.7 million and decreased $1.9 million from the same period last year. R&D expense was $16.6 million in the first quarter, compared with $17.1 million for the same period last year.

And SG&A expense was $14.1 million in the first quarter compared with $15.5 million for the same period last year. Net loss for the first quarter was $28.7 million compared with a net loss of $28.2 million for the same period of the year.

The net loss per share for the first quarter was $0.61 and the weighted average basic and diluted share count was $46.7 million compared with the net loss per share of $0.63 and a weighted average basic and diluted share count of $45 million for the same period of the prior year.

Now onto the balance sheet, we finished the first quarter with a strong balance sheet with cash and short-term investments of $148.9 million. In the first quarter, we used $18.7 million of cash due to the net loss, working capital needs and capital equipment purchases.

We remain on track to reduce our 2023 cash use is down to approximately $75 million for the full year, which is significantly lower compared with $119 million used during the prior year. Now I'd like to turn to guidance. For the second quarter of 2023, we expect total company revenue to be $16 million to $17 million.

Revenue from pharma tests, enterprise sales and other customers to be $13 million to $14 million, which is lower than the first quarter, primarily due to reduced sample volume from Natera and revenue from population sequencing of approximately $3 million.

For the full year of 2023, there is no change to our guidance and we expect total company revenue to be $68 million to $72 million with oncology revenue from pharma, enterprise sales and other customers to be $59 million to $63 million.

Population sequencing revenue to be approximately $9 million and expected to be recognized during the first three quarters. Net loss of approximately $103 million and cash usage of approximately $75 million, a reduction of $44 million from 2022, we look forward to updating you on our milestones as we make progress throughout the year.

This includes obtaining reimbursement for NeXT Dx, showcasing evidence for NeXT Personal and completing the NeXT Personal clinical lab diagnostic test for commercial launch. Please stay tuned for future updates. And with that, I will turn the call back over to the operator to begin the Q&A session.

Operator?.

Thank you very much, sir. [Operator Instructions] Our first question comes from Tejas Savant of Morgan Stanley..

Hi. This is Gabby on for Tejas. Thanks for taking my question. So just to start, so your Pharma and Bio segment saw a lot of strength this quarter, but the guide remained the same. So just kind of curious if some conservatism is baked in the guide there..

Hi Gabby, this is Aaron. In terms of the guide, so it did not change from last quarter in terms of what we did say in the prepared remarks.

So our guide Q2, Q3 and Q4 in terms of Natera is going down, so the Natera volume is going down, which is going to be offset by increased revenue from personalized cancer vaccine and biopharma, which will offset that. So that’s why the guide is the same as what we had last time.

Does that make sense?.

Yes, yes, that makes sense. Thank you.

And then on Natera, are there any updated thoughts on how revenue might tail off in 2024? Is that remaining the same?.

Yes, so in terms of what we’ve said, so the Natera volume will start to tail off from Q2 this year through the end of the year. It’s our expectation that there might be a little bit that shows up in terms of samples in early 2024. But from a modeling standpoint, we’re not assuming much revenue in 2024 at all..

Okay. Great. Thanks.

And then on pharma and biotech customers, are you still seeing some headwinds with sample delivery from your pharma customers? And just given some of the commentary from some companies as of late, are you still seeing cautious spending from pharma and biotech customers? And if so, how has this dynamic changed from last quarter? And do you anticipate these dynamics to continue throughout the remainder of 2023?.

Yes. So obviously with the recession here, pharma is being prudent on their spending. So we are seeing some things being a little bit tighter there from their perspective. In terms of sample flow from pharma, it always can be a little bit variable or lumpy so to speak, in terms of the timing of when samples come in.

But for the most part, we’re beyond the COVID situation where trials and patient enrollment were a lot slower. So we’re beyond that at this point in time. But there is some variability in terms of when samples do show up..

Okay, great. Thank you. That’s it for me..

Thanks, Gabby..

The next question comes from the line of Dan Brennan of Cowen & Co..

This is Joe on for Dan. Thanks for taking the questions. Just first gross margins came in while ahead of our model at around 25% in Q1.

Was there some one-time benefits in the quarter that we should be cognizant of? Or was this more of the pruning unprofitable biopharma revenue?.

Yes. So in terms of the benefits there in Q1, there were some one-time benefits in terms of some favorable mix. We had more volume from the VA MVP that showed up in Q1 compared to prior quarters or last year.

In terms of the way forward though, gross margins, we expect it to be in the low 20% range primarily because of more costs coming online from our new facility..

Great. Thanks.

And then just on the $6.33 million of pharma tested service revenue, is there any way to think about that in terms of oncology testing versus revenue associated with personalized cancer vaccines? And then maybe if possible, same goes for the $30 million-ish that I think is implied for pharma tested service for 2023?.

Yes, so we haven’t broken that out specifically in terms of the personalized cancer vaccines, but we’re very excited about where it’s headed to the back half of this year and into 2024. In terms of, again, we haven’t really disclosed the dollar amounts.

The personalized cancer vaccine revenue has been roughly somewhere between 4% and 5% of our total cancer revenue. So that’s kind of the way to look at it. Over time, we believe it’s going to or we expect to increase as a percent of the total oncology revenue, primarily because of the success we’ve had here with a large project with Moderna..

Great. Thanks..

Thank you, Joe..

Thank you. The next question comes from the line of Patrick Donnelly of Citi..

Hi. You got Lizzie on for Patrick. So I was just wondering on the NeXT Personal LDT launch that’s supposed to happen in the fourth quarter. You mentioned that you’re submitting your first indication for Medicare coverage in 2024.

I guess what’s your line of sight into the eventual like commercialization of this test? I know thinking way down the line, but just some more color there would be helpful. Thank you..

Sure, no thanks. We we’re – it’s Chris. We’re planning to launch it by the end of this year into a few key select clinics and we will grow the adoption through 2024. We’re focusing on three indications, early stage breast cancer, early stage lung cancer, and therapy monitoring or IO therapy monitoring, immunotherapy monitoring.

And we’re building data around each one of those three now and we plan to submit for coverage going through – through the end of 2024 and gunning that way. We will grow the footprint as we go probably with early collaborators, in particular in 2024 that can deepen the evidence set.

Now that could be prospective registry trials and/or that could be working with academic medical institutions start to use it in their clinics. And we expect it as we get coverage to ramp quickly post-coverage and we’ll have a field force in place.

We’re getting a lot of positive feedback around the strategy of having NeXT Dx, which is our cancer genomic profiling product to be – to have that ordered at the same time so a clinician can send us a sample for that test and send us a sample for NeXT Personal at the same time from one set of samples cut from the tissue block.

So we think that products will work synergistically. And we expect the revenue to grow quickly there. That’s a $25 billion market overall. So you can imagine just as we chip away at that, we expect the growth rates to pick up dramatically as we move that oppressively into launch post coverage..

Understood. Thank you. And then just on margins in the second half of the year, given that there’s the one-time cost – I mean the one-time benefit, excuse me, that you had this quarter. Should we think of them sequentially increasing off of the 2Q base? Just wondering the right way to think about that? Thank you. That’s it for me..

Sure. So Lizzie, in terms of the way to think about the expenses as we go forward, so we called out the one-time expenditures of restructuring and that was primarily from the reduction of headcount of 30% and the closure of our China lab.

So if you remove that and take the expenses pretty much flat through the rest of the year, that’ll get you to, to what we expect..

Thank you..

Sure..

Thank you. The next question comes from the line of Mike Matson of Needham & Co..

Yes. Thanks. I hate to keep going back to Natera, but it's kind of important from modeling perspective. I think you had said on the last call that you had expected $27 million to $30 million this year from Natera.

I didn't hear you reiterate that as, is that still the case or is the number come down from that?.

Yes. It's going to come down a little bit from $27 million to $30 million. Mike, it could be a couple million dollars less than that primarily because of some of the information we've got that's more current with where Natera wants to go. So we see that it's going to decline a little bit quicker than what we thought.

And then into 2024 not exactly sure what that volume will look like early 2024, but we're assuming very little in the first part of 2024 and then it going away after that..

Okay. And I think last call you also said that you felt that you could continue to grow even in 2024 because that's going to be a pretty significant headwind as that kind of goes away. Do you think you can grow – continue to grow your revenue to kind of offset for that completely, or….

We do Mike. We're very optimistic about project we've won and personalized cancer vaccine. We are way under penetrated as well in terms of biopharma. We're highly focused on landing more projects with next personal into pharma.

And as you saw in one of our recent press releases, we have a great relationship with AstraZeneca and we're looking to continue to deepen that relationship and further penetrate other large pharmaceutical companies that we've been doing business with. That are on the next platform, and taking a look at NeXT Personal as well.

So we believe we have a few other growth drivers that are going to offset the whole Natera departure selling..

We also expected the clinical laboratory revenue will be growing more significantly in 2024 also.

Obviously it's coming from a smaller base, but we'll still start to be become more meaningful and in 2024 because we plan to be on the backside of the NeXT Dx reimbursement and we'll have a nice build-in base of business from ordering doctors at that point in time, which we're building now.

And that'll be getting reimbursed and then we'll be in the launch of the NeXT Personal. And while the revenue will be low, we expect there'll still be some revenue they’re starting to come through. So we're optimistic about where we'll be next year in revenue..

Okay, great.

And then just with NeXT Dx, I mean that's going to be potentially you could have reimbursement I guess later this year?.

That's correct..

Needed that – is that, I mean, what's the revenue opportunity there? Is it, I mean, I heard you mentioned that it's going to be kind of used together with the Personal MRD test, but is there – is there a real revenue opportunity with that as kind of a standalone? Or do you really need to get kind of a Personal going before you can generate meaningful revenue?.

Well, there is. I think there is and we believe we have the most discriminating way to baseline cancer therapy in the market, and we think that we're well ahead of what other people are doing, especially in particular with fusions and the exome measured TAM B [ph] provides a more discriminating way to front the therapy.

And we think we have the most comprehensive way to approach the targeted therapies. But the market is – there's a lot of competition there and we're being careful relative to sales and marketing spin. So we're gaining in a way that is thoughtful about the revenue/cost burn, sales marketing versus revenue expense.

And so we think it's a standalone business. It's quite. It's a great business and there's a lot of companies that have been built on the back of it, saying we believe we'll be able to get a toe hold in it.

We could throw a huge field force at it but in this climate we're being really thoughtful about how we do it, and moving in an incremental – in an incremental way that that leverages the learning's that we go and is – and builds the business rationally..

Okay. Got it. And then just all the – it was good to hear detail on all those, the trials that you're involved with particularly for Personal.

But I was curious if – is Personal bearing any of the costs of those trials? Are those all being funded by outside groups, either companies or academic facilities?.

So we're funding those studies and the collaborations, Mike, in terms of the need to do that. We understand it's something that is relatively expensive, but that's why we've chosen to do business with a lot of the higher end KOLs that we've landed..

But I would note that like the beauty of these collaborations is that you don't – you don't have to pay for a prospective clinical trial and the time involved to get the samples.

So you're accessing samples and work that was done previously, and while you're funding the development of the data around it, it's significantly less expensive than prospectively doing what we're doing in our B-STRONGER trial that we announced two days ago where we are going out and doing that.

And it's important to do that too because you've got to be able to build ever deeper data and clinical utility data sets around these tests, so you have to do that. But getting going with data sets with some of the top folks in the world with some of the better annotated data sets is really a way to jumpstarted and I would argue really inexpensively.

So that's the approach that we're going at.

Rich, do you anything to add to that?.

Yes. Its everything Chris said is absolutely true. And also the other thing is that it helps us accelerate the data generation.

So the fact that we have these retrospective data sets, very large data sets that we're going to be looking at like TRACERx, outcomes have been accumulated over many, many years and so we know what happened with these patients is going to really allow us to accelerate the data generation..

Okay. Great. Thank you..

Thanks Mike..

Thank you. [Operator Instructions] The next question comes from Sean Lee of H.C. Wainwright..

Good afternoon guys, and thanks for taking my question. I just have a quick question if you could provide some additional color regarding the timelines of the expected studies.

For example, for the first stage where you're comparing the MRD analysis with NeXT Personal versus PCR; how long would that take before you move on to the expend stage of the five-year follow up?.

This is Rich. Hi Sean. Yes, so for the B-STRONGER Study, which is I think the one you're referring to, this is our prospective multi-year, multi-center trial for early stage triple negative breast cancer that we're doing with Academic Breast Cancer Consortium and Criterium.

This split into two phases, the first phase where we're doing the correlation, we're looking at performance in the – at neoadjuvant phase of treatment for these patients. We expect that we'll start getting some data out of that in kind of the year to year-and-a-half timeframe.

And then we'll be moving on to the second phase, and obviously second phase we'll be following the patients out through their adjuvant therapy and looking at outcomes five, six years out..

Okay. Great. Thanks for that. That's all I have..

Thank you, sir. Ladies and gentlemen, we have no further questions in the queue and we have reached the end other question-and-answer session. Please note that this does conclude today's event. Thank you for attending and you may now disconnect your lines..

Thank you..

Thank you..