Personalis, Inc. (PSNL) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Personalis update call. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Caroline Corner, Investor Relations. Please go ahead.

Thank you, operator, and welcome, everyone. Joining me on today's call are John West, 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, pace and amount of new orders from customers, market adoption of a new product, 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 materially -- 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 that was filed on August 4, 2021, 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 a category of customers. It reflects all biopharma and all of the customers, excluding the VA MVP, most of whom use Personalis 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 announcing a new VA MVP task order and strong Q3 orders in our oncology business is available on our website, www.personalis.com, under the Investors section, and includes additional details about our financial estimates. Our website also has our latest SEC filings. A recording of today's call will be available on our website by 10 a.m. Pacific Time today. Now I'd like to turn the call over to John for his comments and recent business highlights.

Thank you, Caroline. Over the weekend, Personalis issued a press release announcing the receipt of a task order from the VA MVP in the amount of approximately $10 million and record orders over $25 million in our oncology business so far in Q3. Together, these orders allow us to reconfirm our total revenue outlook for 2021, with oncology revenue growth now projected to be at least 50% above 2020. Although the amount of the VA order is less than in pre-COVID years, we believe that the VA MVP remains committed to the program, which has been underway since at least 2011. Since early 2020, the VA has prepared for a tidal wave of COVID cases and a major contributor to COVID vaccine clinical trials, vaccinated millions of veterans and launched research initiatives related to COVID. We believe that this led them to defer an expected 2021 sequencing RFP and extend our work for them with the task order we just received. We also understand that the program is actively working to broaden access to the data they already have in piloting new sample collection methods and types of sample analysis. The VA MVP has good support in Congress, and its draft budget includes funding for the coming government fiscal year. We expect the VA MVP to commence an RFP process for additional sample analysis in the summer of 2022. Our work with the VA MVP represents the largest population sequencing effort within the United States, with targeted 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. Since 2012, Personalis has been the sole provider of whole genome sequencing to the VA MVP. And to date, we have completed over 140,000. In our conversations with the administration, they have underscored their commitment to the program. Now I will discuss some highlights from our oncology business. As of today, we have received more than $25 million of new orders from customers in the third quarter. This is a record level. It is higher than we received in the whole first half of this year, double the level of Q3 2020 and triple the revenue level we recognized in Q2 of 2021. Some of these new orders are prospective, which means that we will receive, process and recognize revenue from samples gradually as patients are enrolled in and progress in ongoing pharmaceutical clinical trials. Thus, prospective orders are expected to provide revenue over several years. Some other orders are for retrospective projects, based on patient samples from clinical trials which have already been completed. Those orders may be converted to revenue in less than 2 years and have been a large portion of orders we received in the past. It is great that pharmaceutical companies are increasingly designing our platform into their clinical trials right from the beginning, but we will be conservative projecting the resulting revenue, given the timing of those clinical trials. Still, we now expect that our oncology business will become the larger portion of our total revenue in 2022. And we target an annual growth rate of approximately 50% over our 2021 revenue estimate of $34 million to $35 million. Oncology represents Personalis' largest market opportunity, and we're poised to execute and capitalize on it. We remain focused on our oncology business growth drivers. Our base of NeXT customers has broadened substantially over the last year, with over 50 different customers, including the majority of the top 10 oncology-focused pharma companies. As we deliver for customers and launch new products, our whole team is working hard to expand our customer relationships. We remain on track to expand our liquid biopsy product line with the launch of NeXT Personal, our minimal residual disease, or MRD, offering later this year. As mentioned on our last earnings call, we are working towards providing a clinical offering in 2022. We will also work towards reimbursement, and depending upon our success, target beginning to recognize some diagnostic test revenue in 2022. I'm very proud of what we have accomplished here at Personalis, and I'm excited about what lies ahead. 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, including launching new products, expanding our clinical and regulatory capabilities, driving collaborations, broadening our operations geographically and building capacity to support our revenue growth. Now I will turn the call back over to the operator to begin the Q&A session.

[Operator Instructions]. Our first question comes from Tejas Savant with Morgan Stanley.

Congrats on the task order here. John, just one quick question for you on the task order first. Is it possible that you may receive additional task orders before the current one runs out again? Or is this it, and the next step here is going to be the full RFP process next year?

I would say we don't actually know, Tejas. I think the process for the VA is unclear. Because we're in a procurement time period, we're not able to actually talk with the VA about some of these details. So I think we'll know more in the coming weeks here. Certainly by the third quarter conference call that we'll have, I expect we may be able to have more detail on that. At this point, I'd say it's not 100% clear to us. The VA often has a lot of flexibility about what they do.

Got it. Fair enough. And then with the emergence of Delta and the possibility of other variants running around, do you anticipate sort of a lower translation of that order into revenue here, given the cadence of you guys receiving samples from the MVP? And is there anything you can proactively do to mitigate that?

Yes. Tejas, so I would say that the VA, when they've been able to sort out exactly which samples they're going to send to us, has often been able to send them quite quickly. And it's our understanding from some conversations that most of the samples that are uncovered by this task order may already be decided on. So I'm not sure that there'll be a big delay. We have not heard from them specifically when to expect the samples on this. But I'm guessing, given that they set up an execution period of time on this task order that's only 6 months, I'm guessing they expect to send those samples pretty quickly here. Fortunately, the rise of the Delta variant has not slowed down our production at the company. So as the samples arrive, we certainly expect to be able to sequence them the way we have been and keep up that pace.

Got it. And then, John, I know you mentioned you don't want to comment just yet on '22. But as we think about that biopharma revenue piece, and you mentioned the oncology orders and the 50% growth you're seeing this year, as we look at '22, do you expect that to be essentially a floor that could see upside? Because the question that we're going to get is potentially, after the first quarter is over, could there be a decline in MVP if there's no task order and the RFP hasn't been finalized? And could there be any offsets here, either via the oncology orders or perhaps a POPSEQ program, et cetera?

I think we see a lot of upside potential on both sides of the business, Tejas. And the rate at which we've seen orders in the third quarter in our oncology business has been fantastic. And it's been across the board. It's a pretty wide group of pharmaceutical companies that have been ramping up. So if we have that kind of thing continuing into next year, we could have ramping revenue as we go through the year. We haven't set guidance for the year yet. I think it's a little bit early. We're still in our annual budgeting process and absorbing some of the inputs here. But I think we're pretty optimistic about the oncology business continuing to grow. And that would -- I would expect that to be something where we would expect it to continue to grow as we go through next year.

Our next question comes from Derik De Bruin with Bank of America.

This is [ John ] on for Derik. I wanted to ask about the biopharma mix. Can you tell us how much of the biopharma mix is it's in more traditional whole human genome, exome, the transcriptome versus like some that's like more unique and has the Immuno NeXT ID (sic) [ ImmunoID NeXT ]?

So let's see, our Immuno -- our NeXT ImmunoID is a transcriptome and exome. So I think it's maybe overlapping with that. In our oncology business, our NeXT Platform, which is exome and transcriptome, is the largest single product category we have. There are still a few customers that are using our earlier platform that haven't transitioned over to NeXT yet, but we see increasingly that pharma has been converting over to our NeXT Platform.

Our next question comes from Doug Schenkel with Cowen.

I guess just a few numbers questions. So starting on MVP. I believe you had $16.8 million in unfulfilled orders at the end of Q2. At the time of the last update, you expected that to be fully fulfilled the first month of Q4, so in October. Do you expect the $10 million, via the additional order that you disclosed over the weekend, to be fulfilled by year-end? So that's the first question. And if so, would you say it's prudent at this point, given the ambiguity you referenced in response to Tejas' question? Do you think it's prudent at this point to model nominal MVP revenue in 2022?

Yes, Doug. I think that the pace of our MVP revenue in the fourth quarter will depend a little bit on the pace at which we receive samples on the oncology side of the business. The orders there have been so strong, and that's been ramping up quite a bit. We generally balance capacity between the 2 parts of the business. And so I think depending on when samples come in from the VA, but also when samples come in from pharma, because with the rate of orders that we've seen, there could be a significant increase in our pharma revenue in the fourth quarter. So I think we have to see how we end up balancing that out. I think it wouldn't be surprising if there wasn't some of the MVP revenue. In fact, I think it's almost impossible that there wouldn't be some of the MVP revenue from this task order carrying over to next year. It's hard to say exactly how much that would be. I don't know if Aaron wants to comment on that at all. But I think it's -- given the strength on the pharma side, the MVP may have to be done a little bit more slowly.

Yes. Thanks for the question, Doug. Great question. So in terms of another way you can look at it, our full year guide of $85 million hasn't included the oncology business, which is $34 million to $35 million, which implies the VA MVP would be close to $50 million or so. Okay? If you go look at the backlog, you're correct, we had $16.8 million exiting Q2. And our Q3 guide for oncology now is $8.3 million to $8.8 million, so $8.6 million or so at the midpoint. There's another 13.5-ish for VA MVP. So there's a few million that we're going to push over in backlog into the first month of Q4. And then depending upon sample flow from this $10 million order, we'll dictate how much more we can do in Q4. So there is a possibility a small amount of that backlog flows into Q1 of '22. And as John mentioned, we don't really know exactly what the VA MVP is going to do with additional orders or things like that up through the March period, where this order performance period goes through. So there is a possibility that we do receive more business for the VA MVP going into '22. And then we have the RFP process mid-summer. And so yes, I think your -- and your question about, should you nominally model the VA MVP? I think that's probably prudent or fair at this point in time. And then on the next call, we'll hopefully have more color that we can provide about some of these numbers.

Okay. Super helpful. Building off of that, the $25 million in oncology orders. It's an impressive number. That said, you only bumped up your expectations for biopharma revenue for the year, I think, by $1 million or so. So I'm just wondering, is the expectation that the orders that came in the quarter for the most part will get fulfilled in 2022? Is that the right way to think about it?

Yes, I think that's very good. Generally, there's a period of time where -- from when orders come in from pharma, before the samples arrive from them and so forth, that's -- it's not unusual for that to be 3 or 6 months for that to start. And certainly, on the prospective ones, we're talking about enrolling in clinical trials, that can be an extended period of time. So I think the order volume is great for the -- building for the future. I would expect that a lot of that $25 million will be in 2022 and even some of it beyond that.

Yes. Part of what I'm trying to get at is almost how much in our model for biopharma is essentially derisked with the progress we've made year-to-date. Obviously, like any company, it's not going to be fully derisked. But it sounds like a big part of that $25 million would come in next year. If that's the case, would you be willing to share what your overall biopharma backlog is at this point? Clearly, it's something more than $25 million. Would you be willing to share what it is?

No. I don't think we share the backlog number.

Yes. So Doug, we haven't shared the backlog number in the past, but I think you're looking at it the correct way, in terms of what we said in the prepared remarks that the biopharma business is expected to grow or target to grow at least 50% in 2022 over 2021, which implies a little more than $50 million at this point in time, which says we do have a healthy backlog going into the year. We do have line of sight to a lot of projects. And we have a lot of new projects that are prospective in nature as well, meaning the sample flow will come in as clinical trials and enrollment occur going forward, which gives us better visibility than on retrospective project because retrospective projects could have a lot of variability, where samples come in, they're sequenced, and the project is done. But we do have a lot of new projects stacking up now that are going forward. And then in addition, we have the success we've been seeing on the whole-exome liquid biopsy offering, the MRD offering we're coming to market with. So we're really excited, and we believe that -- Tejas asked that same question about the floor -- next year, do you see this as the floor for the oncology business? And I think based on what John and I see today in our business we do, we believe we can outperform what we're guiding to and -- or what we've just stated. And we'll provide more color on the next earnings call.

Okay. Last one, one thing we haven't heard about at least today and maybe not as much of recently, is progress with your initiatives on the broader pop-gen side of things. Maybe it's just because there's so much going on that's good on the biopharma and oncology side. Maybe it's because it's that, plus [ what you're doing ] with the pipeline to service those customers. But if we think of maybe MVP at least moderating in terms of pace of revenue, it'd also be nice to hear a little bit more about potential offsets with your other pop-gen initiatives. Is there anything to talk about there?

I don't think we have anything new there, I'm afraid, Doug. The -- obviously, it's an area we're continuing to talk with folks about and explore opportunities. I do think that there are opportunities there. I think Personalis is the main company that's exploring population sequencing as a service. And certainly, we have the track record to be able to do that. That said, every country has their own plans, and sometimes that takes a while. So we're afraid nothing new on that yet today.

Our next question comes from Patrick Donnelly with Citi.

Just wanted to follow up on one of Doug's there in terms of the visibility. It doesn't sound like you guys are. But just in terms of the 50% growth for next year, are you assuming kind of similar order numbers in 4Q to 3Q? It doesn't seem like you're assuming any big ramp or you need any big numbers in 4Q or even the beginning of '22 to hit that 50%. It sounds like you're quite confident in it. But just wanted to get a feel for kind of the assumptions going forward and what needs to happen to hit that number from here going forward?

Yes. I don't know, Aaron, if you want to speak to the numbers. Generally, I think we're feeling like the biopharma business is in great shape with what we've seen in Q3. And it certainly feels like it's an ongoing ramp-up in orders. I don't know, Aaron, if you want to speak to that?

Sure, sure. I'll take that. Thanks for the question, Patrick, and it's a good question. So in terms of the Q4 orders that we have line of sight to today and what that level will be, we can't share that number. But again, we've been recording or bringing in more orders than revenue we've been reporting now for the last 2 years or so. And we see that trend continuing. And it's going to continue for the foreseeable future as we continue to grow and drive top line growth. So Q4, any orders we bring in Q4 typically won't get turned around in that quarter for revenue. There'll be a little bit that gets turned for revenue. But it does take a little bit of time for statements of work to get defined and projects to start, samples to be received before we can recognize revenue. And so that's kind of the path we see. Going into 2022, we do anticipate having a hefty amount of backlog to be fulfilled in 2022 and beyond. And so that's what gives us the confidence to be able to state that we anticipate growth of 50% or better at this point in time. Okay? So again, just for clarity, orders that we receive in the quarter, a little bit of that gets fulfilled in the quarter, but a lot of it is for future quarters.

Understood. Okay. And then with the VA, I know you said it got maybe a little bit deferred in terms of the numbers they wanted to do or kind of put through. Do you anticipate the next order as we get into the summer of next year could be almost -- is there a potential for a catch-up, where it could be bigger than the past couple of years versus this one obviously being smaller? And then as we look at that next summer, any reason to believe that it will be a more competitive process? Obviously, others seem to be able to do this. It's been your guys certainly for about 10 years, as you mentioned. But just in terms of the competitive landscape, any color there? And then again, what the size could be? Is there potential that it's bigger than the '19 to '20 number that we saw?

Yes. So just on the competition side, this is John, we always assume that there could be a significant competition. That said, there hasn't been really anybody else doing the kind of thing we've been doing for almost 10 years now. So the -- I don't think anybody else would have the kind of track record we have. We would certainly be very careful about competition. And we will put our best foot forward on that and assume that we have to win the business, not take anything for granted. And in terms of the size of that, I think it's a little hard to say. There are a lot of samples. I mean the VA -- the most recent number we've seen from them is that they've now enrolled 840,000 veterans. They've been beginning to enroll new veterans again. So the number has been going up again this year to some extent. So that's a lot of samples that have not been sequenced. So there's no question that they have the samples, and I think there's the scientific interest. I think it will come down to budget and priorities. As I mentioned, they're looking at a variety of different things. And we'll probably hear more about that in the next few months here. But the -- it's hard to say what the exact scale will be. They did have -- we had orders over $30 million a year for a number of years in a row. So it wouldn't be surprising if they're able to -- if they don't get back to something like that, but we don't have anything in writing saying that.

Okay. And then just last one quickly, it's probably one for Aaron on the balance sheet. Any implications in terms of the cash burn as we think about the moving pieces here?

Thanks, Patrick. No additional implications. So similar to what we stated on our last call, in the Q2 earnings call, we anticipate cash usage of somewhere around $90 million here in 2021. And going into 2022, that level could step up. And in terms of the growth initiatives, the same initiatives are in front of us as before.

Our next question comes from Mark Massaro with BTIG.

I wanted to ask, you've been servicing the VA for a long time. And obviously, the relationship has been good between both of you. For context, I think it would be helpful for us to learn how many times has the VA gone to an RFP? Just because you guys have been working together, I believe, for 10 years, it would be interesting to see if this is sort of a change in how they've looked at re-upping?

Yes. This is John. So we -- there was an RFP that we've won in 2012. There was another one in 2013. The next one was in 2017. And we had expected there would be one this year. But I think with COVID, it was just not going to -- they didn't have the time for it. So it was not won this year. So if there's one next year, that would probably be the fourth one that we would be involved in.

Got you. That's super helpful. In response to Doug's question, you guys sort of confirm that we should think about modeling a nominal value for the VA. The thing that I struggle with is, certainly, I could imagine you could get other task orders, maybe to bridge the other quarters in 2022 ahead of the RFP. But it sounds like you lack visibility whether or not you could get another task order. So I know we're kind of nitpicking here, but we're admittedly struggling with how to think about quarters 1 through 3 with the VA.

Yes. I think it's -- I think the process is different this year. COVID has kind of turned things upside down. We had expected by now that there would have been an RFP and a task order and maybe we would have another 4-year contract at this point. So obviously, that's all changed. I think the fact that the period of execution of this task order is only 6 months, does -- it's not clear to me what the VA will do after that. And during the contracting period of time as the contractor were not allowed to talk with folks there, so I think it remains a little unclear. Usually, after we get out of this sort of contracting window, we're able to talk with them, people at the VA again. And so I expect in the coming months, we may get some more color on their thinking there. And certainly, as we go forward, whatever we hear, we'll expect to share with you on that. I understand the modeling problem. We have a budget to model too, but it's -- I think our sense is we have a lot of focus on the oncology business. And right now, that seems -- it's growing fast enough that that's going to be the -- certainly the majority of our revenue in the -- going forward. And so I think that's probably the biggest thing to focus on the modeling. We do see a lot of opportunity for that to grow. And I think that's probably what we're going to have most of our focus on.

Okay. And at the time of the last earnings call in Q2, I believe you guys alluded to the fact that the VA had a proposed double-digit increase in funding for the following year. Is that still the case? And so as we think about the VA going to an RFP process, I guess I'm challenged with the notion of -- they've worked with you for a long time. You have industry-leading capabilities in the lab, including your relationship with Illumina, which is quite positive. It seems to me that price probably shouldn't be something that precludes you from winning another contract. So how should we think about the moving parts with funding and price?

Yes. So I think the -- our understanding is that the increase that we've seen in the budget would be for fiscal year '22, which starts October 1 and goes through September 30 of next year. When the White House proposed that to Congress earlier this year, they baked in a -- I want to say, a 13% year-on-year increase in the VA research budget and highlighted that as one of the largest growth areas in recent memory. So I think that's very positive. Certainly, MVP is a line item in that. And then -- and we've seen in the past that MVP sometimes also benefits from other sources of funding, and that may include COVID-related funding. So I think it's a little hard to know. But certainly, from a pricing standpoint, we'd expect to be in great position. We work closely with Illumina on this. This is a big business for Illumina as well. And so I think it's very constructive and I think we're pretty optimistic about it.

Okay. Last question for me is on your NeXT Personal, MRD plans. So you affirmed your plan to launch later this year. What else needs to be done to secure the clinical launch? Can you just talk about validation of the assay? And then what your plans are on the reimbursement side?

Sure. So the MRD product, our NeXT Personal product, we would expect to launch in the fourth quarter here. I think it's going to be a terrific product. It will be an RUO product to start with or GCLP for it to be a lab-developed test. Obviously, we'll have to go through a validation process. As you mentioned, there's a variety of ways to do that. I think we'll talk more about the details on that when we get to the actual launch of it, that I would expect it to be an important product for us in 2022. We have been previewing it with a number of our pharma customers, and there's a lot of excitement about that product. So I think it's going to be -- we're looking forward to being able to launch it and talk more about it. But I think it will be something we're going to be describing a lot as we go through next year. I think it will be a significant product for us. Even -- obviously, reimbursement is going to be important and it being a clinical product, but I think certainly in '22, I expect it to be a pretty significant product for us in the -- even in the pharma space.

Our next question comes from Mike Matson with Needham & Company.

Just a couple on the RFP process. So you've been through this a number of times in the past. So I know that they may not have communicated the VA exactly how this is going to work. But just on the -- in terms of timing, how long do you think it sort of has taken in the past? And when would you expect to really know whether or not you've won a new contract?

Yes. So it's hard to know. The process will be different next year because of the different timing we're seeing here. But the -- yes, in prior years, when we've done this, generally, there's been a, what's called a request for information. That's a public document that comes out, looking for what the capabilities of companies are that might bid on something like this. That often comes out in kind of the April or May time frame. The VA takes those responses, looks at what they want to do, and then that will turn into a request for proposal. Again, that's a public document. That can come out perhaps in July. And then, typically, responses are due -- maybe in August, with the idea that the VA would award a contract in September. So that's the historical timing. What the timing is in 2022 and so forth, I think is -- could be different given circumstances. So we'll certainly be paying attention. It is a very public process. So any of these -- the timing of these requests is something that's on the VA website and would be something that we certainly will know about and can communicate.

Okay. Great. And then you've obviously won a number of these in the past and you seem very well positioned should there be another RFP here. But I was just wondering, from a competitive standpoint, are you aware of any other -- any changes, any other companies that have emerged maybe in the last 4 years that might be present more competition with you guys than what you've seen in the past?

I don't think so. The -- we haven't seen anybody else providing this kind of population sequencing as a service. It's a -- certainly, there are other people who do different kinds of sequencing, and there are always people who could decide to go into this area. I would say that there's more to it than just the sequencing. There's the data analysis, there's a lot of the relationship with the customer, the sample handling and tracking. And so there's a lot of elements we've built up around this over the years in working with the VA. And we hope that holds us in good stead going forward. We will continue to be careful assuming that there will be competitors and other people who could be very capable. So we'll make sure we compete well for something like that. We're not going to take anything for granted.

Yes. I understand. And then just more of a -- I guess a wording question. So the press release says with this latest task order, the performance period is through March 31. So does that effectively mean that you'll have to recognize all that revenue by March 31 of next year?

I would think so. We haven't -- again, we haven't been able to really talk with the VA about the details of this. We just got the task order late Friday, so it's been nothing over the weekend. The -- I think given the size of the task order, if the samples arrive, it wouldn't be any problem for us to be able to finish with it during that period of time. So I think if they've set that kind of a performance period, I expect that they plan on sending the samples fairly promptly, and it will all be done by March 31.

Our next question comes from Sean Lee with H.C. Wainwright.

Just one quick one from me. With the shift towards oncology side of the business and the changes to your product mix, how do you think that will impact your product margins going into the coming quarters?

Aaron, do you want to take that one?

Sure. So thanks for the question, Sean. We don't typically guide or provide estimates to margins near term. What we have said is longer term, meaning at scale. So at scale being $200 million or more in revenue, we anticipate our gross margins being 50% or better. And at $300 million of annualized revenue, we'll be better than 60% gross margins. Along the way, there could be a little bit of variability due to investments in some of these different initiatives, investments in capacity and things of that nature that we have going on right now. But we're going to see gross margin accreting or increasing as we go forward here. I think that answers your question.

Thank you. And I'm currently showing no further questions at this time. This concludes today's conference call. Thank you all for participating. You may now disconnect.