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

I'm John Sourbeer, I'm one of the analysts covering Life Sciences at UBS. For our next fireside chat, we have Personalis, and with us today is Aaron Tachibana, who is the CFO. Hi, Aaron.

Thank you, John. Thanks for having us.

So just to get started here, maybe for some that are new to Personalis in the room. Maybe just could you provide us a quick overview on the company before we start to get into the Q&A and just where the company is today?

Sure, happy to. So Personalis is a leader of advanced cancer genomics and we basically help pharmaceutical companies with drug development for precision cancer therapies. In addition, we're going to be taking our business into the clinical setting. So we're working on some lab diagnostic tests. We do have 2 primary product offerings, and they're all from the NeXT platform. So we have the NeXT tissue-based test that's sold into pharma today. In addition, we have an exome-scale liquid biopsy test for pharma. We're also working on developing some lab diagnostic tests for the clinical setting. We do have a current tissue-based test called NeXT Dx for the clinical setting. In addition, we're going to have our MRD test that we've just announced and launched for pharma that we'll be taking and developing an LDT in 2023 and then pursuing reimbursement in 2023 as well. In terms of the market size for our offerings, it's going to be somewhere around $35 billion, $36 billion over time. And that's comprised of the clinical trial market, which is $6 billion to $7 billion in size, and the clinical market, which is $29 billion to $30 billion in size.

Great. Well, thanks for that overview, Aaron.

Sure.

The pandemic has affected companies in several different ways. And maybe just detail us how the impacted -- you were impacted by the pandemic. And then where did Personalis serve within the COVID-19 pandemic?

Yes. So our business has been pretty resilient through the pandemic in terms of clinical trial enrollment, patient enrollment, sample flow to us. We did notice over the last 6 months or so that there has been a slowdown in terms of sample flow to us. So that's impacted our top line a little bit. Customer demand has been very, very strong. So orders from customers have exceeded revenue that we report, which builds backlog, right? So in terms of the demand from pharma, it's stronger than it's ever been. We see business being delayed a little bit. We don't see it being lost. And so it's our expectation that the second half of 2022 is going to be stronger than the first half. Our business is set up really, really well from today going into the future. We have more than 60 customers that have adopted the NeXT platform, our tissue-based offering as well as the exome-scale liquid biopsy. As we take this into a clinical setting, we're well poised to do extremely well into the future.

And then just moving on to maybe some of the oncology in the pharma business, digging in there. Your oncology business has seen pretty strong growth. Can you just talk about the drivers there? And then how has pharma adopted your platform? And where has this gone over the last few years?

Yes. So good question. In terms of some of the key drivers, today, there's just -- the complexity and biology of the tumor and the interaction with the immune system, there's a lot to be learned there. There's not a great understanding of why some patients respond to therapy versus others. And so our platform being very comprehensive looking at the 20,000 human genes, being able to understand and look for biomarkers that can help pharma with drug development. That's been a key driver. In addition, the FDA has been approving more drugs and therapies for earlier-stage cancers. That is leading to genomic tests, especially MRD tests earlier on. And so our MRD test, we believe, is going to be a technology leader. We're looking at 1,800 different variants. We have a tumor-informed approach. And we believe that, that's going to be a key driver going forward to get more and more of these adopted into a clinical setting and then reimbursed as well.

And then just speaking on some of your customers, can you just maybe elaborate a little more on how does pharma use your test? And then when do you win business? And I guess, kind of what are some of the key differentiators on your technology?

Yes, it's a great question. So pharma basically have 2 different types of projects that we typically win. Retrospective projects, which would be clinical trial patient samples that have been stored from the past, and then prospective clinical trials. If I go back and look 3 years ago, more of our business was retrospective in nature, primarily because pharma didn't have a good sense of what our platform could do. But now after seeing the comprehensiveness of the platform, the quality of the data we're able to provide and the biomarker insights we can provide, pharma has started to adopt our platform and use it earlier on in clinical trials. And so they're using it basically to see patient response for different types of therapies. What type of patients will respond? They're using it for patient enrollment type of criteria. So then they can have a better outcome in the clinical trial and have a better shot at getting a drug approved. .

And I guess when you think about the revenues from those retrospective or prospective trials. Any difference in timing there or just a way to quantify them under revenue impact?

Yes. So good question. So in terms of timing, there could be -- for retrospective clinical projects, we're going to get a lot of samples that will come into us much quicker, right? So you can get a bolus of samples because all pharma has to do is go contact their CROs where the samples are stored and be able to get them sent to us, so we could get hundreds of samples at any point in time. For a prospective clinical trial, basically, the key driver there is patient enrollment. And once patients are enrolled, then samples have to be taken from the patients either through surgery or some type of extraction, right? And so we're not going to get hundreds of samples all at once. You could get 5, 10 per month or something like that, but it's going to be more steady or linear over time.

And you touched on it earlier with your MRD test. U.S. launched the NeXT personal MRD test, which initially for the pharma market, but I guess how are things are progressing with the pharma customers so far? And then how do you expect the revenue to ramp up this product?

Yes. So the progress has been extremely good up to now. So the feedback from our first pharma customer has been very satisfactory in terms of the type of data we're providing. A lot of information we provided about the sensitivity, we're able to see down to one part per million were it's 10 to 100x more sensitive than other providers. Pharma, the customer we're dealing with, has endorsed what we've been telling them. And it's our expectation that we're going to win additional projects out into the future from them as well.

Great. And then I think -- sorry, Natera has been a larger portion of your oncology revenue. How is this partnership going? And maybe just provide a little bit of history of how this partnership started.

The partnership is going really, really well. So Natera has been after us for a few years or so to work with them. We've been busy with a lot of other projects and work. And so for us, as we've had a strategy to head into a clinical setting, we decided that we had sufficient capacity to be able to work with them. Signatera, Natera's product is a tumor-informed product. And so we're basically doing the upfront sequencing of the exome for them, which is similar to what we do with NeXT today for other customers. So we thought it would be good for us to be able to get incremental revenue from sequencing the exome upfront without any headaches or household from a reimbursement perspective. Both companies are in this MRD space and over time, we may be competitive. But at the same time, we look at our offering being a lot more comprehensive than the Natera's because we're looking at 1,800 different variants. Natera is looking at [ 16 ]. And so there's plenty of room for both products to sit in the marketplace. So it's a good relationship. Volumes have grown nicely. And from our perspective, things are going really, really well.

And I guess just touching on some of the clinical diagnostic tests. Can you give us an overview of your strategy there?

So we basically started to focus on high-end cancer centers. So our focus is not to go hire 200 commercial sales folks and go start to knock on every oncologist door around the country. We decided to start out commercializing through high-end cancer centers. And by doing that, we're going to get a lot of the KOLs and the thought leaders that have heavy influence on NCCN guidelines. Working with these cancer centers like the Mayo Clinic, who has 12,000 or so cancer patients is going to give us a lot of cancer patients to treat. In addition, they're going to be doing work from a research standpoint as well. And so having these KOLs be able to work with us on collaborations for us to be able to prepare studies and accumulate data and be able to use some of this data for our MolDX submission which will eventually lead to reimbursement, we believe is very, very important. And that's the first step. In addition, we are going to have to sell to oncologists around the country. And so we did hire James Azzaro to lead our diagnostic sales efforts. He's going to be building up a sales team over the next 12 to 18 months, but it's not going to be hundreds of sales folks, right? We're going to hire, I don't know, 15 or so folks over 12 to 18 months, and then we'll expand from there.

And any specific cancer types that you're originally initially focusing on?

Our platform is pan cancer. And so today, our work with pharma is pan cancer. As we head into the clinical setting, especially with NeXT Dx and our MRD offering. NeXT Dx might be better for later-stage cancers, Stage 2, Stage 3 cancers, colorectal, lung cancers were basically folks have been successful with reimbursement. Our MRD offering will be pan cancer. However, at the same time, since we have a very sensitive offering, 1 part per million, we believe it's going to be very, very applicable for breast and prostate cancer, where there's low shedding of DNA into the blood and the mutational burden is very low. But at the same time, we will be participating in studies and work on colorectal and lung cancer and melanoma, where we believe that we should be able to get reimbursed at the rates that are in the marketplace today for other folks like Signatera, Guardant, et cetera, et cetera.

And when you look at your diagnostic tests, are these -- what kind of products -- are they tumor, liquid biopsy, MRD? Just can you talk a little bit about your offering?

So the offering for the clinical setting will be both tissue and liquid biopsy. The tissue test is called NeXT Dx. It's similar to the NeXT offering that we're providing for biopharma, except where it will be performed under a CLIA certified environment in our lab in Menlo Park, California. On the liquid biopsy side, it's NeXT Personal, which is our MRD offering. We still have some work to do to develop that into a lab diagnostic test or an LDT. That will be done in 2023 and we'll pursue reimbursement in 2023. For the tissue offering NeXT Dx, we believe we'll get to reimbursement later this year.

And you mentioned the sales force building and the company is entering the clinical diagnostics market this year. Just any other key milestones to think about with building the sales team, conducting studies, publications? And then you mentioned just reimbursement, just anything to elaborate on there?

Yes. So the key milestone this year is really reimbursement for NeXT Dx by the end of the year. Other milestones, key milestones will be some of the hiring on the commercial front to go pursue local oncologists around the country. In addition, there will be some studies that we'll have to run to be able to have third-party data published on our behalf. So then that's helpful from a reimbursement standpoint. Those are going to be the key milestones.

And you announced several collaborations with partners like Mayo Clinic, UCSD. Any update on how these collaborations are going? And are these near term or long term just any updates on the collaborations there?

Yes. So the collaborations are going extremely well. In terms of the collaboration with the Mayo Clinic. Again, it's a large medical institution. We're very early on with a lot of the programs and projects that we're working on, the engagement between both companies or both institutions are very, very good. In terms of UCSD, that collaboration is going really, really well. We've been processing samples. A lot of the samples we'll test are going to be both tumor and liquid biopsy MRD. So in terms of the path forward, again, we believe it's very, very important to start with the high-end cancer centers, primarily because of the KOLs to be able to then go get data published and have them speak on our behalf and then be able to eventually get guidelines rewritten in the NCCN guidelines.

And I guess looking at the clinical MRD market, potentially large but also very competitive. I guess just, where is your differentiation on the go-to-market strategy? And just how does Personalis', maybe, test, differentiate from some of the other competitors out there?

Yes. So from a differentiation standpoint, we believe we have the most sensitive test in the marketplace looking at 1,800 variants. From a tumor-informed approach, meaning starting with tissue and then being able to look at that and sequence it and then come up with a personalized liquid biopsy assay. There's only a few companies that are doing that, us being one. And again, the sensitivity is most important, primarily because by having high sensitivity, we're going to be able to detect whether or not cancer is present shortly after surgical resection. For example, in breast cancer, typically, cancer is detected by mammography for breast cancer patient. Typically, the treatment options there would be some type of radiation, surgery, right, or chemotherapy or a couple of the above. After that's done, after the original treatment is done, and surgery is taken a few weeks after that, we're going to be able to detect whether or not there's any cancer present in the blood. And so that's going to be an important attribute today compared to where things had been in the past and where things are going, primarily because a patient now can have an option to have an additional surgery to remove that tissue or some type of therapy, and the doctors will know what to go do. If you don't have a sensitive enough test, time can pass. It could be a year or 2 years before the cancer even shows up on some of the other blood panels, which is -- which can be too late.

And we talked on the partnership with Natera before, but now they're potentially a competitor. Any thoughts on just competing with your customers, any concerns there? And do you see the Natera to continue to use Personalis or would they bring that in-house?

Yes. So that's a good question. In terms of the partnership, so I've mentioned that we believe the partnership is really strong right now. We have a very sound and high-quality exome, which Natera endorses by them using us and ramping to the level that they've ramped to up to now. Our offerings could be competitive into the future. But sitting here today, there's plenty of room for both of the offerings to exist. I had mentioned a couple of cancer indications like breast and prostate where high sensitivity matters. For colorectal cancer or lung cancer that are stage 3 or stage 4. More advanced, the Signatera test could be sensitive enough to detect whether cancer is there or not. So initially, there could be -- there's plenty of room for both products to exist in the marketplace. And Natera's done a good job with commercializing and getting the reimbursement. We'll follow suit with similar indications and then also dovetail off into breast and prostate, where we believe the market is largest.

And I think the company has exposure in China. Any way to quantify how big that is? And given the lockdowns, have you seen any impact there?

Yes. So our operation that we've started a couple of years ago is in Shanghai, China, where they've had the predominant lockdowns. So most of our employees have been staying at home for the last 12 weeks or so. It could take another week or 2 before Shanghai does open up. We believe it's imminent to open up. We've been going through internal lab qualifications. That's been going really, really well. We actually have orders from our early customers who want us to do work in China. They have local regulatory approval. And so we believe that in the second half of this year, we're going to be going through customer qualifications of our lab and then eventual initial pilot of that work. In terms of quantifying that type of business, so the revenue this year is going to be relatively small. We believe that in 2023, things should start to ramp. We haven't said publicly how much that will be, but if you look at the population in China and the cancer indications, it's very, very large like the U.S. And so we believe that our business can become quite large in China.

And I guess beyond China, any other plans for international expansion?

Yes. So we're also looking into expanding into Japan. So today, we're processing samples from Japan in our U.S. lab. In terms of commercial resources, we're looking to enhance our commercial penetration in Japan. And so we're looking at that. There'll be other locations over time as well in terms of Asia or Europe. But right now, I think Japan is another place we look at.

And Personalis also has a population genomics business. Can you run through a little bit of the history of this business and just where you serve today and how you compete on population genomics?

Yes. The population genomics business, we started out in that area early on. We won an initial contract with the VA MVP back in 2013 or something like that. And that led to the [ NeXT ] contract. And we've been a great provider and partner for the VA MVP for the last 9 years or so. In terms of whole genome, we processed more than 150,000 samples to date. It's been very profitable business for us. It's good cash flow. In terms of where we're at today, our focus is oncology. We're heading into the clinical setting. And so we see such a great opportunity in cancer that we want to make sure we focus and dedicate most of our resources in that regard. And that's why population genomics of the VA MVP is really a different priority for us than it was historically. In terms of the VA, it's not exactly clear when their next RFP will come out and what the level or the size could be. And again, that's why we're focused predominantly on cancer right now.

And I guess just when you look at other population sequencing projects out there, anything that you would be pursuing in addition to the VA MVP?

There are a lot of other population genomic projects in the marketplace. Most of them happen to be international or outside of the U.S. borders. And that's the other reason why we want to focus on the cancer business. For us to be able to go and set up another lab in another foreign country, will take time and effort, and it will dilute resources on the operational side. So we need to make sure that we're on sound footing here in the U.S. from a capacity standpoint and as our MRD offering grows. We believe we have very lucrative business opportunities here in cancer alone. And so we want to make sure we seize the moment.

And I guess just touching on your lab just a little more. I believe the company has historically been an Illumina lab, competitive landscape in NGS is starting to heat up. There might be more announcements coming at AGBT. Just any thoughts there about what you're seeing across there?

Yes. So in terms of sequencing technology, we have 9 or 10 NovaSeqs in our lab in Menlo Park. We've probably done an Illumina shop. There will be additional technologies that come to market. Not exactly sure exactly what they'll be or what the cost points will be. But one thing that we believe will happen, it's going to drive the cost of genome sequencing down. Today, the cost that Illumina talks about is $400 to $500 per genome. And over time, it's going to get down to $100. So we're talking about 3, 4, 5x lower the cost. And if you look at the Personalis platform, we do whole exome, we do whole genome sequencing. And so our panels are very, very large compared to the traditional diagnostic businesses. And so as the cost comes down, we're going to basically be able to leverage that cost structure and take advantage of it. And so you're going to see that our cost structure will generate better and better margins faster than you might find with other diagnostic companies.

And at the end of 1Q, the company had $266 million in cash. Any update on what the outlook is for the cash burn this year? And what kind of investments the company is making?

Yes. So in terms of Personalis, we've been capital efficient up until now. We've had an enterprise sales type of philosophy and approach from a business model. We're going to continue to be good stewards of our cash. The $266 million, we said on our last call, it should last just 2.5 years or so. In terms of the major investment we have this year, we have a new facility, we have to build out and get into primarily because we don't have enough lab capacity from a footprint standpoint or office space for employees. We've hired a lot of people since the pandemic started. And at some point, people are going to start to come back to the office, and we need to be ready for that. In terms of the operating cash burn, it's going to be $85 million to $90 million this year. And in terms of the onetime investment for the building, $45 million is going to be onetime. So we believe that going forward, our cash burn should be in that $85 million to $90 million range.

And then just, I guess, switching to the margin side. Gross margins were 28% in first quarter. Can you elaborate on the trends you're seeing there? And I guess, can you provide any sort of long-term outlook or guidance along margins?

Sure. So yes, the gross margins came down a little bit in Q1, predominantly because our VA MVP volume had dropped off by 20-something percent. In terms of -- the reasons for the margin decline is basically the under-absorbed labor and overhead. A lot of our costs are fixed. And so in the short run, it's hard to remove those costs. Longer term, as we get to scale, meaning $200 million of annualized revenue, gross margins are going to be over 50%. And when we get to $300 million of annualized revenue, gross margins are going to be somewhere between 60% and 70%, similar to what you're going to find in other diagnostic types of companies. The cancer business will have the richest gross margins compared to population genomics or other areas, and we believe that we're on track to be able to realize those types of margins.

And so I guess, kind of wrapping things all together, where we started. If you -- for people that are new to the story, what's the key message or takeaway you want to have from Personalis?

Sure. So the key message and takeaway here is, cancer is a serious disease, and that's been around for a long time. Today, we're at the forefront of where cancer treatment can potentially change options for patients. And so our objective is to basically help cancer patients live better and longer lives. And today, with what's going on with therapy, with pharma working very hard on new drug development for precision oncology using genetics at the core of it. And then the FDA approving therapy options for earlier-stage cancers, we believe that we're well poised to be at the forefront of being able to change the standard of care for cancer treatment over time. It's going to -- cancer is not going to be solved in 2 years, 3 years, 5 years, it's going to take a long time. But we're at the forefront of being able to drive that change. And I think we're going to find that our business will accelerate from a top line standpoint as we go forward here.

Great. Well, Aaron, thank you very much for participating today, and thank you, everyone, in the audience for joining us.

Thank you, John. Appreciate it.