Welcome to the Q2 2019 Personalis Earnings Conference Call. [Operator Instructions]. I would now like to introduce your host for today's conference, Caroline Corner. You may begin.

Thank you, Operator. Welcome to Personalis' second quarter 2019 earnings call. Joining me on today's call are John West, President and Chief Executive Office, Aaron Tachibana, Chief Financial Officer, Clinton Musil, Chief Business Officer and Rich Chen, Chief Scientific Officer. This call will include forward looking statements including statements regarding the markets in which we operate, including potential market sizes, trends and expectations for products, services and technology trends of demand for our products. Personalis' expected financial performance, expenses and position in the market. 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 SEC particularly the risk factors direct described in our 10Q filing for our second quarter ended June 30, 2019. The forward looking statements we provide during this call, including projections for future performance are based on our reasonable beliefs and expectations as of today. Personalis' undertakes no obligation to update these statements except as required by applicable law. Our press release of our second quarter 2019 results is available on our website www.personalis.com under the investor 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 PM pacific time today. Now I'd like to turn the call over to John for his comments and second quarter of business highlights.

Thank you, Caroline, and good afternoon everyone. It has been a tremendous journey for Personalis' from 2011 until now. We have a mission to help cancer patients by providing comprehensive data and analytics to biopharmaceutical companies so they can develop more effective cancer therapies. I am very proud of the hard work and accomplishments of the Personalis' team and I am pleased to be able to speak today as CEO of a newly public company. In June, we raised $140 million in our initial public offering, net of underwriting discounts and fees and expenses payable by us, which will allow us to continue to expand research and development and build out our commercial infrastructure to deliver high value genomic information to customers. I'm really pleased with all of that recent progress, yet I want to take a chance to step back and introduce the company to those of you who don't know us yet, and to explain our vision and what we hope to accomplish with our pharmaceutical partners. As you know, cancer is a global challenge weighing heavily on patients, families and our healthcare system. Scientists and doctors are hard at work running clinical trials with potential new therapies to help patients. According to third party research, the pharmaceutical industry spends approximately $60,000 per patient in oncology clinical trials. While genetic sequencing and related technologies have enhanced research and development efforts substantially. We believe the current tools aren't good enough. Many cancer diagnostic tests analyze a relatively narrow range of 50 to 500 genes and often miss key pieces of information about the immune system or other aspects of a patient's biology. Today, many pharmaceutical companies still use a disparate set of tests to compensate for the missing information which results in a fragmented and pieced together view of…

Thank you, John. Revenues for the second quarter of 2019 were $15.8 million at 80% from 8.8 million in the same period of the prior year. The 15.8 million was a new record high for quarterly revenue. The second quarter revenue growth was driven by an increase in volume for testing an analytical services provided to biopharma customers, and also the Veterans Administration Million Veteran program. In the second quarter, the MVP accounted for 8.5 million or 54% of the total revenues, and the remaining 7.3 million or 46% of the mix was primarily from biopharma customers. As is the case with certain companies selling diagnostic panels to biopharma customers, we expect to see some variability from time to time for our quarterly biopharma revenue. For example, we just had a relatively strong second quarter in our biopharma revenue, biopharma business and revenue increased approximately 27% from Q1, due to some of the planned first quarter samples arriving later than originally anticipated. Since our customers conduct both perspective data analysis with steady sample flow and retrospective analysis with bad samples and order flow, our revenue mix varies on a quarterly basis while we push towards our longer term growth objective. Given the biopharma sample delays in Q1, we recognized more revenue from our biopharma customers in Q2 than expected. We expect sample flow to normalize in Q3 which may result in less biopharma revenue than in Q2. Well, our biopharma revenue normalized in Q3 sample flow for MVP continues to increase and we expect our total consolidated revenue in Q3 to grow sequentially. Gross margin for the second quarter was 37.3%, an increase 10.1 percentage points from 27.2% in the same period of the prior year. The gross margin increase was a result of favorable operating leverage from higher volume,…

[Operator Instructions]. And our first question is from David Lewis from Morgan Stanley, Your line is now open.

Aaron just one for you and then John, a couple of quick, quick questions. Aaron, your commentary on third quarter was pretty clear. Just two follow ups on that. If I think about MVP, it's pretty clear that's up into the third quarter, should we also expect it to be up into the fourth quarter or more stable? And then for pharma bio, are you confident that absolute dollars in the second half are up over the first half?

In terms of MVP. So, you know, sample volume, as we had mentioned, have been coming in at a fairly good pace over the last three to four months and so that definitely is the possibility that could it could continue to be up sequentially quarter on quarter. In terms of the pharma business. So in terms of the you know, the reason for the, it being lower here in Q3 is really, you know, sample delays from Q1 into Q2, in terms of the full second half being lower than the first half that is a possibility at this point in time based upon what we see but in terms of just to be clear, the total consolidated revenue is going to continue to be up because of MVP, MVP, you know, today we have the sample volume to be able to utilize our capacity and drive continued top line growth of the company.

Okay, very clear. And then John, just two for me. The first is just I know, it's early days on NeXT but any customer feedback you can offer, or potential customer enthusiasm for the expanded analytics would be helpful and then just a quick update on liquid biopsy. We still thinking you know, 2020, or any more specifics around the launch date there. Thanks so much.

I'd say the feedback we've heard so far on ImmunoID NeXT has been very encouraging. People understand that it's improving biology that they haven't seen all together in a single platform before and so I think that that's quite encouraging. We actually are in the middle of having a kind of mid-year update with our sales folks all been in town and I would say, you know, they're all engaging with customers on this and I'd say this is definitely interesting that as in any new product in that we bring to pharma, particularly something that's different from what they've heard before. There's a period of time where they're assessing and going through pilots and that kind of activity but I'd say I'm pretty encouraged with that we've always thought of ImmunoID NeXT is something that would likely drive our revenue up in 2020. I think the, you know, what I see today that's still likely to be the case and appropriate in terms of kind of timing for that but I would say, I mean, one of the reactions we hear fairly often is people finding it almost incredible that it is actually possible to get all those different elements of the biology from a single small FAPE [ph] sample is, you know, almost kind of wow, I didn't know that was possible kind of reaction. So I think that part is kind of we're on track. With that, as you will have seen, we're also in the process of sort of filling out the feature set there. You know, the core assay is what we've said all along, the analytics continue to expand, we had a press release on that the other day was sort of the next wave of those analytics. And I think you'll see, continue to build out along that line so I think that will also help drive the interest in the demand as we get into 2020. So I'd say that's probably our biggest driver there liquid biopsy. As we've mentioned, you know, we're on track for product in 2020. I think we'll probably have more to say about that when we get closer to that. Right now we really have a lot of focus on the next side of things. That's really the big driver for us, and really quite a breakthrough.

Thank you. Our next question is from Derik De Bruin from Bank of America Merrill Lynch. Your line is now open.

So if you mentioned this in the prepared remarks, please forgive me. How should we think about? Can you give a little bit color in terms of your -- what your existing pharma customers are buying from you, Basically I'm just looking for the question of how much is whole genome, exome, whole transcriptome versus some of the other offerings and where I'm going with this question is like, now that your got NeXT fully launched have you seen an increase in terms of the amount of services that the pharm customers are looking at or considering basically, it's questioning about how the mix is shifting in the business.

So I would say our whole genome sequencing business is almost entirely for the VA at this point, we do think that long term, the cancer sequencing will move to whole genome but I think given what that would look like from a cost standpoint, today we're really focused on looking at all 20,000 genes, and frankly looking at moving the field up from the kind of classic 500 gene panel up to up to 20,000. Our [indiscernible] platform is essentially an integrated [ph] transcriptome we really, next really leveraging those together. They're not -- they can be run as separate essays but a lot of the informatics actually goes back and forth between the two. So there's a mutation in a gene that you see in the DNA, you'd like to know whether that mutation was expressed or not and you see it in the RNA, we have the informatics to tie those two together. So we do tend to see it as an integrated platform, not just as kind of a list. On the other hand, we do have customers who have a variety of different needs and who are developing different kinds of drugs and so we also work with them on the basis to make sure that what we're delivering to them is what they most want. So there's a core platform, but then we draw on that, in some cases, customers will use a subset of that sort of one part or the other. We also see cases where customers will combine the elements and just sort of more than our standard. So our flagship product would be include both the transcriptome as well as the exome both thing augmented with the immune repertoire, and so forth and that would be one tumor sample and one normal sample but we do have customers who ask for us to process multiple tumor samples from the same patient than with a single normal, for example, and there are others who have samples that they are measured tissue samples at multiple time points on the patient and so our approaches to be accommodating of them. They are important customers to us, and we want to make sure that we're focused on what's really needed for their clinical trials.

And as a follow up, you know, I believe during the roadshow for the deal, you talked about I think it was 45,46 current customers that have used the product. Can you -- any idea? Can you talk about new customer adds, or people, you know, as a metric on like, who's new within 2019? What does -- I mean were new in the quarter different question about how your book of business is expanding beyond people have already tried your products and service.

Yes, so we continue to add new customers. We're not reporting out on new customer numbers on a quarterly basis. But we do have a number, you saw the press release we had from RAPT Therapeutics, for example, you know, this is the first year where we've worked with them, obviously, a lot of enthusiasm in their case because they're just getting, you know, starting with us, they don't have prior work with the earlier versions of our platform. So they're starting right in using the ImmunoID NeXT platform and then there are others as well. We don't disclose every new customer we have, but it's a growing effort to add new customers.

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

Just to start with a quick follow up on the earlier liquid biopsy question. Can you just talk through what steps you need to complete the before launching that test? You know, basically, what do you need to do as we sit here today to get that product to market?

I would say that the there's a series of steps involved in product development. We probably won't disclose all of those. I would say that we have shown data on that, on the basic assay from that at conferences and it was also part of our presentations in terms of the IPO roadshow deck and so forth. Our focus there is on liquid biopsy being used together with our tissue biopsy results. We see that liquid biopsy and tissue biopsy complements each other in many ways. So liquid biopsy makes it easier for us to have multiple time points. The tissue biopsy gives us access to RNA and it also gives us access to the immune cells that are inside the tumor and those are both pretty critical in terms of understanding what's happening in the growth and evolution of a tumor. So we see them complementing each other in terms of the development program, you know, we have a lot of the core elements together. But any product that's like that we're sort of pushing the state of the art to be doing this at the whole exome scale. So I would anticipate that once we have that running, that the level that we're comfortable with internally will probably work early on with some initial collaborators and so forth to make sure it works well in their hands, and then figure out what we're going to do in terms of a release date. I would emphasize that a product like that is a combination of the assay, and the informatics for it and they're both really important parts of it. So there is ongoing effort to make sure that that product is everything we wanted it to be by the time that we launch it, but I'd say you know, right now, again, our primary focus is on driving revenue through the ImmunoID NeXT product and bring that out filling out all the features and getting adoption from customers with next.

And just to be clear that, you know, in terms of the 2020 launch, that would be exclusively for your biopharma partners, rather than something that would be positioned as more clinical that that would be something that would be on the potentially down the line?

Yes, I think what we've said is, is that we expect the first customers for our liquid biopsy product to be biopharma customers and using it when in clinical trials, again, you know, this is we're looking at 20,000 genes and so that's tremendous from Translational Medicine Research standpoint, clinical utility for 20,000 genes is probably a little bit further out.

In the quarter, what was the split between retrospective and prospective samples? And how do you see that evolving over time?

So in terms of the split, so more would be weighted towards the retrospective. We're not giving the exact percentage but more weighted towards retrospective in Q2. In terms of customer of that are focused on new [ph] antigens that's roughly 10% of our business today in terms of pharmaceutical business.

And then acknowledging it's still early in the current contract. When's the earliest we could get an update on either, I guess call it a renewal or the next MVP contract? I guess I'm just wondering when we could expect some update there.

The mechanism that the VA has is they, because they get their budget from Congress once a year. They can only allocate funds against the contract sort of one year at a time, they set up a contracting mechanism, which they can then extend out over multiple years and then what the way that they term it is that they add what's called a task order, which is essentially committing additional funds to pay for additional samples. Your pricing has already been agreed, some years out. Like we've mentioned, this current contract that we're on which we just started sequencing on at the beginning of this year, has the potential to be a four year contract. So far, there have been task orders for two years and we would expect to hear about the possibility of a task order for the third year, in the second half of 2019. Obviously, when we hear news like that, I'm sure we'll be happy to share it that would be very positive for us.

Our next question is from Kevin DeGeeter from Oppenheimer. Your line is open.

I just want to follow up on your comments with regard to fourth quarter roll out as a diagnostic assay, and you specifically, you know, how should we think about any of the potential contribution towards guidance in kind of 2019 of that introduction, and just kind of probably more relevant kind of what do you think about a typical customer -- should we think about that product offering as being almost solely incremental revenue or does this sort of work into the model I think you've implemented with a number of your customers where you're providing, you know, significant incremental improvement in function, but not necessarily driving that all through in the form of incremental revenue.

Yes. I would say, I think it would be conservative to think about it as a product where we're introducing the capability in 2019, those things always take time for pharma to assess, you know, somebody was going to include that, particularly if they wanted to use it prospectively at a trial, that would have to have to be something that would be have to be baked into the planning for a trial, typically, that gets locked down, you know, can be six, eight months before a trial actually starts and then there's a patient enrollment period of time. So I think that it's a an attractive capability may add to the adoption of the broader ImmunoID NeXT platform and that may be part of the up swell that you see, next year with ImmunoID NeXT. But I wouldn't think about it being a 2019 major revenue event, it's an introduction of a capability. I'd say, it's also, you know, it's really the first time ever, that there's been anyone who's offered this capability to have 20,000 genes scale, translational research data, you know, exome and transcriptome, and simultaneously to have from that a clinical diagnostic report. And so there will be some work needed to work with pharma on the best way to integrate it in that in with their clinical trial workflow. That's all part of what we'll do working, you know, collectively with our customers on that. I think there's interest, but I think it's quite early days. And I think what you would see is it would be, we won't talk offer separate guidance on that or anything of that type. But it is one of the elements that we think will help NeXT driver pharmaceutical revenue in 2020.

And then maybe a question for Aaron. I did see in the 10Q, where you break out customer concentration and Pfizer was significant customer in the quarter 23% of total revenue kind of color roughly, looks like about half of the pharma revenue. Can you just kind of comment on how we think about customer concentration going forward? And we put bolted third quarter results in your commentary with regard to trends and biopharma for the second half of '19. How does customer concentration in the second quarter sort of as a baseline figure into that discussion?

In terms of the customer concentration as noted in the 10Q, we have a certain 10% reporting threshold, as our, you know, revenue continues to increase and we broaden our customer base, as we go forward we believe that the concentration will start to diminish going forward, with the exception of the VA, MVP, obviously, that's going to be a large customer for several years to come but in terms of the biopharma customers over time the concentration should start to diminish as we add to our customer base. In terms of going from discussions to early pilots, which we're in today with our ImmunoID NeXT platform it does take several quarters, before you start to see uptake and traction and volume. So I wouldn't see the concentration changing overnight but over time, it'll start to diminish.

And then maybe just one more for me and you know, the company was very successful through it's IPO process and accessing some more capital than was originally planned. Can you just comment on, incrementally any initiatives you may be able to invest in investment more aggressively and given the relative improvement of access to capital?

Yes. So Kevin, in terms of the capital raise so we were able to raise more than we had originally planned for and so we're going to be very aggressive in terms of investing in sales, business development marketing programs, because that's going to be a direct correlation to driving top line growth. We're also going to accelerate R&D programs and try to bring new products to market even faster than our internal schedules that we've already planned for. In addition, we have $20 million in debt on our balance sheet. And so, you know, that's something we're going to look at potentially paying down here in the third quarter as well, which is a little over $20 million and so it's high cost debt and so since we raised more money, it probably makes sense for them to pay that down.

Thank you. At this time, I'm showing no further questions, I would like to turn the call back over to John West for closing remarks.

Thank you, Operator. I would like to thank our customers for their business and partnership. I would also like to thank our employees for their hard work and putting us in an excellent position for long term growth. We regularly discuss our business at Investor Relations events. These events are listed on our website in the investor relations section and regularly updated. This concludes our call for today. We'd like to thank everyone for attending and we look forward to talking with you again in another three months.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.