Ladies and gentlemen, thank you for standing by and welcome to the Q4 2020 Personalis Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Caroline Corner. Thank you. Please go ahead.

Thank you, operator. Welcome to Personalis’ fourth quarter and full year 2020 earnings call. Joining me on today’s call are John West, President and Chief Executive Officer and Aaron Tachibana, Chief Financial Officer. This call will include forward-looking statements, including statements regarding the markets in which we operate, including potential market sizes; trends and expectations for products, services and technology; trends and demand for our products; Personalis’ expected financial performance, expenses and position in the market; and the impact of COVID-19 pandemic on our operations and our customers’ operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K for fiscal year 2020 to be filed today, our registration statement on Form S-3 filed on December 30, 2020 and the prospectus supplement filed on January 27, 2021. 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. Our press release with our fourth quarter and full year 2020 results is available on our website, www.personnels.com under the Investors section and includes additional details about our financial results. Our website also has our latest SEC filings, which we encourage you to review. A recording of today’s call will be available on our website by 5:00 p.m. Pacific Time today. Now, I would like to turn the call over to John for his comments on fourth quarter and full year 2020 business highlights.

Thank you, Caroline. In spite of the pandemic, Personalis has continued to grow. Personalis achieved record revenue during Q4, our 18th consecutive quarter of revenue growth. For the full year 2020, we also achieved record revenue and grew 21%. Our performance over the last several months highlights our ability to execute and also the resilience of our business. This results from our ability so far to shift our focus and capacity between our biopharma and population sequencing customers. Focusing on our revenue from biopharma and all other non-VA customers, during Q4, we grew 33% sequentially and 73% from the same period of the prior year. In the fourth quarter, we had a few projects where customers required completion before the end of the year, so they could use the data quickly. This customer push helped us achieve a new record level and highlights our ability to turn around test results quickly and support our customers as well. While we may not achieve quite that level of revenue in Q1, we do feel that our Q4 record reflects a longer term growth trajectory, evidenced by the orders we have received from these customers. In every quarter since mid-2019, the aggregate value of orders we have received has exceeded the revenue reported. For the full year 2020, orders were approximately 80% higher than 2019. Because of this order strength, entering 2021, our backlog was approximately double the amount at the start of 2020. In Q4, orders continued above our revenue level. And so far in Q1, the dollar value of orders we have already received exceeds the revenue we expect in the quarter. We believe we are winning pharma business based on the value proposition of our NeXT platform’s technology and capability and also our ability to service customers well. This underscores…

Thank you, John and good afternoon everyone. 2020 was a challenging period for us, our customers and suppliers. Despite the pandemic, we achieved record revenue levels once again, which highlights our focus and strong execution. During my prepared remarks, I will provide detail about our financial results for the fourth quarter and full year 2020 and guidance for the first quarter of 2021. Revenues for the fourth quarter of 2020 were $20.2 million, up 2% from $19.8 million for the prior quarter and up 11% from $18.2 million for the same period of the prior year. The $20.2 million was a new record high for quarterly revenues. And both the sequential and year-over-year growth was driven by an increase in genomic testing services provided to biopharma customers. Aside from the VA MVP, biopharma and all other customers accounted for revenues of $7.6 million for the fourth quarter, a new record high for biopharma revenue, representing an increase of 33% from last quarter and a 73% increase for the same period of the prior year. During the fourth quarter, sample flow from our biopharma customers was fairly linear throughout the period, allowing us to process samples efficiently and also helping to maximize revenue. For the fourth quarter, the VA MVP revenue of $12.6 million was lower by 11% from last quarter and was 9% lower compared with $13.8 million for the same period of the prior year. If you recall, we do not have specific testing turnaround times for the VA MVP. Therefore, we have the ability to modulate volume up or down to complement the biopharma sample testing volume, which can have some variability from time to time. In the fourth quarter, we had a large quantity of biopharma samples on hand, and therefore, we processed fewer VA MVP samples…

[Operator Instructions] Your first question comes from the line of Tejas Savant from Morgan Stanley. Your line is now open.

Hi, this is Yuko on the call for Tejas. Thank you for taking our questions. From a high level, could you describe the economics for the Natera partnership, how should we think about the ramp there?

Yes. So, this is John. I would be happy to describe that. Personalis provides the upfront exome sequencing of the tissue samples. Those are – the sales are all handled by Natera. We provide that upfront sequencing. That data goes to Natera. They then identify which variants they want to use for their Signatera test and then they sell that. So, our involvement is on – is being paid for the upfront exome sequencing. The revenue from Signatera goes to Natera.

That was very helpful. And how should we think about the ramp?

So that the – that will be guided by the ramp in the Signatera product and I think you probably would want to speak with Natera about that, but I think we are all optimistic about it.

Okay, great. And then I have a follow-up, how should we think about cadence for the OpEx through the year with recent new launches, expansion of global footprint, in addition to expectation of additional new launches in 2021, what are the key investments you are focused on for this year?

Yes. So the key investments that we just talked about, new product, the NeXT Personal is very critical and key for us, continuing to invest in clinical and regulatory capability. In terms of the OpEx ramp and so we expect OpEx to grow, I don’t know, 40% to 50% year-over-year compared to 2020 and so our OpEx can be in the $90 million to $100 million range in 2021. And I would expect it to ramp throughout the year, right. So quarter-by-quarter, it’s going to increase and step up. In addition, if you look at 2019 and 2020, we really didn’t spend much money on capacity or footprint or anything like that. We have been hiring a lot of people since we have been working from home. And once things free up and we can get back to the office, we are going to need additional footprint as well as the next batch of capacity as we see a large amount of growth in front of us over the next few years.

Thank you.

Your next question comes from the line of Derik De Bruin from Bank of America. Your line is now open.

Hi, good afternoon.

Hi.

So, a couple of questions. So first, you have increased your number of NeXT customers, I think you said 45 at the end of the year. Can you give us a little flavor on the orders that they are doing – what services they are doing and what are they purchasing beyond whole exome and whole genome and transcriptome services? And just basically, some of the size of the orders and the recurrence, just – I would really like to get some flavor on what those customers are doing and buying and how many – are you expanding their book of services that they are purchasing from you?

Yes. So this is John. I’d say that the – when we start working with a pharma customer, they will often start with us in a single clinical trial. And over time, with the most successful accounts, we’ll actually be in many clinical trials in parallel. I’d say we also tend to start on retrospective analysis of clinical trials where the samples already exist. And as our customers gain more confidence in our platform, they will often start baking us into the trials right upfront. So we will be involved prospectively as they are collecting the samples. So the relationship can begin with the level of just one trial and then ramp up quite a ways from there. I would say that in the past, I think we’ve commented on this in prior quarters, we used to see pilot orders that might be $40,000 or $50,000, that kind of thing. And that still happens sometimes. But we’ve seen big pharma customers now start in on the platform at the level of between $500,000 and $1 million as the first purchase order. So certainly, the scale has gone up from that standpoint. And the number of customers increasing is a good thing, but the total dollar value of orders, which we commented, went up by approximately 80% last year. That’s probably really the key metric because that some of that is increased numbers of customers that we are working with, but quite a bit of it is expansion at the customers we’ve already been working with as they became more and more confident in our platform.

Great. That’s really helpful. Can we talk a little bit about the VA and population genomics? And I’m going to sort of lump those two together. I guess a couple of questions on the VA. I guess the first one is, understand, obviously, that things are hectic, but is there any reason why the VA wouldn’t re-up? And this was more of a competition question in that sense. I mean, obviously, with some of the new technologies that have been introduced at the high end for the sequencing, with the new NOVAS that are out there, there is a lot more genomic services lab that are there. So, are there any potential competition for there that they would sort of go elsewhere? And I guess is there anything that could sort of accelerate the amount of sequencing you’re getting through? I mean, as you pointed out, there is over 800,000 enrolled. You have done 147 contracted over the last 8 years. What do you sort of – what would sort of really get that going even more? Does the cost of sequencing need to come down to – are you using the Illumina $600 genome that’s sort of they are doing in that area right now. I’m just sort of curious like could you talk about that overall dynamics in the market and what could sort of accelerate that program?

Sure. Yes. So I’d say I don’t see any reason that the VA would not re-up, I think the only question is what’s the pace in terms of their budget and ability to focus on this just given that they have had to be really all hands on deck to deal with COVID. And so I think that it’s a great relationship. We like working with them, and it seems that it’s mutual. I think the question for them is do they really want to go through a whole RFP process given that they have so many other things to do? They do have the ability to give us an additional task order on the existing contract. And so that could be a possibility as well. I think we’ll have to see. In terms of the competition, we haven’t gotten any sense that there is an issue with that. I think we’ve worked with them well over time, and we’ve really ramped up a lot. You mentioned we’ve sequenced over 100,000 genomes over the last 8 years. But it certainly has not been a uniform rate. It’s really been growing. And so of the 100,000 genomes that we got to in December, half of them were sequenced last year. So we’re in the 50,000 per year kind of rate. It’s been pretty substantial with them – for them. So I think that’s already a ramp-up. I think if they were to go up to that level, obviously, they are interested in the cost coming down. But from the time that they first started working with us, the costs have come down over the 8 years, and we’ve always worked with them on that. I think, generally, it’s a question of budget and just being able to pay attention at the VA given the COVID situation.

Great. Thank you very much.

Great, thank you.

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

Hey, good afternoon everybody.

Hi.

Just starting on NeXT Personal, you have talked about how the assay may not require a lot of plasma, and I think you’ve positioned that as a competitive advantage. And obviously, a smaller sample size is always better than the reverse. But I’m just wondering, competitively, is that something that you think is an issue for others or is the point you’re making that you can provide more information with a similar amount of sample? And then I guess while I am on this topic, are there things you’re seeing in the near-term that – and I guess, as I say near-term, I should say over the next several quarters that are either being brought to you by your suppliers or being developed internally that could further reduce sequencing costs for things like NeXT Personal, but obviously, the broader portfolio as well?

Sure. So, several questions. Thank you for that. I’ll try to walk through them. So certainly, the – as we’ve designed NeXT Personal, you’ll not be surprised that Personalis is taking probably perhaps the most comprehensive approach of any of the companies in this space, looking at thousands of genetic variants. It’s – we feel that this is something that both allows us to track the tumor in great detail by having both fixed and variable content. It also lets us look for the emergence of new mutations that were not in the original tumor. So you really understand the evolution of the tumor and not just tracking what was there to start with. When you look at so many variants, the number of molecules that you have available, even when there is a relatively low amount of plasma, which might lead to not very many whole genome equivalents in the plasma sample, the more places across the genome you can sample, the more molecules there are to look at them. So that lets us be more sensitive for the amount of plasma. So you can either use the same amount of plasma as others would if that’s available and be way more sensitive or you have the other possibility, which is to sort of maintain sensitivity and do it with a lot less plasma. And when we work with customers, we do find that the amount of plasma is just really a limiting factor in many cases. It’s just not that easy, and they often don’t want to use all of the sample they have on just one thing. So we think it will be an advantage to be so sensitive in that regard. In terms of over the coming quarters, reducing the cost of sequencing, we continue to…

Thanks for all that, John. Maybe just one quick actually unrelated follow-up, as you know as well as anybody because I think you’ve shared in this, a lot of the enthusiasm in Personalis has been the outlook for deploying the platform that you and your colleagues have built for biopharma. And this is not to take anything away from MVP or your broader efforts in pop-gen. But I think a lot of the excitement and where a lot of the value has been assigned has been in the prospects for biopharma. For good or for bad, that has traditionally been a much smaller part of the revenue mix. It still is not the majority of your revenue, but Q4 is, I think, the first time I can remember where you materially beat versus our biopharma expectations. You gave a lot of encouraging detail in your prepared remarks. I mean simply put, is this the new base? And do you think things have inflected in a way where that mix is going to start to become a lot more balanced over the course of 2022 – or 2021 and 2022?

Yes. I would say that the – we have put a lot of effort into the development of our platform and our customer relationships with biopharma and I think we are seeing great results from that. And as I commented, we’ve seen a large ramp-up in terms of orders from biopharma. I think we’re winning in that category. It takes time for that to show up as samples, but I mean you did see Q4, it was the highest revenue we’ve ever had in that category. And I don’t know if we’ll do that every quarter, but I do think it’s part of the longer term growth trajectory. We do expect that the oncology-based biopharma business will grow to be a larger and larger portion of our revenue over time. So yes, I think the enthusiasm is well placed because I think it’s – I think we’re winning, and it’s beginning to happen.

Thanks, again.

Thank you.

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

Great. Thanks for taking the questions, guys.

Thank you.

Maybe just one on – yes, sure, maybe just one on the funnel for the POPSEQ programs, I know you guys have kind of a small team engaging directly there. I know you’re talking, John, a little more about ‘22. But can you just talk about the funnel? And then I guess what it will take for a few of those to flip your way as we go into maybe later this year and into ‘22? What has to happen for those conversations to kind of materialize?

Yes. That’s a great question. I would say we have been talking with people all over the world. We have a pretty substantial list of the programs. One of the things that’s interesting is that although we initially assumed the challenge would be whether the programs would get funded, what we’ve actually found is there is a fair number of programs that have funding commitments, but they almost don’t know how to go about it entirely. I mean it’s not that they don’t have some ideas, but they don’t have in their country any group that has ever done this at scale. And so there is a concern that they could waste a lot of money by sort of trying to do it and not knowing what they are doing and making mistakes and so forth. And so I think in the past, the opportunity would have been that maybe we can have the sequencing done by one of the companies in America or perhaps in England. That doesn’t necessarily meet some of the other goals of those programs. And so one of the things that we’ve seen is that once we decided to go ahead and set up a full laboratory in Shanghai, China, and we’ve been putting a lot of resources into doing that, we realized that if we could do this in Shanghai, China, we could probably do this in a lot of other countries as well. And the kind of people and processes we put in place to be able to go from being a California-only company to one that was also operating a state-of-the-art laboratory in China was one where we could duplicate that and do that in other countries. So then when we talk to these customers and we say, if you want, you…

That’s really helpful, John. I appreciate that. And then maybe just to follow-up, just on the NeXT Personal side. Can you just talk through, as specific as you can, in terms of what the timing we should expect for this year? And just the key hurdles, I guess to get this out there and start generating revenue that we should be watching for?

Yes. So the – what we said is that we’ll release the product this year. It is one of our highest priorities inside the company, and I think people are pretty excited about the opportunity. I think what you’ll see is that when we are ready to, we’ll talk about bringing the product out. It’s likely to be an RUO product to start with, something we can work on for analysis perhaps with our pharmaceutical customers first, but there is a lot of motivation about that being a diagnostic product as well. We see, frankly, the possibility to have the most sensitive test possible. And so we’re excited about bringing that to market. So it’s likely to be on through the year that you’ll see that evolve, probably first as an RUO offering, perhaps later as an LDT, have to see when the LDT can happen. But ultimately, I could imagine that this would be something we might even want to take through the FDA although obviously that process is much more extended.

Understood. Thanks, John.

Thanks.

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

This is Vidyun on for Mark. Thanks for taking the question.

Hi, Vidyun.

Hi. So I just want to just get your thoughts on Exact Sciences recent acquisition of a comprehensive whole exome sequencing test in Phoenix. So how do you believe that the NeXT platform is differentiated relative to that acquisition?

Sure. Be happy to answer that. I mean [indiscernible] is not a company we know all that well, but they – our understanding is that there is nothing that differentiated about the exome there. Personalis started working on exomes 10 years ago, realized the fundamental problems that led to there being gaps in the sequencing that many genes have regions that are not well covered. We realized this would require a different biochemistry to solve. We developed that. We called it our ACE technology. We have patents on that now in the U.S., Europe and in China and ended up resolving that. I think in addition to the sequencing, let’s call it, the laboratory part, in cancer, the question is, can you interpret what you’re seeing? And for us, sure, many people can look at the classic cancer genes, the eGFR and KRAS and so forth that people have looked at for 30 years. But since around 2014, when immunooncology really started to win with the FDA and now has been – become such a large category, we think it’s really important to understand neoantigens because that’s the underlying mechanism of action of the immunooncology drugs. And in order to be able to do that, it’s not just a sequencing problem, but it’s a data interpretation problem. And so this was the reason we spent over 4 years developing our SHERPA technology that I described. And this involved genetically engineering human cell lines, growing them up, looking at the peptides with high-end mass spectrometer, machine learning algorithms. So we said nothing to too is just the sequencing part. And now that we have that kind of a capability, we can look at the genetic variants that we would see out of a tumor, it might be that in an individual tumor, maybe only 1% of the mutations actually can elicit an immune response. And unless you can really say, well, which ones do you think are the 1%? The sequencing itself is perhaps not nearly as useful as it could be. And so the effort that we’ve put in over a period of time to have this proprietary capability to rank the neoantigens, we think, is a huge differentiator, and it goes way beyond the sequencing. So Exact Sciences is a good company, and I understand they are in a number of other areas that really don’t directly compete with what we do. But I think that the technology they have there, I think, is really quite different from the NeXT Platform.

Okay, awesome. Thank you for that. So, just a quick follow-up on SHERPA, as Olivia previously mentioned that reimbursement for neoantigen-based biomarkers would require some proof of clinical utility. So if you could just provide an update on what progress has been made on that front? I know it just launched, but – and any potential data readouts that we should be expecting there?

Sure. So the use of the SHERPA algorithms and capability to start with will be with our pharmaceutical customers. So they pay their own bills. So reimbursement is not an issue for us growing revenue based on SHERPA in the early period of time. We have been working on clinical utility studies. We’ve shown data, for example, from our collaboration with the Innova Medical Center in the Washington, DC area on melanoma patients. We’ve been able to show that we have substantially better statistical significance in predicting response to checkpoint inhibitors by being able to use our neoantigen ranking system. And so we think over time, if this is paired up with the appropriate drugs and taken through the FDA, this would be a terrific next-generation companion diagnostic and once there is that kind of FDA approval that would be a good lead into insurance reimbursement. I think in the near-term, we see our abilities to grow with that as being largely working with our pharmaceutical customers, and many of them are really focused on these immunooncology drugs and so making progress on neoantigens is quite important in that arena.

Got it. Thanks for getting the questions guys.

Great, thank you.

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

Hi, guys. This is Joseph on from Mike. A lot of great questions already asked. So I’ll just try and keep it quick. I guess, first of all, how many VA MVP samples were specifically processed in this quarter or in the fourth quarter?

So, we didn’t give the specific number of samples, Joseph, but what you can do, the selling price is a little over $1,000 per sample, and we did $12.6 million, so somewhere around that level.

Okay. That’s helpful. And then, I guess, continuing with VA MVP, looking at the first quarter guidance, the low end of the biopharma revenue would be guiding to still near flat or a decline in VA MVP revenues. Could you just maybe comment on how personnel coming back into the lab, building out infrastructure, and as you discussed earlier, implementing these automation processes are going to aid in that extra capacity? And I guess, additionally, is your view that any additional capacity will always be steered towards biopharma customers, given the excess order flow you guys are receiving?

Yes. So in terms of our capacity and our ability to use capacity, one thing that’s really, really great about our business is we’re able to modulate and move capacity to biopharma when we need to and over to VA MVP or population sequencing when we need to. Sitting here today, we’re probably running at 65% utilization of full theoretical capacity at any point in time. But a lot of that depends upon when the biopharma samples arrive. They do arrive in large batches at times. And so we have to focus on the processing of them when they come in because of the turnaround times that are required. If we look out here in 2021, like John had mentioned in the prepared remarks, we have received a large amount of customer orders over the last year or so. And so it’s been building up. And to that point, we do see revenue growth for biopharma as we go through ‘21 and beyond, right? And in terms of the capacity, we’re going to need to stay in front and have more capacity that’s built up primarily because we don’t want to leave any revenue on the table. Revenue growth is the number one priority. In terms of the cost of that capacity, we haven’t said anything publicly in terms of sequencing equipment or anything like that. And as John had mentioned in one of the – or to answer one of the questions, other technologies and sequencing capability to reduce cost, we are still waiting for some of that to hit the market. And so before we go and spend a lot of money on capacity, we will make sure we do diligence on what the right technology and platforms would be.

Great, thank you.

Sure.

Okay, great. Thank you.

Your last question comes from the line of [indiscernible] from H.C. Wainwright. Your line is now open.

Hi, everyone. This is [indiscernible] for RK. Thanks fort taking my question. I just had one quick one. Regarding the customer base for the biopharma client, you guys had 45 customers this quarter. I just wonder, is that including the client using the pilot program? Or if you – if not, could you guys give us some color on that part? Thanks.

I’m sorry, so you are asking that the 45 customers, does that include people involved in pilot programs?

Yes.

Yes. So if we have people who were – their first order for the NeXT platform is what we would consider to be a pilot order. They would still be accounted in that. I’d say some of the customers we’ve had coming on board now with their first orders for NeXT have been – we’ve had some that are in – certainly in the hundreds of thousands of dollars and some between $0.5 million and $1 million. So there is – they – not really sure I call them a pilot anymore, those people just beginning to use the technology. But yes, they would be included. And I’d say many of our customers are in a position where we still have substantial room to grow in terms of the fraction of their clinical trials that we’re winning and so forth. So we look forward to that area being a real source of growth for us in the years to come.

Awesome. Thank you very much.

Thank you.

I am showing no further questions at this time. Ladies and gentlemen, this concludes today’s conference call. Thank you all for your participation, and have a wonderful day. You may all disconnect.