Good day, ladies and gentlemen, and welcome to the Personalis Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call may be recorded. I would now like to hand the conference over to your first speaker today, that is Caroline Corner, Investor Relations. Please go ahead.

Thank you, operator. Welcome to Personalis’ third quarter 2021 earnings call. Joining me on today’s call are John West, President and Chief Executive Officer; and Aaron Tachibana, Chief Financial Officer. All statements made on this call that do not relate to matters of historical facts should be considered forward-looking statements within the meaning of U.S. securities laws. For example, any statements regarding trends and expectations for our financial performance, new orders, products, services and technology. 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-Q for the third quarter of fiscal year 2021 to be filed today and our 10-K for fiscal year 2020. Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release with our third quarter 2021 results is available on our website, www.personalis.com under the Investors section and includes additional details about our financial results. Our website also has our latest SEC filings, which we encourage you to review. A recording of today’s call will be available on our website by 11:00 a.m. Pacific Time today. Now I’d like to turn the call over to John for his comments and third quarter business highlights.

Thank you, Caroline. Personalis continues to grow, driven particularly by our oncology business. In Q3, revenue from our oncology business grew 50% over the same period of the prior year. It has increased sequentially over each of the last eight quarters. New orders received in Q3 were more than 3 times the amount of revenue for the quarter. In addition, more than half of the orders are for prospective clinical trials. Our pharmaceutical customers are increasingly seeing the value of our platform and incorporating it in their clinical trial designs right from the start. We expect our oncology revenue to become the largest part of our revenue in Q4 of this year. And based upon the midpoint of our updated guidance, a sequential increase of 57%. Our pharmaceutical customer base has broadened substantially over the last year, and that contributed meaningfully to the record orders we received in Q3. Our partnership with Natera has also continued to grow, and in Q3, it was 10% of our total revenue. Natera’s adoption of our NeXT exome gives them access to its relatively large footprint for identifying somatic variants for their Signatera MRD test. It also lets Personalis participate in a part of the MRD market, which is complementary to our own product, NeXT Personal, which we plan to launch next month. We see a lot of opportunity in the MRD market and are pleased with our progress to date. We also continue to make progress in Asia. Our plans to establish a lab and commercial operations in China are continuing well. We have now hired about 10 employees, and our team has begun to qualify our laboratory in Shanghai. We have received significant pharmaceutical customer orders, and those customers are now pursuing local regulatory approvals. We expect to begin working with customers…

Thank you, John, and good morning, everyone. We had another great quarter and achieved a new record revenue level for oncology. During my prepared remarks, I will provide detail about our financial results for the third quarter of 2021, and our guidance for the fourth quarter and the full year. Total revenues for the third quarter of 2021 were $22.3 million, up 3% from $21.7 million for the prior quarter and up 12% from $19.8 million for the same period of the prior year. Aside from the VA MVP, biopharma and all other customers accounted for revenues of $8.6 million in the third quarter, representing a 5% sequential increase and a 50% increase over the same period of the prior year. This was our fourth consecutive quarter with a year-over-year increase of more than 50% in non-MVP revenue and highlights a couple of key points. First, customer orders that we have won over the past 1.5 years are converting to revenue. Second, the new order amounts continue to exceed revenue reported each quarter and increases our backlog. This provides us with confidence that our biopharma revenue will continue to increase in the future. Also, our current biopharma revenue is mostly from tissue samples. As we ramp our liquid biopsy offerings, we expect this to accelerate growth due to the multiple time points or, in other words, the number of tests per patient. For the third quarter, the VA MVP revenue of $13.7 million was higher by 1% from last quarter and was 3% lower compared with $14.1 million for the same period of the prior year. The VA MVP unfulfilled orders were $12.9 million at the end of the third quarter. And based upon current estimates, we expect the unfulfilled orders to convert to revenue during Q4 of this year…

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

This is Neel Ram on for a Tejas Savant. Just had one question on the MVP. So now that you’re out of the Permian period, has there been any recent dialogue with the VA on the potential for another task order looking at March 2022?

Yes. This is John. Thanks very much for your question this morning. So we haven’t yet. I think it’s a little bit early for that. In general, the VA would look at a new request for proposal. Historically, that would be something we’d start to see activity on in May or June of next year, if they were going to do something for the next fiscal year. And I haven’t heard anything else other than that.

Got it. And one other question, and this is related to your comments on consumables. Can you provide us with some color on how you’re managing supply chain disruptions? And any initiatives to manage inventory in hand while working through backlog in 2022? And do you foresee this having any impact to gross margins.

Yes. So this is John. I think we’ve commented that in prior quarters, actually starting back in early 2020, when we started to see the pandemic sort of beginning to ramp up, we actually invested a fair amount in additional inventory. And it wasn’t necessarily a huge dollar amount, but it was a lot of physical material, because we know that many of the things that can slow you down or be a problem are small, low-cost items like plastic pipette tips. So we had a, frankly, a wall of boxes of pipette tips and other items like that to make sure we didn’t run out. And we’ve been able to continue production. We have seen issues where this issue of shortage of lab qualified plastic has led to delays from some of our reagent suppliers because they have the reagent, but they don’t have a bottle to put it in. We’ve been navigating around that. In general, we’ve increased our safety stocks substantially, and we’ve been very active from a purchasing standpoint. So we’ve been able to stay on track, but it’s certainly been something we’ve had to spend a lot more time and effort on. So far, fingers crossed, but it’s in fact been going well, and we’ve been able to keep up production each quarter. But it’s definitely a very active area of course.

Got it. That’s it for me. Thank you.

Great, thanks.

Your next question comes from the line of Kevin DeGeeter with Oppenheimer.

Good morning, Kevin.

Hey, great. Thanks. Good morning. Maybe just two quick ones from us. As we think 2022 and beyond on kind of R&D spend and the investments in the build-out for clinical diagnostics. Should we think about a need for somewhat larger clinical trials around either NeXT Personal or MRD or kind of some of the other clinically oriented diagnostic test to support reimbursement in the commercial model there?

I think that given the performance of the Personalis product and the fact that it’s, in some ways, breaking new ground, it will make sense for us to have clinical studies that demonstrate that. I’m not sure that that will be required to achieve initial reimbursement, but we do expect there’ll be studies like that, and that’s part of the reason that we’re partnering with the Mayo Clinic. I mean, you almost can’t imagine a better place to work with than the Mayo Clinic. They have about 12,000 cancer patients per year, just of almost every type of cancer. And so I think there will be a terrific partner in that, and I think it will help us to conduct studies like that on a relatively efficient and expeditious basis. But yes, absolutely, we look forward to working with them. And I would expect that we’ll have other partnerships with other IN medical centers that we’ll be able to announce over time as well.

And can you provide an update on the company’s China lab expansion and FUS biopharma, I guess, if you want to comment on POPSEQ as well. But specifically, the China lab, how is that build-out going?

Yes. So I think the lab build-out has gone well. We have a good team there now. We’re now beginning to process non-customer samples just to show that we can get the exact same results in Shanghai as we do in Menlo Park. I think a key thing to understand about the China area is that we’ve ended up receiving some orders from large international pharmaceutical companies, where something like 95% of the value of the order will be processed in our lab in California and perhaps 5% will be processed in Shanghai. But the fact that we were able to do the part and sign up to deliver the identical product in Shanghai has been instrumental in us actually receiving those orders. And so the – if you look at revenue, actually run in the Shanghai lab, that will take some time to grow and will be probably relatively modest in the early period of time, but that doesn’t mean it isn’t having a material impact on our overall results because it helps us win these international clinical trials where some of the recruiting sites have to be in China. So I don’t know if that helps you there, but we are seeing a lot of positive feedback from our – particularly the larger pharmaceutical companies that do operate in many countries in parallel and where China is important for them.

Great. Thanks.

Great, thank you.

[Operator Instructions] Your next question comes from the line of Patrick Donnelly with Citi.

Hey, guys. Thanks for taking the questions. Maybe one of the oncology orders, obviously, encouraging traction there. I know when you talked about the VA a couple of months ago, you talked about what growth we could expect for 2022. Has the momentum increased since then? I mean, again, clearly, the numbers came in really strong. 4Q, it doesn’t feel like you need a whole lot of orders to hit the numbers you talked about, but would love to just talk through the setup there and how you’re feeling about the numbers?

Yes. I’d say we’re feeling great about Q4. I mean, you saw us predicting now with the new guidance at the midpoint, that quarter-on-quarter growth in our oncology business would be 57%. So that’s a pretty strong ramp, 77% year-on-year. So I think we’re feeling great about that. Many of them are – these are things that have been coming together for some time. We have a number of large pharmaceutical companies that have really been scaling up pretty rapidly for us there. So I think we had expected over time that the oncology business would become the largest part of our business for the long-term relative to the population sequencing. And to some extent, the way that this has played out with orders, the order we received from the VA was lower than I think we had thought was possible for this year. On the other hand, the orders from the pharma side have been almost a tidal wave. And I think that’s been – the two of those offset each other to some extent. So I think we’re basically just turning that corner sooner than we thought we would. And actually that’s a good place to be. So we’re excited about the growth of the cancer business. That’s the biggest part of our company for the future and an enormous available market.

Just to elaborate on that a little bit, Patrick, so in terms of what John just went through, if you go back 1.5 years to two years ago, a large order for us was a couple hundred thousand dollars. And we had a significant concentration with just a couple of large pharmaceutical partners. If you look at the third quarter, we had 3 times the new orders come in compared to revenue we reported. And if you look at the mixture of those orders, we had several customers that were multi-millions of dollars of orders in that batch. In addition, we had several customers who had hundreds of thousands of dollars of orders. So in terms of the penetration that we’ve been after over the last couple of years with the adoption of the NeXT platform, it’s working. And we’ve got most of the large top 10 pharmaceutical companies as our customers today, and we’re focused now on deeper penetration with all of them, and we believe we have a long ways to go, and we’re really excited about where we’re at today. And going into the fourth quarter and then into next year, we’re not providing guidance for 2022 just yet, but we’re very confident that we can grow at least 50% in 2022 because of all the order traction we’ve seen to date.

That’s really helpful. Thank you, Aaron. And maybe kind of following-up on that, you talked about the VA. It sounds like your expectation given where the backlog is. Basically, we should assume it’s kind of fully done by 1Q. And then beyond that, should we just model essentially nothing? Is that kind of the message going out? I just want to make sure we’re thinking about the model right for next year?

Yes. So in terms of the VA MVP, we’ve got enough backlog right now that will be fulfilled here in Q4 and then into Q1. The RFP process, like John had alluded to, would come out in the summer time. And so the second, third and fourth quarter right now, I think from a modeling standpoint, it’s safe to model zero basically. And we’ll know more if we win in the next contract in the summertime. And we’ve been a partner, a good partner, for the last nine years or so, and we’re very confident that when an RFP process comes out, we’ll be able to win, but we just don’t know the size or scale of that. And so right now, I think it’s prudent to be conservative.

Very helpful. Thank you, guys.

Sure. Thanks, Patrick.

Your next question comes from the line of Arthur He with H.C. Wainwright.

Hi, good morning, everyone. This is Arthur in for RK. Thank you for taking my questions. So I believe if I recall correctly, Aaron, you mentioned for the oncology business about 50% are from the tissue biopsy. Could you give us more color on the coming new order in terms of mix of tissue and liquid biopsy? And how is your internal thinking driving more the liquid or tissue biopsy business?

Yes. I would say I just – go ahead, Aaron.

So Arthur, I was just going to clarify, we didn’t say 50% has come from liquid biopsy. I think what we’ve said is, in terms of the growth that we’ve seen, it’s been substantial. Most of the business we’ve had to date has been from tissue. We have done a great job here in the third quarter and the last couple of quarters with orders for liquid biopsy, our exome scale liquid biopsy. But we believe that going forward, is really the great opportunity for us to scale with liquid biopsy, our exome product as well as our MRD NeXT Personal that’s going to be coming out next month, right. So very little liquid biopsy to date.

Okay. I see. So is there any trend you guys see through the new order for the mix?

This is John. I guess, one of the thing I might want to highlight is that we actually see customers ordering both of them together, I think, in some other companies because they don’t have a tissue product. They’ll sometimes portray liquid biopsy is just being an alternative to tissue biopsy. But actually you get different information from liquid biopsy compared to what you get with tissue and they’re both valuable. So we’ve seen – I think we highlighted that one of our customers ordered for a clinical – set of clinical trials that they’re running, they’re combining both liquid biopsy and the tissue biopsy at multiple time points each through the clinical trial. So you can see with the tissue biopsy, you see things like RNA and you can see the immune cells that have infiltrated the tumor. So those are things you can’t see with a liquid biopsy. But the liquid biopsy is obviously a way – an easier way to get multiple time points. So we find that – and I think we encourage this that customers use the two of them together. Each one complements the other. And so I think you’ll see since we actually have both, that the capability to use them together actually is a real advantage for our customers. And so we think we’ll see somewhat more of that.

Okay. Thank you. Thank you for the color.

Yes, thank you.

I’m not showing any other questions at this time. Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone, have a great day.

Thank you.