Greetings ladies and gentlemen. And welcome to Personalis’ First Quarter 2023 Earnings Conference Call. [Operator instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to Caroline Corner of Investor Relations.

Thank you, operator. Welcome to Personalis' first quarter 2023 earnings call. Joining me on today's call are Chris Hall, Chief Executive Officer and President; and Aaron Tachibana, Chief Financial Officer and Chief Operating Officer; and Rich Chen, Chief Medical Officer and EVP R&D. 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 this year and longer term, cash runway, revenue expectations and timing, size and booking of orders, products, services, technology, clinical milestones, the outcome and timing of reimbursement decisions, expectations for our existing and future collaboration activities, cost expectations and our market opportunities, business outlook. 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, including the risk factors described in our recent Annual Report on Form 10-Q. Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release for the first quarter 2023 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 5 p.m. Pacific Time today. Now, I’d like to turn the call over to Chris for his comments and first quarter business highlights.

Thank you, Caroline. Good afternoon everyone. And thank you for joining us. Since I was appointed CEO in March, I have only become more convinced that Personalis is uniquely positioned for its technology to power the two most important developments occurring in oncology. One, is creating personalized diagnostic assays to monitor patients with cancer; and the second is delivering personalized therapies to patients. Both of these developments in the management of patients require discriminating technology that is able to illuminate the uniqueness of each patient's tumor and provide actionable information that can change the arc of the disease. It's been a few months since we laid out our strategy to “Win in MRD” and go after what we estimate to be a $25 billion MRD market. Our product addressing the phase is a tumor-informed, personalized liquid biopsy test called NeXT Personal. Our focus strategy involves pursuing three cancer indications, early-stage breast cancer, early-stage lung cancer, and immunotherapy monitoring and finding partners for other cancer indications. We picked early-stage breast cancer, lung cancer, and immunotherapy monitoring because we believe our technology is uniquely suited to guide treatment decisions in those indications based on its ultra-high sensitivity. At the heart of our “Win in MRD” strategy is our aggressive product performance goals, which we call ultra-high sensitivity. We aim to achieve cancer detection at levels down to one part per million. What we mean by that is that NeXT Personal may find residual or recurring disease when there is only SQ as one circulating cancer DNA fragment among a million normal DNA fragments in the blood. And can do this not just for a few patients, but consistently for most patients across many different cancer types and stages. We believe NeXT Personal can find cancer before other technologies, and importantly can provide…

Thank you, Chris. We executed well in the first quarter and although it's still early, we are beginning to see the benefits of our strategy to focus on areas where we expect to win as Chris mentioned earlier. So I'll now provide detail about our first quarter financial results and guidance for the second quarter and full year. Total company revenue for the first quarter of 2023 was $18.9 million and increased 24% compared with the same period of the prior year, primarily due to strong oncology revenue performance. Our oncology revenue, which includes revenue from pharma tests, enterprise and other customers was $15.9 million and increased by 35% over the same period of the prior year. The year-over-year increase of oncology revenue was driven mostly by the increase in volume from Natera, which accounted for half of our total revenue in the quarter. First quarter revenue from population sequencing, which includes the VA MVP was $3 million. Gross margin was 25.1% for the first quarter, compared to 28.1% for the same period of the prior year. The year-over-year decrease of 3% was primarily due to under absorbed overhead costs. Our lab expenses have increased over the last year and a half to support our growing oncology revenue volume and for background, testing cancer samples requires more labor and overhead compared with testing samples for the VA MVP. Over the next couple of years, we expect some gross margin variability due to fluctuating test volume, operating at lower utilization rates, providing diagnostic tests while we continue to increase our efforts to secure reimbursement, lost for our new facility and others. Longer term, we expect our gross margins to increase as we achieve scale by growing our oncology revenue. Operating expenses were $34.6 million in the first quarter and included a…

Thank you very much, sir. [Operator Instructions] Our first question comes from Tejas Savant of Morgan Stanley.

Hi. This is Gabby on for Tejas. Thanks for taking my question. So just to start, so your Pharma and Bio segment saw a lot of strength this quarter, but the guide remained the same. So just kind of curious if some conservatism is baked in the guide there.

Hi Gabby, this is Aaron. In terms of the guide, so it did not change from last quarter in terms of what we did say in the prepared remarks. So our guide Q2, Q3 and Q4 in terms of Natera is going down, so the Natera volume is going down, which is going to be offset by increased revenue from personalized cancer vaccine and biopharma, which will offset that. So that’s why the guide is the same as what we had last time. Does that make sense?

Yes, yes, that makes sense. Thank you. And then on Natera, are there any updated thoughts on how revenue might tail off in 2024? Is that remaining the same?

Yes, so in terms of what we’ve said, so the Natera volume will start to tail off from Q2 this year through the end of the year. It’s our expectation that there might be a little bit that shows up in terms of samples in early 2024. But from a modeling standpoint, we’re not assuming much revenue in 2024 at all.

Okay. Great. Thanks. And then on pharma and biotech customers, are you still seeing some headwinds with sample delivery from your pharma customers? And just given some of the commentary from some companies as of late, are you still seeing cautious spending from pharma and biotech customers? And if so, how has this dynamic changed from last quarter? And do you anticipate these dynamics to continue throughout the remainder of 2023?

Yes. So obviously with the recession here, pharma is being prudent on their spending. So we are seeing some things being a little bit tighter there from their perspective. In terms of sample flow from pharma, it always can be a little bit variable or lumpy so to speak, in terms of the timing of when samples come in. But for the most part, we’re beyond the COVID situation where trials and patient enrollment were a lot slower. So we’re beyond that at this point in time. But there is some variability in terms of when samples do show up.

Okay, great. Thank you. That’s it for me.

Thanks, Gabby.

The next question comes from the line of Dan Brennan of Cowen & Co.

This is Joe on for Dan. Thanks for taking the questions. Just first gross margins came in while ahead of our model at around 25% in Q1. Was there some one-time benefits in the quarter that we should be cognizant of? Or was this more of the pruning unprofitable biopharma revenue?

Yes. So in terms of the benefits there in Q1, there were some one-time benefits in terms of some favorable mix. We had more volume from the VA MVP that showed up in Q1 compared to prior quarters or last year. In terms of the way forward though, gross margins, we expect it to be in the low 20% range primarily because of more costs coming online from our new facility.

Great. Thanks. And then just on the $6.33 million of pharma tested service revenue, is there any way to think about that in terms of oncology testing versus revenue associated with personalized cancer vaccines? And then maybe if possible, same goes for the $30 million-ish that I think is implied for pharma tested service for 2023?

Yes, so we haven’t broken that out specifically in terms of the personalized cancer vaccines, but we’re very excited about where it’s headed to the back half of this year and into 2024. In terms of, again, we haven’t really disclosed the dollar amounts. The personalized cancer vaccine revenue has been roughly somewhere between 4% and 5% of our total cancer revenue. So that’s kind of the way to look at it. Over time, we believe it’s going to or we expect to increase as a percent of the total oncology revenue, primarily because of the success we’ve had here with a large project with Moderna.

Great. Thanks.

Thank you, Joe.

Thank you. The next question comes from the line of Patrick Donnelly of Citi.

Hi. You got Lizzie on for Patrick. So I was just wondering on the NeXT Personal LDT launch that’s supposed to happen in the fourth quarter. You mentioned that you’re submitting your first indication for Medicare coverage in 2024. I guess what’s your line of sight into the eventual like commercialization of this test? I know thinking way down the line, but just some more color there would be helpful. Thank you.

Sure, no thanks. We we’re – it’s Chris. We’re planning to launch it by the end of this year into a few key select clinics and we will grow the adoption through 2024. We’re focusing on three indications, early stage breast cancer, early stage lung cancer, and therapy monitoring or IO therapy monitoring, immunotherapy monitoring. And we’re building data around each one of those three now and we plan to submit for coverage going through – through the end of 2024 and gunning that way. We will grow the footprint as we go probably with early collaborators, in particular in 2024 that can deepen the evidence set. Now that could be prospective registry trials and/or that could be working with academic medical institutions start to use it in their clinics. And we expect it as we get coverage to ramp quickly post-coverage and we’ll have a field force in place. We’re getting a lot of positive feedback around the strategy of having NeXT Dx, which is our cancer genomic profiling product to be – to have that ordered at the same time so a clinician can send us a sample for that test and send us a sample for NeXT Personal at the same time from one set of samples cut from the tissue block. So we think that products will work synergistically. And we expect the revenue to grow quickly there. That’s a $25 billion market overall. So you can imagine just as we chip away at that, we expect the growth rates to pick up dramatically as we move that oppressively into launch post coverage.

Understood. Thank you. And then just on margins in the second half of the year, given that there’s the one-time cost – I mean the one-time benefit, excuse me, that you had this quarter. Should we think of them sequentially increasing off of the 2Q base? Just wondering the right way to think about that? Thank you. That’s it for me.

Sure. So Lizzie, in terms of the way to think about the expenses as we go forward, so we called out the one-time expenditures of restructuring and that was primarily from the reduction of headcount of 30% and the closure of our China lab. So if you remove that and take the expenses pretty much flat through the rest of the year, that’ll get you to, to what we expect.

Thank you.

Sure.

Thank you. The next question comes from the line of Mike Matson of Needham & Co.

Yes. Thanks. I hate to keep going back to Natera, but it's kind of important from modeling perspective. I think you had said on the last call that you had expected $27 million to $30 million this year from Natera. I didn't hear you reiterate that as, is that still the case or is the number come down from that?

Yes. It's going to come down a little bit from $27 million to $30 million. Mike, it could be a couple million dollars less than that primarily because of some of the information we've got that's more current with where Natera wants to go. So we see that it's going to decline a little bit quicker than what we thought. And then into 2024 not exactly sure what that volume will look like early 2024, but we're assuming very little in the first part of 2024 and then it going away after that.

Okay. And I think last call you also said that you felt that you could continue to grow even in 2024 because that's going to be a pretty significant headwind as that kind of goes away. Do you think you can grow – continue to grow your revenue to kind of offset for that completely, or…

We do Mike. We're very optimistic about project we've won and personalized cancer vaccine. We are way under penetrated as well in terms of biopharma. We're highly focused on landing more projects with next personal into pharma. And as you saw in one of our recent press releases, we have a great relationship with AstraZeneca and we're looking to continue to deepen that relationship and further penetrate other large pharmaceutical companies that we've been doing business with. That are on the next platform, and taking a look at NeXT Personal as well. So we believe we have a few other growth drivers that are going to offset the whole Natera departure selling.

We also expected the clinical laboratory revenue will be growing more significantly in 2024 also. Obviously it's coming from a smaller base, but we'll still start to be become more meaningful and in 2024 because we plan to be on the backside of the NeXT Dx reimbursement and we'll have a nice build-in base of business from ordering doctors at that point in time, which we're building now. And that'll be getting reimbursed and then we'll be in the launch of the NeXT Personal. And while the revenue will be low, we expect there'll still be some revenue they’re starting to come through. So we're optimistic about where we'll be next year in revenue.

Okay, great. And then just with NeXT Dx, I mean that's going to be potentially you could have reimbursement I guess later this year?

That's correct.

Needed that – is that, I mean, what's the revenue opportunity there? Is it, I mean, I heard you mentioned that it's going to be kind of used together with the Personal MRD test, but is there – is there a real revenue opportunity with that as kind of a standalone? Or do you really need to get kind of a Personal going before you can generate meaningful revenue?

Well, there is. I think there is and we believe we have the most discriminating way to baseline cancer therapy in the market, and we think that we're well ahead of what other people are doing, especially in particular with fusions and the exome measured TAM B [ph] provides a more discriminating way to front the therapy. And we think we have the most comprehensive way to approach the targeted therapies. But the market is – there's a lot of competition there and we're being careful relative to sales and marketing spin. So we're gaining in a way that is thoughtful about the revenue/cost burn, sales marketing versus revenue expense. And so we think it's a standalone business. It's quite. It's a great business and there's a lot of companies that have been built on the back of it, saying we believe we'll be able to get a toe hold in it. We could throw a huge field force at it but in this climate we're being really thoughtful about how we do it, and moving in an incremental – in an incremental way that that leverages the learning's that we go and is – and builds the business rationally.

Okay. Got it. And then just all the – it was good to hear detail on all those, the trials that you're involved with particularly for Personal. But I was curious if – is Personal bearing any of the costs of those trials? Are those all being funded by outside groups, either companies or academic facilities?

So we're funding those studies and the collaborations, Mike, in terms of the need to do that. We understand it's something that is relatively expensive, but that's why we've chosen to do business with a lot of the higher end KOLs that we've landed.

But I would note that like the beauty of these collaborations is that you don't – you don't have to pay for a prospective clinical trial and the time involved to get the samples. So you're accessing samples and work that was done previously, and while you're funding the development of the data around it, it's significantly less expensive than prospectively doing what we're doing in our B-STRONGER trial that we announced two days ago where we are going out and doing that. And it's important to do that too because you've got to be able to build ever deeper data and clinical utility data sets around these tests, so you have to do that. But getting going with data sets with some of the top folks in the world with some of the better annotated data sets is really a way to jumpstarted and I would argue really inexpensively. So that's the approach that we're going at. Rich, do you anything to add to that?

Yes. Its everything Chris said is absolutely true. And also the other thing is that it helps us accelerate the data generation. So the fact that we have these retrospective data sets, very large data sets that we're going to be looking at like TRACERx, outcomes have been accumulated over many, many years and so we know what happened with these patients is going to really allow us to accelerate the data generation.

Okay. Great. Thank you.

Thanks Mike.

Thank you. [Operator Instructions] The next question comes from Sean Lee of H.C. Wainwright.

Good afternoon guys, and thanks for taking my question. I just have a quick question if you could provide some additional color regarding the timelines of the expected studies. For example, for the first stage where you're comparing the MRD analysis with NeXT Personal versus PCR; how long would that take before you move on to the expend stage of the five-year follow up?

This is Rich. Hi Sean. Yes, so for the B-STRONGER Study, which is I think the one you're referring to, this is our prospective multi-year, multi-center trial for early stage triple negative breast cancer that we're doing with Academic Breast Cancer Consortium and Criterium. This split into two phases, the first phase where we're doing the correlation, we're looking at performance in the – at neoadjuvant phase of treatment for these patients. We expect that we'll start getting some data out of that in kind of the year to year-and-a-half timeframe. And then we'll be moving on to the second phase, and obviously second phase we'll be following the patients out through their adjuvant therapy and looking at outcomes five, six years out.

Okay. Great. Thanks for that. That's all I have.

Thank you, sir. Ladies and gentlemen, we have no further questions in the queue and we have reached the end other question-and-answer session. Please note that this does conclude today's event. Thank you for attending and you may now disconnect your lines.

Thank you.

Thank you.