Good day and welcome to the Personalis Second Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mr. Caroline Corner, Investor Relations. Please go ahead.

Thank you, operator. Welcome to Personalis’ second quarter 2024 earnings call. Joining today’s call are Chris Hall, Chief Executive Officer and President; Aaron Tachibana, Chief Financial 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, reimbursement goals, 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, our market opportunity, and 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 most recent filings. Personalis undertakes no obligation to update these statements, except as required by applicable law. Our press release with our second quarter 2024 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 would like to turn the call over to Chris for his comments and second quarter business highlights.

Thank you, Caroline. Good afternoon everyone and thank you for joining us. I'm very proud of our team at Personalis as we continue to fight cancer and help patients with our novel technologies. For those of you joining one of our calls for the first time, welcome. Personalis is one of the leaders in the fast-growing MRD testing market. MRD stands for minimal residual disease and involves using blood, which is commonly called a liquid biopsy instead of imaging or invasive biopsies to monitor therapy and to detect cancer recurrence after treatment. The MRD market is expected to mature into a $20 billion market. And with our first-of-its-kind ultra-sensitive MRD test, Personalis has emerged as a leader in this space. Our technologies are able to spot cancer when there's only about one fragment of tumor DNA circulated and 1 million DNA fragments in the blood. Our platforms are used by many of the world's top biopharma companies to improve clinical trial results by new ways to personalize treatment and power a new generation of therapies. Earlier this year, we laid out our strategy to drive Personalis to $100 million in revenue in 2025. Now, this operational milestone has at its core three growth engines and its effect has been to shift us into a higher growth mode. In the second quarter, we achieved revenue of $22.6 million, up 35% year-over-year. This growth was driven by our biopharma business, which grew 117% year-over-year, led by strong demand for our tumor profiling product that is used to create personalized cancer vaccines for patients as well as increasing demand for our MRD product NeXT Personnel. Our strong Q2 revenue also helped us to increase our guidance for the full year by $3 million, and we now expect full year revenue in the range…

Thank you, Chris. Total company revenue for the second quarter 2024 was $22.6 million, an increase of 35% compared with $16.7 million for the same period of the prior year. The increase in revenue was driven by higher volume from biopharma and personalized cancer vaccine customers, which was partially offset by declines from the VA MVP. Biopharma revenue grew 17% compared to the same period last year, and the growth was primarily from the ImmunoID NeXT. In addition, we recognized $0.1 million of clinical revenue from our NeXT Dx tumor profiling test. Gross margin expanded to 35.6% for the second quarter compared with 28.7% for the same period of the prior year. The year-over-year increase of 6.9 percentage points was primarily due to product cost reduction and operating leverage from the 35% increase in revenue. Over the last year and a half, our focus has been to reduce product costs and to reduce lab operations expenses to drive margins higher. Recall that just a few quarters ago, our gross margin was only 19%, so we are making very good progress. Also, we had over 4 percentage points of unreimbursed clinical test costs during the second quarter. Otherwise, gross margins would have been closer to 40%. One of our top goals is to continue expanding gross margin. As we go forward, we expect margins to continuously improve with scale, although there could be some quarter-to-quarter variability due to fluctuations in volume, unreimbursed clinical test costs and other factors. Operating expenses were $24.9 million in the second quarter compared with $30.1 million for the same period of the prior year. Most of the year-over-year decrease was attributed to actions taken to reduce headcount in 2023. R&D expense was $13 million in the second quarter compared with $17.9 million for the same period…

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question is coming from Yuko Oku from Morgan Stanley.

Hi, this is Madison on for Yuko. How are you guys?

About the same, Madison.

Congrats on the quarter and thanks for taking the question.. I have a two part here. Just first one, I was wondering, should Moderna's PCV eventually secure FDA approval, I was wondering if you could remind us what the potential upside could be on that? And are you specked into the product? Or is it possible that another sequencing vendor could also start to sequence for Moderna once approved?

Hi Madison, thanks for the question. In terms of the Moderna relationship, so we are ecstatic about how this has been operating. Again, we've been partners with Moderna since 2016 to 2017. In terms of where this goes upon commercialization, that's something from Moderna to talk about. We're not really talking too much about the upside or the opportunity. We just know that it is a huge opportunity for us. We're excited about it, but that should come from the Moderna folks to talk about. In terms of the offering, so again, today's samples are taken from patients and the patient samples are sent to Personalis, we profile them and we send back this rich, informative set of data back to Moderna. So, they can then customize a vaccine or a therapy for that individual patient. In terms of, again, the relationship, we believe we have a very, very solid relationship and Moderna values our platform. So, in terms of the longer term prospects, we feel very confident about this going into the future.

Got it. Okay, that's good to hear. And then -- just on -- with Tempus launching their own MRD solution. I was wondering how you make sure that they are incentivized to also market NeXT Personnel, like what is the kind of incentive structure there put in place for the product so that they gain equal commercial push from the sales force?

Yes. No, great question. I mean first of all, just backing up, while we're on the Tempus requisition, like we're growing the number of Tempus' sales reps that are selling the product over time and aggressively to be able to get the volume. So, it's like right now, we're starting the journey and moving it up slowly. Tempus' product is a blood based. It's not the same type of product, it's a tumor-naive product. Ours is a tumor normal product. They positioned in a colorectal cancer, we're persistent at lung, breast, and IO therapy monitoring. So, products are positioned a little bit differently. And I think it's actually really, really great to have both products under the same proof because the truth is, for some patients, you're not going to have the access to the -- you're not going to have access to the tissue and you're just going to have access to the blood. And so I think if you just step back and think about it, Tempus is uniquely the company that stitched together both a tumor-naive and a tumor normal approach under one roof and they're really set up to accelerate growth in the marketplace with a comprehensive offering. So, we actually think the two products work together really well and I think that's how Tempus is viewing it and is set up nicely.

Got it. That's good to hear. Thanks so much for the time.

Thanks Madison.

Next question on the line will be coming from Mark Massaro from BTIG.

Hey guys, this is Vidyun on for Mark. Thanks for taking the questions. Could you just touch on NeXT Personnel reimbursement. Just remind us how you're thinking about a potential crosswalk or gap-fill there for pricing? Just where you think that will land and any potential upside as it relates to potential ADLT status? Thanks.

Yes. Great question. I mean I -- we built all of our economic models assuming we get similar to what other players have been reimbursed in the marketplace. But there's a couple different shots on goal to drive that higher. One is that the test and of itself is a more resource-intensive test than an exo-based test. Medicare reimburses based on that. So, we think that's one way just fundamentally that the test should be priced higher because it's a more resource-intensive test to run, which is how these tests ultimately are priced. And secondarily, there is a shot to get ADLT status, so we're working on management. But the expectation we've set is that we're tracking to have gross margins greater than 60% even if we don't achieve any of those things, we're set up well, and the Tempus relationship brings sales and marketing costs down in that 20% to 25% range and so we built the economics from there. And then the rest of it will just drive the numbers to be more lucrative if we're able to achieve higher reimbursement.

Perfect. Thanks so much for the color there. And then just a follow-up on Moderna has sort of exceeded expectations. Can you just remind us, I think they've expanded the number of indications they're looking at on PCV. So, maybe just touch on that and then also your longer term outlook on the pharma side of the business? Thanks.

Sure. Thanks Vidyun. So, in terms of the Moderna relationship, remember, they're in the Phase III clinical trial right now with melanoma patients. They had free success in Phase II. In terms of the volume that we're seeing today, a lot of that is because of the Phase III trial. So, the number of patients in the Phase III trial significantly outpace what you'll see in Phase I or Phase II. In terms of other cancer types, yes, they are focused on additional cancer types as well, right? But in terms of talking too much in terms of specifics, that's something, again, that should come from them, but they are working on and others as well.

Great. Thanks so much for taking our question.

Thank you.

Next question will be coming from Thomas Flaten from Lake Street.

Good afternoon guys. I appreciate taking the questions. Chris, you mentioned in an earlier response kind of gating the Tempus efforts here in the near term. Can you talk to us a little bit about exactly how you're going to do that? How many reps are you going to bring on? And how are you going to pace those reps, so you don't overburden the system with too much volume when you're not getting paid? Any color there would be super helpful.

Yes. Yes. So, the -- we've started out with a small number of Tempus reps that are actually trained in marketing and talking about the product and the plan is to grow that over time. So, it's a graduated approach that's the largest the resources put at the sales process as we go. If you remember, there's actually some volume gates also built into the agreement so that Tempus has agreed not to exceed certain numbers on a year-to-year basis, and we've all been sort of aligned around that. So, the part of the challenge here is how to show increasing clinical traction with doctors and investigators so that they're using the product and they feel comfortable at the same point in time, managing the burn rate in running those tests because you want to be at a spot where the run rate of running test is good enough so that the revenue really explodes when you're able to get reimbursement because you've already got a running start. So, we're trying to walk that tight rope. And we've structured the agreement and the commercial rollout plan with Tempus to achieve that. We think we believe we're on our way to executing in a way that's consistent with that.

Got it. And you mentioned in your prepared remarks the publications for each of the key data sets in breast and IO and lung. Any visibility into timing of that? And I guess the follow-on to that would be what are your expectations now around submission of dossiers to CMS?

Yes. Yes. So, a couple of things on that. I mean, all the data has been run and the data has now all been publicly out there. All the data looked awesome. I mean it was great this quarter to see the breast cancer data, which created a really nice buzz in the community and it's in the IO therapy monitor is also an oral presentation and it's gotten a lot of interest and excitement. And that joins the TRACERx data. So, you've got multiple studies where the test is really showing that it adds great value. So, investigators are working on those papers now. They're being put together. They're all in different phases, but they're all sort of nearing the end of it. We don't actually control the submission of those. They write and drive those publications because they're in their name, but we're optimistic that those will be submitted soon. We'll submit to Medicare as soon as those are published. So, to be clear, like Medicare wants to see a peer review study in order to consider an application. So, that's the next step in the journey for us is to have those studies actually submitted and published. And that's what we're working on, and that's in the investigator's hands right now. So have anything to add, Rich.

we're on track. It is to be great, and we're hopeful we can get these published soon.

Yes. Just one of the really great things about us from an executional standpoint is we are executing on a plan that we laid out more than a year ago about how this would all happen. And we have gotten the data, we've gotten the study set up. We've gotten the samples in here. We've run the samples. The samples have been discussed in scientific meetings and the data has all been run and the papers are all happening exactly the way we had talked about doing in the plant that we had laid out. So, we've been executing in a really, really rapid pace, and I'm proud of the team for bringing it up to this point.

Great. Appreciate taking the questions. Thanks guys.

Thanks.

Our next question will be coming from Mike Matson from Needham.

Hey guys. This is Joseph on for Mike. A couple of questions here. Maybe I think you said 4% -- there was a 4%, I guess, revenue headwind, when you want to call it from clinical tests that weren't reimbursed. Are these tests that you plan to go after for reimbursement? Or have you kind of already excluded this from future revenue?

Yes, we -- the costs are in the quarter, we certainly bill insurance companies for them, but we just don't expect to get paid for them because they're not medically necessary or in the case of Medicare, we -- but -- so they weigh down gross margins. So, I think Aaron's point was if they hadn't -- if those hadn't been in there weighing them down, which is all part of the investment we're making into the growth, and I think we all appreciate what we're doing there. The gross margin would have been near 40%. So, we've made tremendous progress, I think, is a larger point.

With the gross margin--

Yes, absolutely tremendous progress on margins and cash burn overall. I guess maybe just on cash burn, the reduction in the guidance for cash burn. I was just curious, is that coming from further, I guess, cost reduction initiatives? Or was this mostly coming from upside from raising the revenue guidance?

It's really from the revenue and the gross profit, right? Revenue went up $3 million gross profit there as well.

Okay, great. And then just maybe one more. You had mentioned the Duke data set being predictive. I assume this was ImmunoID of immunotherapy response. Just curious if you--

It's actually NeXT Personnel, it's the MRD product.

I see. Okay. Okay. That makes perfect sense. But I guess the question then, do you see that use case mostly sticking with pharma? Or is there a potential to use that use case in the clinical setting for immunotherapy eligibility?

No, absolutely. Certainly, across the clinic, it's one of the large use cases for these MRD assays because doctors -- it's tough you're stimulating the immune system, and so it's tough on imaging to see whether or not your therapy is working because you could have an immune response and the tumor looks like it's growing on imaging. It looks like the patient is getting worse, but indeed, the immune system and the drugs are working exactly the way you would think it would be, so you would be misled. And so these blood tests are actually, I think, taking over for doing a lot of the heavy lifting in terms of monitoring. So, it's one of the key use cases. There are now three data sets supporting the use here. One is with UKE, which is melanoma and another one with Duke, which is the gastric patients. And then the PHIO data set, which is pan-cancer, that's really the key one and the other two support it. So, there's three data sets that are coming together to support the reimbursement for IO therapy monitoring. And it's one of the key use cases. Anything to add, Rich?

Yes. No, it's just like you said, 40% of all cancer patients are eligible for immunotherapy, but actually only 12% of patients actually respond. So, if you think about that, it becomes really critical to be able to understand whether these patients are actually having a response to immunotherapy. And so MRD is definitely one of the key tools now that they can use. And we're showing the data that is highly predictive of response. And so that's definitely one of the key indications.

I see. Okay. It makes perfect sense. I had read that comment as, I guess, testing for eligibility pretreatment rather than monitoring, but thanks for clearing that out.

No, absolutely. It's monitoring. It's key. And it's one of the big parts of the $20 billion -- estimated $20 billion market.

Thanks.

[Operator Instructions] Our next question will be coming from Arthur He from H.C. Wainwright.

Hey good afternoon Chris and Aaron. This is Arthur on for R.K. So, congrats on the quarter. I had a couple of quick ones. So first, regarding the total [Indiscernible], how about the physician right now enrolled in the EAP? Does that number bumped also?

So, that includes all the tests that we got, which are from those physicians and some Tempus physicians that were added towards the later of the last quarter. So, they're coming from that group. Now, we did grow the number of physicians. We started with 10 and we've been slowly growing that out. And so it does -- there are more physicians being added, not a particularly great clip, but that's what that is.

Got you. Thanks for the color. And my second question is, so regarding the Razor guidance regarding revenue, it's seem to coming more on the former testing business. I'm just curious, is this driven more by the ImmunoID service or there's some interest in that NeXT Personnel on the former?

So, it's actually both. So, most of the revenue today is from ImmunoID NeXT. The pharmaceutical business has been very, very strong over the last few quarters in Q2 especially. The pipeline for NeXT Personnel with our biopharma customers is growing rapidly. And so we're going to start to see that start to take that over the next few quarters here as we go forward.

Got you. That's good here. The last question is, so for the NeXT Personnel, what's your plan when you're looking beyond the breast cancer, lung cancer, and IO therapy monitoring. What's the potential beyond that?

We haven't really stated anything beyond that just yet, Arthur. So, right now, we're focused on these cancer types. It's close to half of the market. It's going to give us plenty of things to keep us busy with over the next couple of years. So, right now, we're hunkered down and focused on these cancer types.

Got you. Thanks Aaron and thanks for taking my question.

We have a question from Dan Brennan from TD Cowen.

Hey its Joe on for Dan. So, it was really nice revenue performance in the quarter at 22.6%, which is well on your way to the run rate to hit the $100 million in 2025 levels. So, if we get closer, can you just share some thoughts on how you're feeling about achieving this milestone, especially with Natera business rolling off? It'd be great if you could kind of walk through expectations for different revenue buckets in terms of like MRD vaccines, enterprise, and VA.

Sure. Great. Thanks for the question. In terms of looking ahead into 2025, we haven't given specific guidance as to the buildup of it. But the way to look at it, so in Chris' prepared remarks, he talked about the enterprise work with Natera ending by the end of this year. So, we can assume and you folks can assume that there's going to be zero from Natera in 2025. We're going to have about $22 million in 2024 from Natera. You could assume most of that is going to be offset by our biopharma increase. Biopharma will increase from not only ImmunoID NeXT, but also NeXT Personnel. Again, the funnel is growing immensely. We're expecting that to start to take up here over the next few quarters. In addition, we're also engaged and looking for additional enterprise type of work. And so we're optimistic that there could be something in the horizon as well. The VA MVP might be $7 million to $8 million. So, if you assume the current run rate there, that it's going to be flat, all right? But most of the buildup for growth is going to come from biopharma.

Got it. And then if you could give a little more color on the Myriad deal. This is what we're both Personalis and Myriad are looking to get out of this agreement. And then maybe in the lens of like, it seems Personalis is kind of changing its IP strategy from one where you were previously enforcing your patents and now it seems like you're sharing your IP with Myriad and settling with Foresight? So, that will be it.

Yes, I mean I think it's all about patient access and having a model that is comprehensive and margin and helps all build the market. And -- but in a way that actually you want to create value for the IP. So, in the case of Myriad, they had a lot of de-foundational work there. And by doing a cross-license deal, we give each other -- make sure that each other can move in a way that we both have freedom to operate, and I think that's really good for both companies, and for shareholders, and for patients, doctors, and is a way for us to be appropriately spending money. In the case of Foresight, there's some great IP and we end up with royalties there and moving forward, we'll continue to find ways to bring value for the IP that we've developed.

Got it. Thanks.

There are no further questions at this time. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Good bye.