Good afternoon, everyone, and welcome to Personalis Third Quarter 2024 Earnings Conference Call. All participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Mr. Caroline Corner. Please go ahead, ma'am.

Thank you, operator. Welcome to Personalis’ third 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 third 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 third [ph] quarter business highlights.

Thank you, Caroline. Good afternoon everyone and thank you for joining us for our third quarter call. For those of you joining one of our calls for the first time, welcome. Personalis is a leader 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 ultrasensitive MRD assay, NeXT Personal, we believe Personalis is positioned for success. Our technologies are able to spot cancer when there's only one fragment of tumor DNA circulating in the million DNA fragments in the blood. Our platforms are used by many of the world's top biopharma companies to improve clinical trial results, personalize treatment, and power a new generation of therapies. Before we dive into our third quarter results, I want to share a recent case that highlights the power of NeXT Personal to find residual and recurrent cancer and impact the patients' care. A doctor began using NeXT Personal to monitor a female in her 70s who have been diagnosed with Stage 1 HER2-positive breast cancer. After the patient had undergone lumpectomy and received standard adjuvant therapy, the doctor began monitoring the patient with NeXT Personal, performing multiple follow-up tests over a five-month period. Each test showed the cancer still present with circulating DNA tumor at a low level between 25 and 30 parts per million, which is in the ultrasensitive range. Now, as a reminder, the ultrasensitive range are measurements of circulating tumor DNA below 100 parts per million that our NeXT Personal test excels and quantifying that could be missed with less sensitive test. In this case,…

Thank you, Chris. Total company revenue for the third quarter of 2024 was $25.7 million, representing a 41% increase compared with $18.2 million for the same period of the prior year. The increase in revenue was driven by higher volume from biopharma customers and the VA MVP, which was partially offset by the expected decline from Natera. Biopharma revenue grew 96% compared with the same period last year, and the growth was primarily driven from higher ImmunoID NeXT volume from Moderna's PCV projects. Our VA MVP revenue increased 85% compared with the same period last year as we fulfilled the remaining amount of the 2023 to 2024 task order in alignment with the VA MVP's fiscal year-end. In addition, we recognized $0.3 million of clinical revenue from our NexTDx tumor profiling test. Gross margin expanded to 34% in the third quarter compared with 19.1% for the same period of the prior year. The year-over-year increase of 14.9 percentage points was primarily due to favorable customer mix and operating leverage from the increase in revenue volume. Over the last 1.5 years, our focus has been to reduce product costs, improve productivity, reduce lab operations expenses and improve utilization to drive margins higher. We are making very good progress. In the third quarter, we saw an impact of over 4 percentage points to our gross margin due to unreimbursed clinical test costs. Excluding those costs, gross margin would have been approximately 38%. One of our top goals is to continue expanding gross margin, but we expect some variability from quarter-to-quarter along the way. Operating expenses were $23.1 million in the third quarter compared with $34.3 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 and also a…

Thank you. We will now be conducting the question-and-answer session. [Operator Instructions] Our first question comes from Yoko Kou [ph] of Morgan Stanley. Please go ahead. Thank you.

Sheena [ph] for Yuko. Thanks for taking question and congrats on the quarter. Maybe start off, I know we're now at almost six months post launch for NeXT Personal, and it sounds like it's been seeing a lot of positive traction here. I know with the expansion with Tempus agreement, you increased the quantity of patient samples for NeXT Personal that you would accept. Can you just talk a bit about the rationale behind this decision ahead of reimbursement and how you're balancing the volume ramp ahead of getting paid?

Yes. Thanks for the question. Yes, the product has been really well-received. And what we originally started was with just a handful of Tempus reps. And we wanted to -- we want to be able to put ourselves in a position where when we get reimbursement, which we're anticipating in 2025. We have an army of people out that are well-trained and have worked with the product and been learned how to be pretty agile telling the story. And so the expansion of the agreement allows us to have more reps out there talking about it and learning and working with it and allowed us to -- the Tempus folks to better figure out how to integrate it into their story across all of the different environments they work in. And so we think that's really positive for shareholders because it puts us in a position where revenue growth, we think, will be more explosive on the other side of reimbursement than if we had started out at a slower rate. But we're still getting it. We're still being very thoughtful about it, and we're still moving in a thoughtful way.

In addition to what Chris just articulated, and that was the reason and premise for Tempus exercising their warrants of $18 million in the quarter as well as adding to that in the form of an additional investment of 3.5 million shares at $5.07. We understand that we don't have reimbursement just yet. So in order to go faster, we do need a little more capital. So that was part of the premise as well.

Okay. That makes sense. And then maybe just one other one. Wondering how you're thinking about gross margin cadence as we look to 2025 as volumes from NeXT Personal start to ramp? And what are the kind of key levers you're thinking about pulling there to improve gross margin next year?

Yes. So great question. We haven't provided formal guidance for 2025 yet. We'll do that on our fourth quarter and full year call early in 2025. Our gross margin for 2024 is probably going to be in the 31% to 32% range based upon where we exited Q3 and what we're looking at for Q4. What we can say, and again, on our last couple of calls now, we've stated that we've had headwinds of about 4% to 5% gross margin points for unreimbursed test costs. That's going to increase in 2025, primarily because of the volume increasing as well, right? And so there could be headwinds into gross margins of somewhere between 15 and 18 gross margin percentage points. Our gross margins, aside from that will accrete but that's going to -- we'll have those headwinds to deal with as well. So the gross margins could come down from where they're going to exit 2024 at. We don't know the exact amount just yet, and we'll provide that clarity early in 2025.

Got it. Okay. That makes sense. Thanks so much for the time.

Sure. Thank you.

Our next question comes from Dan Brennan of TD Cowen.

Hey, this is Joe on for Dan. Thanks for question. It seems to be some really great momentum in MRD. But when I look at the filing, revenue from Moderna increased from 26% to 33% of total sales quarter-over-quarter, which translates to like 45% sequential revenue growth. So it seems to be making up most, if not all, the sequential strength in the pharma business. So I guess the question is, one, did MRD or CGP revenues increase sequentially? And two, is there an opportunity for these revenues to grow before your first Medicare approvals?

Yes. So that's a great question. Hi, Joe, and thanks for the question. In terms of PCV with Moderna. So Moderna has accelerated in Q3, as you had mentioned. So it did grow. In addition to that, our ImmunoID NeXT platform and MRD with biopharma clients did increase as well, okay? It didn't increase as much as Moderna. So Moderna did drive most of the increase in the biopharma line. We did get paid about $300,000 from our CGP NeXT Dx test from Medicare. So that was recorded as revenue as well.

And the -- and I'd just add the MRD revenue from biopharma companies is also starting to get traction. The buying cycles on these things are longer. We -- the first time the data was presented on the product was at ESMO last year, and that got a lot of biopharma companies starting to spend some time with us in the data. That was the TRACERx data. And then the ASCO data around breast and IO really accelerated some of the movement. But buying decisions in these big biopharma companies are not quick. They typically start to interact with you. Then they run tests, they run pilots, they may do bake-offs. And so we've been moving through that process, we think, a really rapid clip, and we feel like we're in a position to do really, really well with the revenue growth around MRD coming from biopharma companies prior to reimbursement happening in 2025.

Got it. Great. And then on the 945 molecular tests in the quarter, is there a way to think about MRD versus profiling? And I just want to confirm that this is no longer just on the 10 physicians that you started with on early access?

That's right. That's right. That's a combination of some organic growth in the physicians coming from our small number of reps that we've allowed in from the wait list. And then it's coming -- Tempus is starting to grow that number out. So that number is starting to grow in terms of physicians. We're starting to see the strategy of the CGP test NeXT Dx being sold with the MRD test, NeXT Personal is working really well in our customers. Tempus obviously is not selling NeXT Dx. And so the tests that are coming from them are just NeXT Personal. And so we -- you see most of that -- a lot of that growth is coming from the MRD product, quite frankly. But we're really, really pleased with the success we've had executing putting the NeXT Dx CGP with the MRD because customers want a one-stop shop experience, and that's what we're seeing.

Is that helpful, Joe?

Yes. Thanks very much.

Our next question comes from Mark Massaro of BTIG. Please go ahead.

Hey guys. Congrats On a good quarter. Thanks for taking my questions. Apologies if you covered this, some of us are hopping multiple calls, but would love to just get your insights about how NeXT Personnel is being received in the marketplace relative to other MRD tests that are available. Obviously, you guys have talked about the ultrasensitive range. I'm just curious, how you think that's resonating. How much education needs to go in before people seem to clearly understand what that means? And maybe I'll just start there.

Yes. I mean I think that's the core thing, and we really tried to distill that down because every day, when we're returning results back to physicians, they're seeing 30%, 40% of the results in the ultrasensitive range of the positive results. And that has been super well received because those are patients that they're able to see more than what they've been able to see before. And we're seeing tremendous retention. I mean we put that 90-plus percent number in there, but the physicians that are -- that have started with us are still working with us. The customers are ordering quarter-over-quarter and sticking with us, and we feel like we're in a good spot. Do you want to add something, Rich?

No, I think you stated it well. I think the ultrasensitive concept is really resonating, just like Chris said. And they definitely can understand when they see a low-level detection, but it's positive. It's easy to say, see that actually, that could have been missed if the test was sensitive. So -- and a lot of these physicians have experienced situations where the initial test or other tests have been negative and it goes on to be positive later on.

Yes. And so we think it's working well. And then we've had -- I talked about the example that we used in the script where the patient was in that 20 to 30 PPM range, didn't expect her to be there, started doing -- looking for evidence of the disease, found it unexpectedly in another spot and then was able to take action. And those types of cases really cement the value proposition and don't take a ton of education and/or teaching to do, right? I think that's what's important. The ability that we've had to distill this down into the ultrasensitive range, tie that to the data that's shown in the -- by the collaborators with the plots, et cetera, have all tied together well and made it a good story. I will note that one of the things we're doing, Mark, is we're trying to sell customers across the continuum. So we learn how to take people that have experience doing testing at MRD testing at a good scale in their clinics. We're trying to work with doctors who have dabbled with the technology, because part of the challenge there as we try to make MRD testing standard of care as an industry is how do we grow their usage. And then we've also found new people, quite frankly, who are trying out and working with MRD testing in the beginning because we want to be able to move the needle on all these different customer segments if we're going to put Personalis in a position where we're really pushing the needle forward on this MRD market. And so, very, very purposely as a part of our execution plan, we're focusing in this phase of the business on learning how to attack each one of those different segments.

Okay. So the volume number grew, I think, 68% sequentially for the molecular test, you were at 66% in Q2. I'm just curious if that's coincidental that it's about the same growth rate. I know it's early days, but I guess what I'm really trying to get at is, are you intentionally holding back the throttle commercially until you get reimbursement? Maybe just remind us, we've seen other precision oncology labs do that. And then I'm just wondering, when reimbursement does come in, how should we think about resources that you might deploy internally to work together with Tempus?

I think it's fair to say we're holding back. I mean we still have a wait list of doctors. We're not pushing hard on it across the board. I mean we're still -- we're moving in a more aggressive pace with the expansion of the Tempus arrangement, but we've been really thoughtful about it and being purposeful. When we get reimbursement, we will put some more people in the field on our own accord. Those staff will drive organic growth that's just for Personalis, but they'll also, quite frankly, work with the Tempus team. Tempus brings a lot of benefits to this. They've got the knowledge, the skill sets of working with these individual institutions. They're often integrated into the EMRs, and we've largely been indifferent about where the samples are coming, but we will apply more people on our -- in sales and marketing ourselves to accelerate the commercial traction once we get reimbursement. And the other thing we're learning right now also is how to scale the lab. And so growing this thing at this -- in the last couple of quarters, 60% really, we're learning how to get samples in here, how to get them through the system, how to meet all of our lead-time commitments that we're making to doctors, how to build for it with customer care and building this business from the ground up, you want to go -- you want to keep -- you got to keep moving and keep taxing the system to keep nailing it, and that's what we're doing.

Okay, great. It's nice to see the extra cash coming in the door from multiple sources. I don't know if you covered this already, but can you give us a sense now that your balance sheet is maybe on a firmer foundation. How are you thinking about spending in 2025? Maybe walk us through what you're thinking about in terms of commercial organization? And then how do you prioritize the timing of that as reimbursement might come in?

Yes, I mean we're -- I would just think -- appreciate the comment on the cash. I mean it's super important, and we did it in a really cost-effective way, and we're really excited about that. We called that out in the script. But sometimes the fundraising can take a big chunk off the top and the way we did this really -- I think it was really cost effective. We we're going to -- we'll stay largely very -- we'll be in cash conservation mode all the way now to when we get this company and all the way through to cash breakeven. And then as we try to scale it over time to a highly profitable company, we're very focused on. I think we all learned a lot through this last period, and we're not going to going to keep our eyes on the bottom-line. And certainly, in this next phase, we'll be very thoughtful. We'll stay very focused with our current reps in the field until we start to -- until we know that we're going to get reimbursement and then we'll start to grow it out from there. But we're not going to expand that out ahead of anything, Mark, because you can just burn a lot of money necessarily. And we have a partner that's actually nailing it in the field for us. So, we don't really need to. We're getting the traction that we need, and we're starting to get installed at many of the top institutions and we're making the progress commercially. You see that in the 60% sequential quarter-over-quarter numbers that we need to do with what we've got.

Just one other thing on the capital allocation, Mark and so inside of our R&D expense, that's $50 million to $55 million per year, roughly one-third of that goes towards creating clinical evidence. And that's going to stay in a similar range as we go forward into 2025, and we could step it up in 2026, primarily because we do have to continue down that path to be able to go get some of the private payers …

Yeah.

…to pay us as well into the future.

We'll keep driving hard in clinical evidence and showing the value of ultra-sensitive testing. No clinical utility studies are prospectively gathered before firing that stuff up. But we've got all that embedded in our models. And I think investors should feel actually happy that we're going to invest there. I think the learnings from all these diagnostic companies is that is always good spending as you build deeper evidence in the well of products.

Okay. Thank you, guys.

Thank you, Mark.

Thank you, Mark.

Our next question comes from Thomas Flaten of Lake Street Capital. Please go ahead.

Good afternoon guys. Great quarter. Congrats. Chris, in your prepared remarks, you mentioned that breast and IO had been submitted to peer-reviewed publications. Should we just then extend that logic and assume that those will be the two indications that you're seeking to get reimbursement for 2025? Or do you think there's an opportunity for lung to kind of leapfrog one of them?

No. No, no. No, we're all over lung. We -- we're shooting to have three out of three, but we think that two out of -- you want to have three shots on goal with the idea of getting two. Does that make sense, Thomas, that, something inevitably on the reimbursement road map could happen. And so presumably, you could say those two marbles are rolling a little faster now, but the lung one could certainly catch up. The data looks really strong there. It's one of the larger MRD trials in lung. And so I think we're going to move all three of them pretty aggressively. And we have a shot at getting all three reimbursed in 2025. To be perfectly honest, that's our internal plan. It's just that we think it's prudent to assume that something could happen with one of them on the journey, either in a publication or somebody wants us to run some more data to validate something, …

And …

…anything to add to that, Rich?

Oh, sorry.

Go ahead, Thomas.

No, please go ahead, Rich.

No, there was nothing more. I just -- I was just checking in and hang more, go ahead.

Got it. So with the Merck Moderna melanoma study largely enrolled at this point, do you have a sense of timing on when these other studies might ramp up and how that might impact your $100 million aspirational target for 2025? Or how should we think about that aspirational target in light of melanoma now being largely done?

Yeah. I mean I think we set that target knowing that melanoma would largely be done this year. They were pushing pretty aggressively forward. We're still committed to shooting and pushing for $100 million. We haven't guided next year, and we don't want that to be implied that we've guided that. That's what we're pushing for internally and building our plans to nail that, because that will be a big spot in the business, and that's where we are. There's a bunch of studies going. I think they just announced a Phase III lung trial that they're pushing forward with, and we're excited about the relationship with them. And I think it's been another cornerstone relationship for Personalis, and we've done a great year supporting them in their journey.

Excellent. Appreciate taking the question. Thank you.

Thank you, Thomas.

Our next question comes from Mike Matson of Needham & Company. Please go ahead.

Hi guys. It's Joseph on for Mike. So I understand it's still early days with NeXT Personnel and the partnership with Tempus. But I'm just kind of wondering if you've seen out of the three indications of a certain indication, whether it be breast, lung or IO has been a predominant driver of volume there? And then maybe if there's not an answer there, if there's a certain data set, whether it be something robust like TRACER that you've heard from physicians or similar contacts that have driven awareness of NeXT Personnel?

Yeah. I mean, I think that we're seeing it across all three of those indications. IO therapy monitoring, I think probably does -- it's fair to say, does a lot of the heavy lifting, and that's pan-cancer. That's probably true across all the use of molecular diagnostics. It's where most of the CGP tests are play and are covered. So I think that's always one of the key indications. But there's been a lot of interest in what we're doing with breast and lung. We're solving real problems that physicians have with patient care and that insight is being valued and is driving the usage. I think all the data sets have been well-received. I think the TRACERx data set and the Royal Marsden data set, we're able to show finding cancer 15 months ahead of imaging. For lung cancer, on average, sometimes as long as three years ahead of imaging, but 15 months median, I think it is. And in lung cancer, nearly a year ahead of imaging has been really well received and physicians have sort of underlying the power of the ultrasensitive approach.

Okay. Great. And then maybe I think Aaron had mentioned that you guys are still having ongoing discussions with other companies for doing additional sequencing work for the enterprise sales. Just kind of wondering what type of contract or relationship would have to exist for you guys to maybe shift focus away from your main strategic efforts, MRD being that main one. I guess, yes, what type of contract, whether size or scope would need to be presented?

Yes. Go ahead, to answer.

Yes. So good question. In terms of our main focus, winning in MRD is our number one focus, both in the clinic and with biopharma. In terms of discussions, we have some ongoing discussions with potential partners. It's going to have to be something where it's not going to take us down or deviate too far away from what we do and what we're good at, right? It's going to have to be something along the lines of products that we have in service today to make sure that it can be run in our lab the same way from an efficiency standpoint, right? It's still in early days, so we don't have anything to report in that regard. But that's just kind of how we think about it today, Joseph.

Okay. Yes. That’s very helpful. That’s all the questions from us and congrats on the quarter.

Thank you.

[Operator Instructions] Our next question comes from Li Chen of H.C. Wainwright. Please go ahead. Q – Unidentified Analyst: This is Li Chen [ph] for Arthur He. Just a quick question from us. Previously, you guided gross margin for 2025 to be in the low 30s. I wonder if this is still true and if you have any updated thoughts on that. Thank you.

I'm sorry, we didn't guide 2025 to be in the low 30s. It's really for 2024. 2024, our gross margin estimate is in the low 30s, 31% to 32%. We'll guide for 2025 once we get into our fourth quarter and full year earnings call early 2025. Q – Unidentified Analyst: Thank you for the question.

Thank you, Li

Thanks.

With no further questions in the question queue, ladies and gentlemen, we have reached the end of the question-and-answer session. Thank you for attending, and you may now disconnect your lines.