Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter 2019 Personalis Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Ms. Caroline Corner of Westwicke. You may begin, ma'am.

Thank you, Operator. Welcome to Personalis' third quarter 2019 earnings call. Joining me on today's call are John West, President and Chief Executive Office; Aaron Tachibana, Chief Financial Officer; and Clinton Musil, Chief Business 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 of demand for our products. Personalis' expected financial performance, expenses and position in the market. 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 SEC particularly the risk factors described in our 10-Q filing for our third quarter ended September 30, 2019. The forward-looking statements we provide during this call, including projections 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 of our third quarter 2019 results is available on our website www.personalis.com under the investor 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 PM Pacific time today. Now, I'd like to turn the call over to John for his comments and third quarter of business highlights.

Thank you, Caroline, and welcome everyone to our third quarter earnings call. As you can see from our press release, in the third quarter 2019, we generated revenues of $17.2 million, up 47% from $11.7 million in the same quarter last year. We received our largest VA MVP order ever increasing our unfulfilled orders with the VA MVP to approximately $82.5 million. In Q3, Personalis set another overall revenue record, and it was our 13th consecutive quarter of sequential revenue growth. We are raising our revenue guidance for the full year 2019 and are projecting over 70% revenue growth for 2019 over 2018. Before I dive further into our progress from the quarter, I'd like to address our biopharma business as it's an area where we see a clear long-term opportunity. Our biopharma revenue in Q2 was $7.3 million an all time record, but in Q3, it declined to $4.3 million. This quarter-to-quarter variation in our pharma revenue is in part a consequence of the groups of clinical trials. You might call them waves or campaigns conducted by our large biopharma customers. Given our customer concentration, these campaigns at individual customers lead to surges of samples for us to process. As we have seen historically, and noted prior to our IPO, biopharma customer revenue can increase or decrease based on the number of samples we received from large retrospective projects. Customers performing retrospective studies often send us large batches of samples for storage, resulting in the surges of revenue and then gaps, while customers performing prospective projects and those samples from patients as they steadily enroll in clinical trials, often over the course of a year or two, which results in steadier streams of revenue. Given our customer concentration, the choppiness from large retrospective customers not only affects us on…

Thank you, John. Revenues for the third quarter of 2019 were $17.2 million up 47% from $11.7 million in the same period of the prior year. The $17.2 million was a new record high for quarterly revenue. The third quarter revenue growth was driven by an increase in volume for testing and analytical services provided to the VA MVP, partially offset by a decrease in biopharma volume. In the third quarter, VA MVP accounted for $12.9 million or 75% of the total revenues, and the remaining $4.3 million or 25% of the mix was primarily from biopharma customers. As mentioned during our last call, the acceleration of VA MVP sample flow over the last several months created a backlog of sample that we need to process. For the third quarter, VA MVP revenue of $12.9 million was 51% higher than $8.5 billion last quarter, and 98% higher than $6.5 million for the same period last year. Recently, we announced receipt of our third VA MVP past quarter for up to $38.1 million under the current contract. We ended the third quarter with $82.5 million of VA MVP unfulfilled orders and based upon current estimates, we expect the unfulfilled orders to convert to revenue over the next year and a half. Biopharma and all other customers accounted for revenues of $4.3 million for the third quarter of 2019 compared to $7.3 million from the second quarter, and 5.2 million for the same period last year. As John mentioned, our pipeline of potential new projects and new customers continues to grow. And for the third quarter, biopharma new orders were significantly higher than the 4.3 million of revenue we reported. The sequential and year over year decline in revenue during Q3 was due in part to the lumpiness we see in both…

Thank you. [Operator instructions] And our first question comes from David Lewis with Morgan Stanley. Your line is open.

This is Edmund on for David. Just two quick question, two quick ones for me. First, in terms of your biopharma traction, can you give us a little more details on how your customers are adopting to the new product? And how much longer do you think it will take before it actually kicks in? And in terms of the whole genome sequencing, can you provide more details on that one as well?

Yes. Hi, this is John West. I'll take a first shot to that and I think others may want to chime in, as well. I'd say in terms of the biopharma traction of our new platform of NeXT, I think we're really pleased with the reception to it, we see very common responses that people find it amazing, and they actually didn't think it was even possible to do something like that. So I think, in that regard it's impressive. We also see broad understanding of the importance of having such a comprehensive capability to look both at the cancer cells, all 20,000 genes of the cancer cells, but also the immune cells that are in a tumor at the same time from a single sample. So I'd say the buy ins to where we're headed there, I think has been great as with all of these kinds of things in a clinical trial setting. It's important for pharma to have not only our validation but often to do their own validation. So there's a time process for that to go through. And I'd say so far, we're actually quite happy with the response to the initial product there. And you asked about our whole genome sequencing business. I think that's an area we've been approached, we actually had thought that full genome sequencing and cancer would be further in the future. But what we find is that there are customers who are looking to build data sets that may have a really a long lifetime to them. And so, the view that 10 years from now, you may still be using this data means you really want to build in as much future proofing as possible. And so that's often where whole genome comes in is trying to build in something that has a very long lifetime to enter the data. So it ends up being a slightly different customer application than the analysis of clinical trials that we see our print. Because of Personalis' extensive experience with whole genome sequencing and our experience working with these very difficult cancer samples, we've actually been able to respond to that and launch that kind of capability.

Hi Edmund, this is Aaron. Just a follow up on John's response there on the biopharma traction with the NeXT, so even though our revenue today was NeXT is minimal, We have 10 customers who have placed orders, so we have a significant amount of orders on the books with customers. And in terms of potential customers, John did mention in the prepared remarks, we're dealing with several new potential customers that can be significant size, and we haven't done business with them in the past. And we're in advanced discussions today we believe that this is going to lead to good business into the future. And we believe that increasingly throughout 2020 the NeXT revenue will ramp and gain traction. And what we said is past is that the significant part of the ramp will take place in the second half of 2020 as far as NeXT.

I'm sorry, just to go back. In terms of the potential new customers, it's going to take them about, say roughly a year to ramp up. So they're more going to be able to 2021 impact and sorry to jump back and forth, that's for the whole genome sequencing? Can you give us more color on how you expect this to impact the revenue and the pacing or any sort of additional color on this?

Yes, so in terms of some of the new customers, new customers typically can take a little bit longer to ramp. However, we are in involved with existing customers today as well. Okay, and we do have orders on the books from a handful of existing customers and some new customers as well.

I'd also say there's a lot of variability from customer to customer. Some customers will go through an extended piloting process and evaluation and other customers will act more quickly and move directly to a project that may involve more substantial revenue. So it's not a one size fits all in terms of how long it takes customers to adopt the technology. And we certainly expect that there will be customers who are completely new to us now who will be sources of revenue in 2020 from our NeXT platform, we have very specific customers that I can have in mind that they give us an idea of that. And I'm sorry, you had a question also about the whole genome side?

Yes, any color on the pacing or in terms of when it's actually the actual impact on revenue when it's going to happen or any additional details on that?

I don't think we're going to break that out separately, but I would say that it's -- this is something that that is generally funded biopharma. And they are often interested in this kind of data. We do see it as being something that is often partnered up with whole transcriptome sequencing. And so, that is similar to our other products where we leveraged both the analysis of the DNA and the RNA. I think I'd say we see a whole genome as being perhaps a wave of the future in cancer, but that may take some time. I don't want to set any great expectations with that, but just to say, whereas in the past we would've said that it was something for the future. I think we'd now say it's actually beginning to happen and actually probably happening sooner than we would have thought only a few months ago.

Thank you. And our next question comes from Derik De Bruin with Bank of America. Your line is open.

This is Ivy for Derik today. Thanks for taking questions. So just two questions. One is in terms of the biopharma attraction with net, for the customer orders, wanting to see if you've seen an increase in terms of the amount of services that much the young whole genome sequencing they see and second one, gross margin, wanted to see if there's any granularity on the GM trends for the rest of the year and maybe in 2020. Thank you.

Okay. Why don't we do the gross margin one, firstly, Aaron if you want to speak to that.

Hi, Ivy, so in terms of gross margins and the trends as we look forward, so we're not providing specific guidance on any specific number, but as you can see from the reported results, you know, our VA MVP gross margins are very, very solid. Most of the costs there in the operation are somewhat variable, because we are, we are able to maintain a certain level of volume through the, the operation in terms of the variability. It's really tied to the lumpiness that we see in the biopharma volume in terms of as orders come through, we process and the more we process, the more we're able to leverage the fixed cost base in the operation. And so gross margins will be a little bit volatile and you know, through 2020, there could be some slight uptick but I wouldn't, be too aggressive in terms of how we would characterize, our focus is top line growth. And that's what we're after. In terms of beyond 2020 and 2021 as we get to scale, we've talked about, as revenue gets to $250 million to $300 million than we could see gross margins much more elevated, like in the 60% range. But right now our focus is top line growth.

And then I think back to your first question there, if I understood it correctly, you wanted to understand kind of the relative positioning for customers of our next platform relative to the whole genome. Is that correct?

Yes.

I would say they really are addressing different customer needs. The folks who are interested in our NeXT platform are often working in active clinical trials of pharmaceutical compounds. And really we're trying to understand why various patients respond or don't respond to a specific drug. And they're looking for a very comprehensive set of data, including data on the immune system and so forth. I think the people who are interested in whole genome have a different application area tend to be focused on the mutations across the genome and perhaps the transcriptome. So they ended up being different customers. So it's perhaps a new, somewhat additional category for us, not one thing cannibalizing the other.

Got you. If I may squeeze in a follow up on the the biopharma business, for next year, the guide think you mentioned 20 million to 25 million. It's relatively a wide range. So just wanted to see what's your visibility on that? Thanks.

Yes. So, this is Aaron, Ivy. So in terms of the 21 million to 25 million, 2019, we're going to do little over 21 million. And so, as we've seen over the past three, four months, the biopharma business is relatively choppy, it's lumpy, primarily because of the order inning and the sample processing types of volumes. And what we've learned over the past several months is that, it does take time to be able to go drive adoption, we really feel and believe that we have the most comprehensive tool or platform in the industry. Other folks are not looking at 20,000 genes. In terms of the product itself, it does take time for the customers to evaluate, to really get their heads around it, because they're using smaller panels today and they're using a piece of tissue sample that's cut up and sent to multiple vendors. We're trying to get biopharma customers to send us tissue sample, and we do all the work. And that's the end of it. And in terms of getting them to that state, it does take time. And so what we've been doing is we've been adding to our sales force. We've tweaked our go to market strategy by adding business development resources to be able to go have this discussion with the chief scientist level in biopharma. And we're seeing that is working, we're getting great traction. However, it takes time and so in terms of the guide, we kind of build some of that into our guide in terms of, it's going to take some time, but we do feel bullish that we're going to drive this adoption. It's just going to take a little bit of work and time.

And our next question comes from Doug Schenkel with Cowen & Company.

I actually just want to start with one follow-up to Ivy's question. I just want to make sure we heard it right. Did you say that you expect -- what did you say you expect 2019 biopharma revenue to be?

2019 is going to be our guide was 21 to 21.5, so the low $21 million range, and our guidance 2020 is 21 to 25 so up a little bit,

So then for the fourth quarter to make sure we're getting it for biotech pharma and personalized here, I guess mathematically, assuming there's about $4 million in revenue for that category with the balance being the VA?

So that's correct. Doug, we're assuming that is kind of flattish to Q3 or in the same range.

So I guess building off of that. So that mix is a bit different than I think what most of us expected for this year. And then as we look ahead to 2020, the overall revenue target is about in line with what we're modeling, maybe a little bit ahead of what we're modeling, that's a mix is clearly a lot different. Yes, I think most of us expected the mix to be about 50-50 VA, non-VA, based on our discussions with you earlier this year, it now seems like it's going to be around 70% VA. So it seems pretty clear pharma revenues taking a bit longer than you expected to ramp. Maybe you could just walk us through what the key drivers are to that. And what gives you confidence that as you get to the back half of next year that you're going to get back on the trajectory that you were expecting earlier this year?

Sure, Doug, let me take a shot at it. And then I'll pass it over to John to follow up. And thanks for the question. But in terms of where we're at today, so what we've learned is it does take time to drive change and drive adoption inside of biopharma, especially large pharmaceutical companies. And we've proven we can win. We've had a couple of very, very large customers that you've seen in our filings in the past, right? We did, we've been adding sales in business development resources because we found that just what we had before, before the IPO, we were a private company, so we didn't have a lot of capital to be able to go invest in a lot of different areas, but now we do. And so we're investing in additional sales and business development resources to be able to go continuously, have additional discussions, have multiple discussions inside of a pharmaceutical company where we're already doing business, because again, we believe we're under penetrated in the accounts that we're at today. Once they see the data, they have to go through data validation and look at what's coming out of the next platform compared to the ACE platform. And once they get through that validation, we feel very strongly that we're going to be able to drive that adoption. It just takes time. It's not something that just happens in one or two months. It takes several months of discussions, dialogue and again, we're trying to drive change where they're going to provide us with the one tissue sample and we're going to do all the work versus them choosing a supplier to do a piece of the work, say, RNA or a DNA piece, right? They want us to do the whole amount of work. And so that's kind of what saves time.

This is John just to maybe take another angle on your question here. I think you were asking, how do we have, how do we get visibility about when revenue will ramp and so forth. I guess, I would come back to kind of what the process is here. I mean we've been engaging with customers. We see what their responses in terms of reaction to the platform, their level of interest and how compelling they find that. We know that that then can take time before they decide on the right project they want to have to use that technology. But then, we see that, we'll see that showing up in terms of orders from orders, depending on the type of project, whether it's retrospective or perspective, there then can be a lag in terms of until we have the samples. And then of course it takes us time to process the samples. But we have visibility here inside the companies, all those steps. And so, it's not like we have nothing. And then all of a sudden revenue comes up at the end of the pipeline a year from now. All that process is going on along the way. And we're getting constantly a sense of feedback from customer engagement projects, they're looking at which customers are signing up, where they're positioning it. As the orders come in, when we think samples will come from that. So there's a great deal of detail internally, that gives us a view about what that timing will be and gives us the sense that they, there's this concept that we'll see this ramp increasingly through 2020 is on tracks.

Just a couple more. As you mentioned in your prepared remarks, Pfizer dropped from 23% of revenue in the second quarter to 11% in Q3 that that's going to be inherently lumpy at points, like all pharma revenue. I guess my question is, going back to your point about having good visibility here is the expectation that that Pfizer is as a revenue source is going to start to pick up in Q4 and into next year. I know you don't typically want to be too specific on specific customers, but given they are disclosed as a customer, given the percentage of sales. I thought it might be fair to throw that out there.

This is John. So, we obviously don't give guidance on a customer by customer basis. But I would say, you know, we really like working with the folks at Pfizer. They're doing really state of the art things. And I think we have great engagement on that. Obviously we have to earn their business every single time we do something with them. And I think they're a terrific group to work with and I look forward to having a great relationship with them going forward over many years. So I think I've seen, maybe that's about as much as we can actually say, but I think it's a terrific working relationship with them.

Okay. No, that's great. And then the last one, you again indicated that the liquid biopsy product is on target for later in next year, I believe is how you described it. What are the key milestones or hurdles that need to be achieved between now and launching that product?

Yes, so this is John. So I think what we've said is that we are on track for launching that product in 2020. And I think that's probably the level of specificity that we're comfortable with right now. Obviously there are questions that we've been showing data on this product for some time at scientific conferences that's progressing obviously we work with different types of samples. The things we're trying to do in liquid biopsy are pretty unprecedented, meaning 20,000 genes off of what can be tiny amounts of DNA to come out of a plasma sample. So we're working to make sure that with the variability of samples that can come from patients that were satisfied with the results we can get before we go out to customers. So I think what you would normally expect in a product development process, but we've actually shown data comparing a tissue and liquid biopsy samples for quite a long time. And we're actually, I think pretty optimistic about what that's going to look at. It's just a it's sort of a first in the world kind of events. So we really want to get it right.

Thank you. And our next question comes from Kevin DeGeeter with Oppenheimer.

Hey, good afternoon. Thanks for taking my question. I want to follow up on some of the earlier questions in discussion with regard to a better understanding what I've kind of categorized as sort of the sales cycle on the pharma side of the business and take it from a different perspective, specifically the expansion of the commercial team. You mentioned kind of a 30% growth and in the commercial team. Can you just sort of a. quantify for us sort of what that means in terms of number field reps that have been added and then perhaps the more interesting part of the question. How do we think about sort of sales force productivity because when we kind of look at the 2020 guidance with regard to biopharma revenue it is a prospective growth number that is less than kind of that 30% increase in commercial resources. So I'm just trying to appreciate the length of time you're thinking that it will take some of these new folks to become fully productive and kind of what sort of metrics we should measure over time in terms of sales force productivity?

Sure. This is John. I would say when we talk about the 30% growth at the time of the IPO we were probably in the range of 14 to 15 people in that group. We actually have a roadmap for a pretty substantial increase in our commercial organization. It's one of the things we've really wanted to do that the IPO has now made possible. I'd say it's also a little different from perhaps a conventional product sales force where you might tend get referred to how many sales reps you have. We actually have a lot of different kinds of people involved in our commercial organization. We obviously have people who are seasoned sales executives, but we also have a group of really amazing, PhD level field application specialists who work out in the field with our commercial people engaging scientifically with our customers. We recently added a new capability of inside salespeople work from our home office here, but that can engage with customers. And, we've also added this new business development capability. Again, we're working with people, particularly at big pharmaceutical companies at many different levels and it's absolutely crucial for us to have people who can work with the scientists who are working on the ground with individual clinical trials. But it's also important for us to engage with the senior management of those companies in, in thinking about, where are they going with this kind of platform Personalis in many ways is looking to customers and talking with them about making a pretty dramatic change in how they think about their data. You know, going from a few hundred genes, mostly focused on cancer driver genes to transition where you're really looking at the genetics of immuno-oncology, which is 20,000 genes. And the complete immune cell repertoire. And so that's actually quite a substantial scientific change. And so we need to be able to engage at that level as well. So when we think about how we're staffing this, it's sort of not purely just the sales rep model selling. Let's say like insert businesses that have run before and it's a pretty broad commercial and scientific team that's engaging with those customers. I think you will see continued growth in the commercial side of our company as we go through next year and see our biggest challenge, we've been actually going to hire quite a few people since the IPO. But it is very selective. Trying to find people with the right skills is always a challenge. I think you'll see that continue to grow over the coming quarters.

Okay, great. And then maybe a question with regard to the gross margin, I appreciate the commentary, in terms of the opportunity through automation to certainly improve the gross margin for the biopharma business. I guess my question pertains to, any potential laboratory expansion, I think you've been reasonably clear that that's the potential for 2020, is there opportunity for any stepwise improvements in gross margin specifically on biopharma related to a new or expanded lab facilities? Or should we think about the opportunities there being related, firstly volume, but then kind a secondly to continual incremental technology improvement?

Yes, that's a good question, Kevin. So, in terms of gross margin, so if you go back to Q2 2019, our gross margins were over 37%, and that was with biopharma being over $7 million of revenue. So you can see that having biopharma dropped by 40% in terms of volume, it had a significant impact on margins. As you go out into 2020, there will be the possibility of lab expansion. You know, we're, out of space in some regards in some areas, and so we will be expanding a little bit. And as you expand, that could be as a small headwind into margins. In terms of automation, so the VA is a highly automated process and it requires very few people to process what we did with $12.9 million last quarter. So, in terms of the biopharma side of the business, we are working on automation there as well. And that will come to fruition probably throughout 2020.

And then just if I could sneak one more in with regard to, you called out and I believe, you know, four or five, discussions with large pharma companies that are ongoing, that you think are going in a positive manner. Is the introduction of either the companion diagnostic or the liquid biopsy sort of important in driving either one or any of those relationships forward into kind of more revenue visibility or is your view that with the NeXT platform and the promise of expanded product offering in 2020 that you have the products in the market now to get those discussions over the goal line, is just a question of time.

I think it's primarily a question of time and the build out we've talked about commercially the products -- the newer products that we just mentioned, I think we're pretty excited about those. But again, to be realistic in terms of the timing with pharma from adoptions for the revenue some of those things like liquid biopsy, it might be more substantial drivers of revenue in 2021. And so, yes, I don't think we’re going to set big expectations as far as that's concerned from a revenue standpoint. I think it is going to be an exciting year for us. And getting that product out of the initial engagements in it,, but from a purely financial guidance standpoint, I think we're trying to be careful about, you know, thinking about that volume on those products, likely to be maybe more of a 2021 event. I think we're pretty happy with the products we have out there. There are incremental improvements in the products. You've seen us release new versions of the capability around the NeXT platform where for example, initially we reported on the TCR beta later added the TCR alpha and other features. I think that kind of incremental improvement, which just keeps on adding value to the platform, I think you’re going to expect to see some of those kinds of things as we continue through next year. But largely I feel like we have the platform we need, we were going to be working on executing with it.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.