Ladies and gentlemen, thank you for standing by, and welcome to the Fourth Quarter 2019 Personalis Earnings Conference Call. At this time, all participant lines are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Caroline Corner at Westwicke ICR. Please go ahead.

Thank you, Operator. Welcome to Personalis' fourth quarter and full-year 2019 earnings call. Joining me on today's call are John West, President and Chief Executive Officer; 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 and demand for our products, Personalis' expected financial performance, expenses and position in the market, and the impact of COVID-19 on our operations and our customer's operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-K filing for our full-year ended December 31, 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 fourth quarter and full-year 2019 results is available on our Web site www.personalis.com under the investor section and includes additional details about our financial results. Our Web site also has our latest SEC filings, which we encourage you to review. A recording of today's call will be available on our Web site by 5 PM Pacific time today. Now, I'd like to turn the call over to John for his comments on fourth quarter and full-year 2019 business highlights.

Thank you, Caroline, and welcome everyone to our fourth quarter and full-year 2019 earnings call. Before going into detail on our performance in 2019, I would like to address the impact of COVID-19 on our organization. The virus has caused disruption across the globe, which affects us, our customers, and suppliers. First and foremost, we are focused on the health and wellbeing of our employees, their families and our community. On March 16, several counties within the San Francisco Bay area issued orders for individuals to shelter at their place of residence, meaning people were to leave their homes only for essential purposes. For Personalis, this order meant we had to direct the majority of our employees to work from home, with the exception of those needed to keep laboratory operations running, so we can support customers that are critical to the healthcare ecosystem. Like many of our peer companies, we have seen a slowdown with certain customers and suppliers, although, we have not been able to quantify the full impact just yet. We have proactively taken measures to increase our inventory of lab supplies in case supply disruptions occur or are prolonged. We cannot be certain, however, how long the situation will last. We are in communication with our customers and their partners regarding the status of new orders, and the receipt of samples for pending orders. Certain customers have had disruptions while others continue to send us samples and work with us so that we can deliver crucial information to them in a timely fashion. We can't be certain any of our customers will continue to send us samples for processing during this disruption. For the safety of our employees, we have implemented strict cleaning, visitor, group meeting and other protocols for our office and lab to help…

Thank you, John, and good afternoon, everyone. I will first provide an overview of our full-year 2019 results and then more details about the fourth quarter. 2019 was a great year for Personalis. We increased revenue 73% over the prior-year and released two important new products for future growth. Our NeXT Platform was released in the first half of 2019 and we have seen great customer traction thus far and also, we completed the development of the NeXT Diagnostic test at the end of the year. In addition, we raised $140 million from our IPO last June, which provided us with the capital needed to invest in growth initiatives and also maintain a healthy cash position which is very important during this time of uncertainty. Revenues for the full-year of 2019 were $65.2 million, up 73% from $37.8 million in 2018 and exceeded the upper end of our guidance. The VA MVP revenues were $43.5 million for the full-year of 2019 up 134% from last year revenues and biopharma revenues were $21.7 million for 2019 up 13% from last year. Gross margin for the full-year of 2019 was 33.9% compared with 31.3% in 2018 and the increase was primarily due to operating leverage from higher volume mostly from the VA MVP samples that we tested. Operating expenses including R&D and SG&A were $44.5 million for 2019 and net loss was $25.1 million, with a net loss per share of $1.39 based upon a weighted average share count of 18 million. Now on to details about the fourth quarter, revenues for the fourth quarter of 2019 were $18.2 million, up 38% from $13.2 million for the same period of the prior-year. The $18.2 million was a new record high for quarterly revenues. The sequential quarterly revenue growth was driven by an…

[Operator Instructions] Our first question comes from the line of David Lewis with Morgan Stanley. Your line is now open.

Hi, guys, this is [Edmond] [Ph] on for David. Can you guys hear me? Okay.

Hi, Edmond.

Hi.

Thanks for providing the color and the update on the coronavirus situation, and I appreciate that you guys won't be providing financial guidance on 2020 until the next call, but could you help us think about next year, specifically, I guess in regards to your clinical or your MVP side, when a task order is received, does that mean the sample is already there and just needs to be pulled from a [biobank] [Ph] and send to Personalis, or does it still need to be acquired? Like I'm trying to think about whether or not this can be a coronavirus impact on sample acquisition from the MVP side? And similarly on the biopharma side, I know like a lot of clinical trials, the enrollment has been slowed down significantly by biopharma companies. What have you been getting from it customers over the past month, and how is this impacting Personalis now, and what are you expecting in terms of how this is going to play out?

So, let me answer those two pieces, Edmond. So first, I'll talk about the MVP. So, as we had mentioned on our last couple of calls, the VA MVP sample flow had been accelerated from five to six months ago, and so, sitting here today, near-term we have sufficient samples in-house to continue to process. The key question, since we are on -- you know, this order from the county and the state, we do have a limited number of workers in-house, processing samples in the lab, and so that could be the amount of revenue we can produce for the VA MVP. So, it's not really going to be sample flow in near-term, it's going to be capacity and capability. In terms of sample flow from the VA, so right now we're in close communications with them, we don't have any indications that sample flow is going to slow down anytime soon. However, if the VA laboratory is on any type of an order or shut down just like we are over here in the Bay area, you know, that could affect sample flow to us down the road. Okay? And so, sitting here today to answer the question, we have sufficient sample near-term, that's going to be a capacity question. In terms of the biopharma sample flow, so we have been seeing sample flow over the last couple of weeks in terms of the information about clinical trials, the enrollments going slower, and some cases has stopped. In terms of samples that are coming in, what we're going to do is prioritize those samples that are needed for our Personalis cancer therapy customers, because patients in those trials [are relying on our] [Ph] customers to be able to manufacture a drug or a therapy quick for them, and so, we're prioritizing those samples. Right now, we are seeing some sample flows, however again, all of our customers and suppliers are taking measures to protect their employees, families, and the community, and so that could slow down over time as well. It's just too early for us to tell exactly what that magnitude is going to be, or how long, but the way we see it, business is not going to go away, it's probably going to be shifting out to the right. So, the growth curve is going to move out, and it's hard to tell is it six months, is it nine months, right, but it is moving out based upon what we see today.

This is Clinton. Just to be clear about the sample collection, the large majority of our samples have already been collected in both parts of our business. So, the VA MVP samples have been collected, and the majority of the work that we do on the biopharma side is retrospective as well. So, most of the samples have been collected.

Got it, and in terms of the biopharma side, I'm assuming the retrospective studies are less affected by the coronavirus to recall that in terms of processing samples. Can you give us a mix of [what stands today] [Ph] in terms of retrospective versus perspective?

Yes. So, Edmond, in terms of the sample flow, that's generally correct. Retrospective are not going to be as problematic with this COVID-19 as perspective samples coming in. However, if our customers have to go and lockdown or shutdown some of their lab operations or their suppliers, the CROs have to shutdown their operations, then it could affect the sample flow that comes into us eventually. In near-term, as Clinton had mentioned, we do have samples in-house, but over time that dynamic can change. In terms of the mixture today, so today, more of our business is weighted towards retrospective in the biopharma business. It's still more than half on the retrospective side.

Great, and in terms of your NeXT Dx Test, your critical test, how can we think about the revenue contribution and the vamping, and do you have any price points that you can give us, or price to submit the panel to the FDA down the road?

Hey, John, did you want to take that?

Yes, maybe I can answer that one. So, we focused our NeXT Dx Test as being something we would use to work with pharmaceutical companies, and so, this is -- that's really the positioning of the product to start with. It's for companies that, in fact, we're already buying into the comprehensiveness of the NeXT platform, but then also wanted to be able to have diagnostic test readout at the same time from the same very limited sample. So that's the positioning of that. We are interested in the regulatory path for that, and I've been exploring that with probably more to say about that in future quarters.

Okay, thank you very much, guys.

Thank you, Edmond.

Our next question comes from Derik De Bruin with Bank of America. Your line is now open.

Hey, good afternoon. You mentioned that you've signed a couple of large pharma customers recently, some of the -- you converted two of the four you were talking with. Can you sort of talk about what services they're buying? Basically, sort of like, what were the menus that they're choosing from you?

Yes. This is John West. I'd say the area that we have seen the adoption that we're really happy about has been with our NeXT Platform, and so, this is our platform we introduced in the last year that looks not only at all 20,000 genes in both the DNA and the RNA, but also provides a comprehensive view of the immune system with both the adaptive and the innate side of the immune system being captured. So that's probably our frontline product. There are cases where customers want to have subsets of that or who are still working with familiar products that we have. But the real focus and actually part of what we're probably most excited about has been the adoption of the NeXT Platform. So we mentioned 19 customers now have been placed orders for NeXT. Obviously, a number of those are these large pharmaceutical companies that we also mentioned.

And so how many of your prior customers did you step up to NeXT ID?

Yes, so when we talked last year about the business, I think we were saying we had between 45 and 50, biopharma customers, and so, now we're saying that we have 19 customers, who have been looking at who have ordered our NeXT Platform. So it's probably approaching 40% in terms of numbers of customers at this point, I would say that there is a lot of interest in the platform and the capabilities and so unless people have a reason that they need to stay compatible with something with the prior platform. Our existing customers, who are already using our earlier generation often, are quite interested in NeXT. And that is some of the adoption we see, and it's also new customers that are coming in because of NeXT.

So, on the Veterans Program you mentioned that it got an incremental funding boost in the last budget. Can you talk a little bit more details? I guess some of the questions I'm getting from clients are basically just want to know, you know, how secure that funding is, it could be repurposed. It basically is there any indication all from the Veterans Program that money could be pulled from that program to go elsewhere to be redirected in the current fight?

So, I would say -- this is John, we have not seen any indication of that being repurposed and to give you an idea of the new budget that was proposed by the White House would be for fiscal year '21, which could conceivably lead to a purchase order for us in September of 2021. And so that's a year and a half from now that the purchase order might come or the new contract might come at that point. And then we would be talking about samples to be processed in the time following that. So, that's some distance out. You know, I think if there were going to be repurposing it, potentially it could be from nearer term current year budgets, but in fact, the contracts we have for those budgets are largely paid in advance, and we've largely received those payments at this point. So I think we're feeling pretty solid about that. I think that the Million Veterans Program is actually quite a priority for the VA. And the resources that that are used for it largely are separate from the clinical resources of the Veterans Administration.

Great, thank you for the additional color on that one, and I guess I can appreciate the uncertainty and sort of the situation. I mean, obviously, all companies are going to be facing headwinds. I guess the question I want on if you have some sort of sense on are we looking for a I guess I'm just sort of giving us any sort of direction on the amount of decline you could possibly see soaring based upon current trends. I mean, like, for example, we've heard that like wellness visits to diagnostic labs are down 50%, right. I mean, it's we're questioning it's like, what are you seeing in your current outlook or current thing like that just sort of give us any sort of direction for the next couple of quarters?

Yes. So, this is John. I guess, I would say that the things like Wellness Business are not the source of our sample.

Yes.

Obviously, we're working with cancer patients and the flow of cancer patients is not very much changed by the outbreak of the virus. I think that said, when you're talking about experimental therapies, which might be in trials, but pharmaceutical companies, some of those trials may be delayed. And so to the extent that we're involved in those prospectively, that could lead to delays and samples, and I'd also say that it would be just many of our pharmaceutical customers even a large fraction of their workforces are working from home. And so, although we're actually still remarkably engaged with any of them, there are going to be things where you have to assume there will be slowdowns there either in uptake of the platform people adopting it for the first time, and that would be reflected a year from now or people being able to get samples shipped to us if those samples are being held by the CRO, and the CRO will shut down or that kind of thing. So, I'd say that I think looking for some color on kind of the magnitude of all this and I would say, we're currently seeing shipment of samples from customers, so some amount of that is continuing. We also have those customers who have had to push out dates, in some cases somewhat uncertain what the dates will be because of the disruption. So it's sort of, it's not 100%, it's not zero, it's sort of in between, I think we'll have a better idea of being able to quantify that, potentially on our Q1 conference call.

Okay. So just -- so summarizing as of like so, your VA business, stable for now, budget looks fine, but the question on what your own operations are at your lab and whether or not you can stop it and to people there in sample flow, and the biopharma probably take that down, more just given some of the trial delays. I'm sort of thinking about how to sort of like put together the head on this.

Yes, of course, I'd say that the -- on the VA side, I think, as Aaron has said, we have a substantial number of samples in the house already that we received from the VA. The challenge there will be on bail, whether we can in fact process all of them. I would say it's a very dynamic situation, and then we came into work Monday last week, and we -- there were no government orders. By Monday afternoon, we had an order from the Six County area around the San Francisco Bay area, and then on Thursday evening that was in a different order from the state of California. So it's just a very dynamic situation, and it's not only the orders that affect our geographic location, that affects governments around the world that are taking action and we have customers who are located almost all around the world. So it depends on what's happening in their countries as well, not just in the United States.

Great, thanks for the color.

Thanks.

Our next question comes from Doug Schenkel with Cowen & Company. Your line is now open.

Hey, good afternoon, guys. Thanks for taking the questions and glad to hear you're safe and to hear your voices.

Thanks for…

So, recognizing most of your biopharma work is retrospective, as you mentioned a few times, and you have most of those samples, if not all of them, and recognizing that VA sample accesses is pretty streamlined at this point. Is it fair to assume that the revenue timing and trying to time the impact of COVID-19 on your company? It could be a little different for you than for others in the sense that you have a little more control over Q2 because you have the samples, obviously not perfect control, and there's a lot of unknowns out there, but with most of the samples and houses, is it fair to assume that to the extent there is a pronounced revenue impact on your business, it might be felt a little bit later for you than for others, meaning it probably requires a prolonged period of pandemic impact before it hits your P&L?

I think I want to be clear, maybe I can answer that one that the -- when we talk about retrospective samples from biopharma customers that it may be that the pharmaceutical company has the samples that typically would they be the case in a retrospective study that it doesn't mean that they're able to send them to us because they often they have them, stored in a biobank, the people who operate the biobank may no longer be going to work, then maybe being held at a contract research organization, sometimes we receive samples from almost every country in the world. And so, those organizations are having delays or shutdowns, it can be a delay in us receiving samples. So although, it's not likely that there'll be so much delay in retrospective cases, obviously the samples already had been taken. So, it's not that there's a delay in the samples being essentially created to start with, but the sort of chain of custody of those samples going from where they're originally collected, to actually ending up in our laboratory can have a lot of steps and we do see issues and delays with that changed, so I think it's, we will have some impact from samples where our customer already has the sample, but they're already pushing out the data on which they'll get sent to us.

Okay. Yes, that's helpful. I mean, it sounds like a lower hurdle than having to go out and get a new sample from a patient in a prospective study, but still, if a customer is shutdown, or folks are working from home, that's obviously going to have an impact. Okay, so I'm with you. That's helpful.

Yes, okay.

Does the pandemic impact timelines for any pipeline products, including but not limited to your liquid biopsy product, which I believe was targeted for later this year?

So, yes…

We say this is…

Go ahead. John.

I guess, I'd say this is actually a very. I mean, it's never good to have this kind of disruption, but whenever you're bringing out a product like that, there would be people who would be busy in the in the lab working on initial samples and characterizing them and getting radical product launch and analyzing that data and so forth. And all of the activity that we can do remotely by computer can continue, but the part where we're actually running samples and typically at this stage of a product development, we're really trying to ramp up the number of samples, you're characterizing and potentially working with collaborators and so forth. So a lot of that really comes to a halt during this period of time. So it's a little bit depends on how long this happens. We do have samples that we have run prior to this situation happening. So we have data to work with and so forth, but product development is not fulfilled, but it -- but there definitely is a delay there. We're still thinking about that being released in 2020, but I'd say, we really can't say for sure because we don't know how long this situation with COVID-19 is going to happen.

Understood. Has your ability to have discussions with existing customers about expanding into new programs or new potential customers. I imagine that's been impacted. But I also wonder if there's some potential for you to move those discussions for maybe not in person, but kind of along the lines of what you've just described while folks are working from home. I mean, I guess a long-winded way of saying, does the selling process have to come to a halt, or have you found ways to keep that going even with folks working remotely?

Yes, so absolutely. I think we've been on more video conferences in the last two weeks than you can shake a stick at. If I say that the…

Same here.

Yes, you probably have been too, I'd say the -- with existing customers where we already have a relationship, then, if we're talking about new things and so forth, there's obviously a lot of engagement with those customers and some of those kinds of discussions can continue. There's probably a percentage reduction. But in general, those can continue. But we also talked quite a bit in our script about adoption of next by new customers who've never worked with us before. And in those cases getting in front of somebody in person and walking them through things and be able to answer their questions in real time, and they, the feedback back and forth discussion, that's pretty important. And so, I think when we look at the impact of COVID-19. Obviously, we're doing everything we can to minimize that, but I think part of it is not just, which samples show up on which day in the next one or two or three quarters, but also what's the adoption of by completely new customers to us? And if that's adoption, that would have happened this year as orders, that could be revenue that happens in 2021. So it's a little longer term there. So I think we're kind of thinking about this as something as Aaron described, where the revenue growth curve as we look forward probably shifts to the right by some amount, it depends a little bit on how long this process goes on. It also depends on whether our customers are impacted, and if there's an economic downturn as well, then, there could be some slowdown there. We don't know.

Okay. That's all. Really helpful, thanks for taking all the time that think through this with us, and I know it's a difficult and fluid situation. So thanks, guys.

Thanks, Doug.

Thanks, Doug.

Our next question comes from Kevin DeGeeter with Oppenheimer. Your line is now open.

Hey, thanks for taking my questions. So in prepared comments, you called out some opportunities to expand the biopharma business into indications outside of oncology, I believe inflammatory disease and genetic disorders among potentially others. As we think about the current product menu, are there specific components of the menu that you really lead with in your discussions, outside of oncology, that and probably more to the point of our thinking, how do we think about your -- the need for potential menu expansion to really kind of capitalize on some of those additional opportunities?

Yes, Kevin. Thanks for being on the call this afternoon. I'd say, one of the reasons that we've begun to pay more attention to that is that customers started to approach us and say, hey, we saw you have this product and you're maybe working with people in our pharmaceutical company in cancer, but actually, we can also use that in these other areas, so I think is the initial opportunity that we're seeing is something where we work with the existing products we have sometimes maybe some changes in the informatics and reporting and so forth, but that many of the kinds of capabilities we have from an assay standpoint or a laboratory standpoint or workflow standpoint, many of those are applicable to these other areas. So I think there's -- what we're seeing is an opportunity where there may not need to be a long new product development to address those markets, we may be able to at least begin making progress in those markets. In fact, we've been beginning to see some progress there. Using products that we already have, I would say, one of the things that's interesting is in as you know in cancer, we've focused a lot on immuno-oncology. But of course, the immune system is really important in a lot of other diseases as well, and so, our ability to see that and to combine those genetics, with the genetics that we're seeing, that would impact the other aspects of the disease is quite helpful, and the -- in many of these diseases, the RNA side of what we do is also tremendously informative. And so, the combination of those capabilities that we have, lets us address these other opportunities in some cases, with a more or less our existing products, if the opportunities got to be larger, we'll think about making expansion, but even with the existing menu, we think there are opportunities.

And you also called out population sequencing opportunities beyond the MVP program is being an area where you see huge potential increase opportunity, I guess, particularly against the backdrop of expanding public sector spending across the board. But from an operational perspective, that would seem to be a pretty concentrated list of opportunities. So, is the investment there really about how to better identify potential opportunities earlier or is it really about the ability to properly resource our fees or other areas specific contracting work that you're hearing about are already in the public domain?

Yes, so I'd say that obviously we have visibility to a lot of the population sequencing efforts. I know a number of you have written pieces on that space, and I think before we were public company, we probably would not have considered things that were in other countries, but two things have happened. One is, obviously the company is better capitalized at this point, and that makes it more possible for us to think about this, but also the progress we've made in development, the scale we've needed to build out for the MVP, and the automation that we've had to build out there. At this point, I think we described on our prior call, sequencing over 10,000 human genomes per quarter, you know, that's a lot of robotic automation, and so, that makes it easier for us to think about, "Well, what if we have to do that in another country, and partner with another country," and some of the countries that are developing these projects have their own high-end sequencing laboratories and probably will do those in those laboratories and often those are University-affiliated and so forth. On the other hand, there are more countries on the list that have large scale sequencing efforts, and this is not just a matter of buying a few illumina instruments, plugging them in and getting started. And so, it's our ability to do this in a commercial fashion with bringing in the kind of automation and the optimization that we are. We've worked -- been working on this since 2012. So we're pretty far down the learning curve, and other people could talk about, in principle having the possibility to sequence the large numbers of genomes, but we've already done it. We've already sequenced over 50,000 whole human genomes, that…

It makes sense. And then, maybe just a housekeeping question for me, you'd call out one large order in 1Q that you may not repeat, was that order from an existing customer that was already a top 10 customer, was that from one of your, your new large pharma customers?

Yes. So, this is a customer, we started working with them, we got our first order from them in the fourth quarter, and we had it received a much larger order in the first quarter, and the relationship we're building with them is one where, if things go according to their plans, and ours, we would expect that there could be additional orders in future quarters, but they've given us orders that sometimes, it might take a few quarters to be executed on. And so, it's not that if we think of this as a one-time thing that may never repeat. It's just that it may not repeat every single quarter, and so, there may be quarters where there's an order there that could be substantial in size. And then, maybe the following quarter, we're working on executing on it, so it's not a, let's say a smooth every quarter I think from an orders perspective, but it is a, it is in cancer and leveraging a lot of our capabilities there.

Well, great. Congratulations to all the progress of the business.

Great. Thank you, Kevin.

Thank you, Kevin.

And that will conclude today's question-and-answer session. Ladies and gentlemen, this concludes today's conference call. Thank you for participating.

Thank you.

Thank you.