Q2 2020 Personalis Inc Earnings Call
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Marks there will be question and that sort of session. If you will likely I think question Jordan peacetime seemed depress bar and the number one on your telephone keypad.
Thank you I wasn't all like the surgical opportunities tower line corner. Please go ahead.
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Thank you operator welcome to personnel second quarter 2020 earnings call. Joining me on today's call, our John Welch, President and Chief Executive Officer inherent Kashi Vajna, Chief Financial Officer. It's called will include forward looking statements, including statements regarding the markets in which we operate including potential market sizes.
It's an expectation for products services and technology trends in demand for our products personality as expected financial performance expenses and position in the market and the impact of the cobot 19 pandemic on her operation and our customers operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially.
Hi, My current expectations.
Kurt you to review our most recent filings with FMC, particularly service back as described in our 10-K filing for fiscal year 2019, and in our 10-Q filing for a second quarter ended June Thirtyth 2020. The forward looking statements. We provide during this call including expectations for future performance are based on how reasonable beliefs and expectations adds up.
Today personality undertakes no obligation to update these statements except as required by applicable law.
Our press release with our second quarter 2020 result, because available on our website www dot personnel dot 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 five PM Pacific time today.
Now I'd like to turn the call over to John for his comments on second quarter 2020 business highlights.
Thank you Carolyn.
Personnel as has been responding to cope with nine change in Q began responding to cope with no change in Q1 before government shoulder orders that really response helped us have a record quarter in Q1.
Our continued response and execution has been I'll, let us to another record in Q2.
In April we coordinated with the VA MVP program to take the largest shipment of samples from them that we have ever had just before their lab in Massachusetts was closed in response to the pandemic.
The automation that we've put in place over the last three years that allowed us to officially maintain or whole genome sequencing work, even when we had a reduced workforce and our lab as a result of operational changes, we implemented to comply with state and local orders related to cope with 19 and to protect their health and safety of our employees.
As a result in Q2, we were again April so sequence about 14000 whole Schuman, James up 70% from Q2 last year and matching the personnel as population sequencing revenue record we had set in Q1.
On the oncology side of our business, we also had to adapt rapidly.
Some prospective clinical trials that are biotech customers are involved with where it was slowed or stopped to do the pending.
And also revenue from our leading biobank customer fell 98% from Q1.
We were able to overcome these challenges that beginning to ramp revenue from our next platform.
This allowed us to achieve a sequential revenue increase for biopharma at all other customers.
Most of our Biopharma business is for retrospective projects, which had been resilience during this pent up.
Over the last four quarters bio pharma customer orders have significantly exceeded revenue driven by adoption of our next platform and predominantly by large pharmaceutical customers.
As we saw in Q2. These orders are now beginning to convert to revenue.
Another challenge we faced during the quarter was the timing of Biopharma sample receipts. Many were delivered to US later in the quarter. The unexpected. So we were not able to process all of them for revenue. This does however put us in a good position heading into Q3.
Her laboratory operations team executed well during Q2 and carefully arrange the sample processing schedules to focus on via MVP samples early within the quarter, where labor capacity was lower due to shelter in place guidelines.
That allowed us to utilize more capacity later in the quarter for bio pharma sample processing.
As a result, our revenue from pharmaceutical customers increased by more than 20% sequentially.
This more than offset the dip in revenue from biobank, and biotech customers and helped us achieve quarter on quarter growth and our oncology focused business.
Driven by this growth of mixed our overall revenue increased for a 16 consecutive quarter to $19.5 million up 23% from Q2 last year.
All of this was accomplished while more than 80% of our employees were working from home.
Shifting focus to our progress this quarter there are several factors, which give us confidence in the long term growth of our business.
In the month of June we were able to bring our liquid biopsy development team members back into the lab.
You may have seen our recent press release launching next liquid biopsy, which is now available for customer orders.
Both our tissue and liquid biopsy based products have been designed specifically to meet the needs of our pharmaceutical customers and provide data on all 20000 human James.
With the addition of our liquid biopsy product, we expect to enable comprehensive monitoring of patients across 20000, James at multiple time points.
The new cancer drugs extend the lives of patients, but do not eradicate the disease. So growing segments of the cancer Survivor population consists of patients who are still undergoing active disease management.
Our first liquid biopsy product tracks the evolution of what can be hundreds or even thousands of cancer mutations in a single tumor.
Importantly, it can also detect new mutations as they emerge out of the therapeutic pressure.
Note that some cancer patients develop second genetically independent cancer, while being treated for the first.
Our liquid biopsy products ability to see new mutations may also provide early detection of some so-called second to cancers.
I'm extremely proud of our team we pulled together during this challenging time to get this exciting products into the marketplace. We expect to receive first orders in the coming months and while we expect that liquid biopsy revenues will be modest initially we think this new product puts us in an even stronger competitive position as we go forward.
Our liquid biopsy product is designed to be used together with our tissue biopsy products not instead of it.
We expect initial sales to be to customers using our tissue based testing. We're also seeking liquid biopsy capabilities to monitor the same patients overtime.
We believe that our capabilities offer both tissue and liquid biopsy based products and to leverage the synergy between them positions us favorably relative to companies, who only offer one or the other.
In the future, we will be broadening our liquid biopsy product line to include personalized test design for a specific patients' tumors. The team is hard at work here and barring any covert 19 related interruptions or other unexpected delays, we expect to launch this additional offering.
Twentytwenty one.
We have continued to gain traction with biopharma customers, realizing strong order levels once again in Q2.
To frame the pace of customer orders in a different way in the first half of 2020, we received about the same dollar value of Biopharma orders as we received for the full year of 29 team.
As we've explained before it takes time for orders to convert to revenue and the actual revenue recognized from an order maybe less than expected due to failure of individual customer samples to meet our sample quality requirements and other factors that this growth in orders gives us confidence that future revenue stream.
We are winning business based on the value proposition of our next platform.
Our next platform could identify biomarkers, including Neoantigens across all types of cancer, providing comprehensive data across all 20000, given jane's all from a small tissue sample.
Our customer base has also grown substantially over the last year.
While we can't disclose all of our customer names I can tell you that we have now received orders grew a majority of the top 10 oncology focused pharma companies.
As of the end of Q2, we had 32 different customers who have placed orders for next.
From 26 at the end of Q1.
In addition, you may recall that new customers typically evaluate for run a small pilot before growing into larger contracts.
Up until the last few quarters, a pilot order could be around $50000, but with our recent progress. We are now receiving initial orders that can be several hundred thousands of dollars and in a few cases approaching $1 million.
We believe that this growing adoption of next further highlights the power of our platform.
And that the comprehensiveness of our platform is important to our customers.
In June we announced a research collaboration with Sarepta Therapeutics leader and precision genetic medicine for rare disease.
As part of the collaboration Sarepta is working with us to characterize immune response precision genetic therapeutics utilizing our advanced proprietary neoantigen analytics.
We are excited that the value of our platform is now being recognized in areas beyond the cancer.
We also announced in June we are establishing a lab and commercial operations in the People's Republic of China.
Several global pharmaceutical companies have asked us about China underscoring our belief that it's a good time to expand there.
Additionally, we recently announced a partnership with very genomics, the Chinese company focused on the development and commercialization of genetic test technologies in clinical applications.
With approximately 1500 employees and seven different clinical laboratories.
We believe that our partnership with very genomics will be complementary since our customer focus is pharma and there is clinics and hospitals.
We have continued to expand our commercial team in both the U.S. and Europe.
In particular, we've added business development staff with extensive commercial experience in companion diagnostic development and as a result, we are now engaging with an increasing number of biopharma companies for potential companion diagnostic development programs.
We've also expanded our quality and regulatory team to support these efforts and in June we had our first FDA pre submission meeting for a single site.
May for next which went well.
I'd now like to update you on the population sequencing part of our business, which is sometimes referred to in the field has population genomics.
As you may have seen in our June press release, our population sequencing business hit a big milestone with a 75000.
Full human genome samples sequence and we're well on track to reach 100000 by the end of this calendar year.
This could make personality first for profit company ever to sequence 100000 hold human genomes in the United States and we're really looking forward to achieving this milestone.
Our work with the VA NBP represents the largest population sequencing effort within the United States.
Okay now targets enrollment of 2 million veterans and over 825000 veterans have enrolled so far.
Personnel as has been contracted so far to sequence over 116000, VA MVP samples with approximately 41000 remaining to be sequence.
Having already received population sequencing orders totaling over $145 million from the VA NBP.
We're now expanding our commercial team to address and extend our reach into is projected to be a multibillion dollar population health market.
We expect our unparalleled experience with the VA MVP program.
Position us well for new opportunities in population sequencing.
Given our clinical experience and work with pharma. We also see an opportunity to help transition population research population health and to involve pharma in the future.
Our population sequencing and Biopharma businesses share a unifying theme in the comprehensive and large scale genomic characterization of human samples.
Both our whole genome sequencing at our next platform cover all 20000 human James.
Because of their shared underlying technologies and operational implementation, we achieve considerable synergy between the two businesses.
I would now like to expand on the synergy between the population sequencing and oncology parts of our business in particular synergies that go beyond the operational and cost synergies already achieved.
Our extensive experience with whole genome sequencing combined with our deep expertise in cancer has allowed us to launch whole genome sequencing from cancer samples.
We believe that this will be increasingly important to in the future.
Particularly and cancers, such as breast and prostate which have relatively low mutational burdens.
Using our cancer whole genome technology will identify up to 20 times symmetric variance.
To serve as the basis for personalized cancer assay as.
We believe this will let us achieve high sensitivity, even in cancers, which have low mutation rates, which had been surgically resected or with shed relatively low amounts of cell free DNA into the blood.
We believe this can be a leading technology in some very large market opportunities and we'll have more to say about this has these product development progress.
Before I wrap up I'd like to give you an update on another pipeline product.
As many of you know we had been working for over three years on a combined laboratory and informatics projects to advance our neoantigen characterization capabilities.
We believe that Neoantigens are the crucial centerpiece of a new generation companion diagnostic Biomarkers, we expect our biopharma customers will apply this capability to mainstream cancer drugs, such as checkpoint inhibitors and also to experimental personalized cancer therapies, which explicitly target neoantigens.
Our new advanced capability May also be is for development of drugs that are designed for use outside of cancer such as gene therapies.
This personnel as R&D project has required multiple proprietary technologies, including genetic engineering of proprietary human cell lines mass spectrometry to identify and quantify peptides binding to chalet.
And the training of novel machine learning algorithms.
Our data shows that this project has achieved leapfrog advance in this field.
We expect to launch this capability as part of our next platform in the fourth quarter. This year.
In summary, I'm very proud that our combined business has shown strong brazilians throughout the pandemic customer adoption for next has been excellent at our pipeline of compelling new products is rich.
We believe these factors among others put us in a strong position for long term growth.
With that I'll now hand, it over to Aaron per our financial results.
Thank you John and good afternoon, everyone.
Revenues for the second quarter of 2020 were $19.5 million.
Up 2% from 19.2 main for the prior quarter and up 23% from 15.8 million for the same period of the prior year.
The $19.5 million with a new record high for quarterly revenues.
The quarter on quarter revenue growth was driven by an increase in volume for genomic testing services provided to biopharma customers.
Biopharma and all of their customers accounted for revenues of $4.7 million for the second quarter, an increase of 8% from last quarter.
In the second quarter revenues from our next platform began to ramp and exceeded $2 million.
Also to note.
The revenue increase from next more than offset the sequential decline of over $1 million from both our biobank customer that had sample collection in shipment delays due to the pandemic.
And also biotech customers that were impacted by the slowdown of clinical trial.
For the second quarter, the VA MVP revenue of $14.8 million was flat from last quarter and was 73% higher compared with 8.5 million for the same period of the prior year.
The VA MVP unfulfilled orders at the end of the second quarter were $39.3 million and based upon current estimates.
We expect the unfulfilled orders to convert to revenue over approximately the next two to three quarters.
The balance of the unfulfilled orders will decline from the fourth quarter of the prior year through the second quarter, but the current year since the annual New order is typically received late in the third quarter.
Gross margin was 24% for the second quarter compared with 21.1% for the prior quarter.
The VA MDP gross margins continue to be solid and once again were higher than the corporate gross margin reported for the second quarter.
The VA NBP being higher volume and a single service offering has been automated and does not require a significant amount of labor and has a very efficient sample test process.
In the second quarter, the negative impact to gross margin from Cobot 19 was approximately 80 basis points from higher labor costs related to overtime pay.
Also we had a 100 basis point impact from higher facility costs related to an increase in lease rate.
As a reminder, we may see gross margin variability in the future as there are a few moving part.
Such a sample receipt linearity from customers the mix of customer projects and capacity utilization of labor and equipment.
During our last conference call, we mentioned our initiative to build out a map operation in China, This year, which will add startup expenses beginning in 2020.
Most of these expenses will be classified as SGN a this year.
We expect revenue from China to begin ramping throughout 2021.
During this ramp up period, we expect to have gross margin headwinds from the under absorbed labor and overhead.
Operating expenses were $14.2 million into second quarter, compared with $10 million for the same period of the prior year.
R&D expense was 6.5 million for the second quarter compared with 4.5 million for the same period last year end desk DNA expense was 7.7 million in the second quarter compared with 5.5 million for the same period last year.
Net loss for the second quarter was $9.3 million compared with a net loss of 5.9 million for the same period of the prior year.
The net loss per share for the second quarter was 29 cents and the weighted average basic and diluted share count was 31.7 million compared with a net loss per share of 89 cents and a weighted average basic and diluted share count a 6.6 million for the same period the prior year.
Now onto the balance sheet.
We exited the second quarter with a strong balance sheet with cash and short term investments of $105.2 million.
Second quarter cash flow from operation with the usage of approximately $15 million, primarily due to the net loss and working capital needs.
During the quarter, we maintained our buffer inventory level of approximately $1.5 million to help mitigate potential supply chain disruption.
Now for discussion about our guidance.
During our May conference call, we did not provide any 2020 revenue guidance due to the uncertainty from the pandemic.
And although we had a set a solid second quarter too much uncertainty remains about whether or not work conditions for us our customers and suppliers will remain the same as today or change in the near future.
Potential changes could have an adverse effect on our financial result, and therefore, we're not providing revenue guidance for fiscal 2020 at this time.
We plan to provide an update to this information during our next earnings call.
Now I will turn the call back over to the operator, Jerome can begin to Q any session.
Operator thanks.
Thank you at this time I would like to remind everyone characterizing let's jump. Please press star then the number one on your telephone keypad.
Your first question comes from July enough data sentiment from Cowen Your line Snow Ben.
Hey, guys take just a little on for Doug Schenkel.
You posted a be updating truck auto under the update given that you attack on track to complete the project.
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How long will put most of the data we've been given to get on track to finish hundred Casey granted most often we noticed that DWR that has integrated electronically took a data has more value do you envision that to happen Adobe MVP project.
Yes. This is John last I'm happy to answer that actually a part of the key part of the advantage that the million Veterans program has is that veterans have all been on the same electronic medical records system for years and so they already have that in electronic format and unlike other population sequencing after.
They don't have to try to harmonize results from many different electronic medical record systems. All of the patients that are handled by the the a and b P or patients who would be had been on the same electronic medical records system. During their time as patients who are the VA. So it's actually a really a major advantage that day.
They have I would also say that we're coming up on 100000 patients Thats nowhere near finishing the project. The project is to sequence and stick to enroll 2 million patients. There are actually 825000 samples that have already been collected so actually we're just beginning to scratch.
The surface of the of the project we've been contracted to sequence 116000, and we anticipate that there can be an additional order.
Still this year they will extend the program even further.
Thank you.
If I heard you try to do it already doing that you already have data.
The electronic and took a needle if all these individuals.
Do you plan to do that in future.
Our customer already has that information the VA, they're the ones who have that health record data.
They are the ones shattering it will be their database, they're the ones paying for it but they do already have all of that health record data.
Got it and you recently participated in the mix and you also said that that is so there's your local subsidiary opportunity. How do you plan to check Ajay that given that Ngs testing has just begun gaining traction there and that have already fuel high profile. So quickly.
So what would be the key advantage would you call into a.
Cool technology or is that some other stuff that you think of working on.
Yes. So thank you for that question. So the key reason that we are expanding to China is that there are international pharmaceutical companies that we already work within the U.S. and Europe, we're conducting international clinical trials and so they have patients who are being enrolled into those clinical trials.
From China now in addition to other countries and we've already been sequencing samples from patients that are from countries outside of China, but our pharmaceutical customers came to us and said, we're not allowed to export the samples of patients from China, We can't send them to you in California.
They have to be sequence inside China because of the regulations.
I'm, China, and so they've asked us to set up this additional capability using our proprietary technology our next platform.
To be able to run that inside China.
Got it thank you Dave.
Hey.
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Your next question comes on line of Kevin Degeeter from Oppenheimer. Your line is helping.
Hey, guys.
Congrats on a really nice quarter, thanks for taking my questions.
You just.
Talk a little bit about the recently launched liquid biopsy program.
Specifically in addition to.
Yes breadth of coverage how else do you envision differentiating the product.
In the market at least initially and then.
In terms of the backhaul incremental our second generation product that would provide.
Additional functionality for.
You know really kind of personalized precision oncology program. She has kind of walk us through.
The developing steps that may be necessary to add functionality.
Sure. This is John so they again this year or liquid biopsy first of all his paired together with a tissue biopsy and both liquid and tissue has advantages and because we have both that's actually a relatively unusual offering many companies that offer liquid biopsy products don't actually habit tissue biopsy.
Products at the tissue is the only way to see our M&A. A in addition to the DNA and it's the only way to see the immune cells that have actually infiltrate the tumor and so having the combination of the tissue and the liquid is an important step.
Say that in addition to that the we have designed our product because it's it covers the entire XOMA. It doesn't just see mutations that that people might expect it because its intended to be used in pharmaceutical research.
Hey, pharmaceutical companies are interested in understanding when a patient response to a drug for a period of time, but then eventually stops responding what what changed about the tumor what would the mechanisms by which the tumor began to.
Escape from the effects of the of the drug and so being able to see the new mutations that occur wherever they are in the genome.
Wherever you are in the exome.
Is really important to them.
Most other liquid biopsy products or about 40 times smaller in terms of the number of genes. They look at they traditionally just look at the the cancer driver genes that targeted therapy jeans, and that's that's fine Chris as it is a diagnostic but if you're trying to understand the biology of the of the tumor which is often the goal in pharmaceutical research.
Then it's important to be able to see all the biology.
Not just the to some extent the biology that was known about for.
Decades.
So I think that hopefully that answers your question on it on the Exomes side in terms of the personalized products.
Personnel as has designed a variety of.
Tests over the years, both for ourselves and for customers, who is actually become quite expert at that and so we anticipate that the ability to make.
Personalized assays will be something that will leverage those same skills. So we're pretty optimistic about that.
I think that a key skill in being able to manage that kind of a program is actually the informatics of being able to keep track because you have a different assays for every patient and different patients may have different time points and so forth.
So there isn't that sort of a logistical complexity to all of that and that's also an area. The personnel says a lot of strength, we have developed assistant we call our symphony system.
Which which keeps track of all the internal.
Dramatic similar laboratory in and they are processing operations and that's been a fantastic asset for us at this point and we think will also help us real quickly to bring these personalized products market.
Okay, Great and then maybe as a follow up question can you just comment on near the potential impact on average contract size from the addition of liquid biopsy more explicitly.
You should we think about the customer that wants ball tissue and.
Liquid biopsy functionality is essentially.
Yes, doubling the potential economics personalities or do you anticipate more of a bundled economic model where.
This increase in functionality.
Isn't necessarily going to translate to a.
You know linear increase in an economics.
Yes, so the expectation is that this willing to lead to a significant increase in the economics and also then the biological value of the data that we can deliver.
We have a few customers now where we actually already provide data at multiple time points from tissue and in those cases, we've already had cases, where customers are paid up to $16000 per patient because they're either getting data from multiple time points via tissue. We think that kind of thing can expand quite substantially as we have.
More and more customers it where it's easier for them to have multiple pipelines, which when we looked at the clinical trial protocols of many of our largest pharmaceutical customers. What we see is that they're often actually already collecting those kinds of samples we wouldn't be unusual and a clinical trial for there to date 20 or 30 different time points.
Which they the patient would be being dosed and often when the patient comes into the dose that experimental drugs. There. There are laboratory tests that are conducted at each of those timelines. So we think this can fit quite well with the way the clinical trials are already being conducted and it will provide.
Dramatically more insightful information on the trajectory of each patient.
Great. Thanks for taking my questions.
Great. Thank you.
Your next question comes from July to Derik de Bruin from backup Omega No lights and open.
Hi, This is de on for Derek I'm, just wondering on next what do you see average order size that you're seeing what is that why did each order encompassing is it just DNA sequencing or they ordering more.
Yes. So this is so this is John our next platform includes both DNA and our name sequencing and from that combination. We also capture the complete T cell and diesel repertoire. So it's really quite comprehensive that's where each tissue sample that we have that now that we have multiple time points with.
Biopsy that could be included as well so that that gives you an idea of the data per patients.
Typically we the orders we received will cover all of the samples that the pharmaceutical company has collected during the course of a clinical trial. So that can be hundreds of samples in some cases, a thousand samples or more and.
Many of the orders we receive a retrospective so the pharmaceutical companies already has all of the samples are they understand what happened in the trial at least in terms of the clinical outcomes and now they wanted to understand that the molecular level what was different about all the different tumors and how they progress. So that's that's off of the scale of what we contract or with some customers.
There are larger blanket orders, which are set up basically to put a certain amount of money.
Sort of against the accounts and then individual projects are in a sense. They are just charged to answer that account and as they account gets used up then they'll they'll put more money against it. So yes, that's a little bit contracting a framework, but that's been in general the the contracts are four groups of patients who were the patients are they predict.
Other clinical trial.
Or groups of clinical trials that have a related trials of a particular drug.
Great. Thanks.
Yes.
Your next question comes from the line up can you guess happen from Morgan Stanley Your line open.
Hey, guys. This is Edmonton invitations, thanks for taking the questions on that.
Hi, just in terms of your next liquid biopsy I know you guys talked about economics, a little bit earlier, but are you.
Do you guys mentioned that.
Solid tumor single test things about 16000 per sample. So in terms of the liquid biopsy caught up with a ISP b.
Somewhere within that range or even higher maybe.
And.
In terms of your customers that are still on the old platform can you remind us what percentage of that is remaining today.
Yeah, sorry, so they you know what do we think about the next liquid biopsy, we anticipate that that different customers will have different numbers of time place to want to look at we anticipate that really on some customers. We'll just do as straightforward comparison of what they see with tissue and what they see with.
Liquid biopsy.
We don't expect those to be exactly the same built there are the biology is different for the two and so there'll be some genetic variants that overlap, but as you would expect it would be quite a few do not overlap, but people may want to characterize that and get a feeling for it and began as they start to explore the numbers of time points or sensors that people probably will stay.
<unk> with modest numbers of time points, and then as they see the utility of that but the number of time points per patient may go up in up enough that there's a there's a lot to be seen from what we understand the dynamics of tumors can actually be reasonably rapid in terms of changes you can have.
You know when people have sequenced the metastasis ease of a patient and then also sequence the primary tumor the same.
Patients you can end up with twice as many genetic variance in the metastasis as they were in the primary and so that's a lot of new variants to be able to be to be saying and so it's a lot of dynamics to understand the the biology of and so those are all the things. If you think we think people well.
Start to get used to being able to see if it does that up to quite a bit of sequencing I'll comment just as an interesting ANNEXA that isn't internal calculation. We were looking at a information the alumina published on their had an industrial conference earlier in the year. They indicated that last year on alumina platform.
As worldwide. The total sequencing was about a 150.
Bites and if we look at the amount of sequencing.
Personnel us conducted in the second quarter, we were probably in the range of 3% to 4% and that kind of a number so the scale of sequencing that we do.
So you very large this comes with the fact that we're doing a lot of whole genome sequencing that are asked to send all be 20000 chains. So they have become a pretty large scale.
Sequencing center, and we think it's part of the power that we bring to the field is to have come fairly expert at being able to manage that and the data horn.
Got it.
For Darren and so you'd ask question about the liquid biopsy. So just to make sure that your calibrated. So our current pricing today for tissue with next is ranging between 3200 $3500 per patient.
Liquid biopsy, you know the pricing is probably going to be somewhere between 15, and 20% more than that and as John was explaining we're gonna have the opportunity for multiple time points. So you know the average dollar per patient could be 567 times of what we're getting for tissue. When you look at it.
Patient standpoint, and then the other question you had about.
What percent of our customers are on the old platform versus next so I had mentioned in the prepared remarks that next revenue exceeded $2 million in Q2.
Next revenue was a little more than half of our total biopharma revenue of $4.7 million. So we're starting to ramp next now I will always have customers on the older platform because they build that need to remain and keep having data consistent for clinical trial purposes on the old system or the old platform, but we're starting to see.
More and more conversions to next at this point in time.
Got it and in terms of the NBP side I kind of just wanted some help understanding the increased enrollment to 2 million participants. They haven't provided a specific timeframe for that I don't think and I'm just trying to understand how that impacts everything on your end does that mean, a more samples we see.
Weve per batch more frequent sample receipts or.
Maybe a bigger task order.
Expected in the next quarter.
Hi, this is having a happy.
Yeah. So that they are the MVP are you there increase in target enrollment up to 2 million is likely to take something on the order of another 10 years, a they started enrolling patients in this.
In the year 2011, they've been able to collect about 100000 enroll about 100000 collect samples from about 100000 per year since that time and so by early this year they were up to about 825000.
They have samples, while they have hospitals and clinics all over the United States that they've been collecting at during during covered they have had to shut that down so they've they've stopped collecting samples live at the hospitals, although people can continue to sign up.
Online.
The collections will be way down during this period of time, but but as we get passed this they've indicated that they expect to go back to collecting samples and it's really the fact, they originally were targeting a million samples that they began to get closer and closer to the to the million. They said well we're going to do when we get to embed we're really going to stop this is so valuable.
And so they they concluded that they would they would expand the target. They said no we're going to keep going.
We're going to set a new target of getting to a million and if you think about at the number of veterans who receive their medical care.
From the VA health system, depending on exactly how you counter might be something in the seven to 9 million range. So.
The original 1 million target probably represented maybe 14% of the patient population, the 2 million targeting you're probably approaching 25% to 30% of the patient population you can imagine that as the cost of sequencing keeps coming down and they continue to gain experience with this.
You can imagine in the future, it's likely to be that they would want to sequence all veterans in the in them in the V.A. system I think that will just become.
Standards. So we may have some more years for that right now a they have so many more samples then they've contract that us for that even if they didnt connect to the collective live sample.
For several years, they could continue to could contract with us because they've selected over 800000 samples, but they really contracted with us so far for 116000 really limited by the budget. So we do continue to see.
Ongoing bipartisan support for veterans, both Republicans and Democrats tend to be Outspokenly supportive of.
Veterans and the and the VA and so we anticipate that the budget for this as a lot of potential to continue to grow over the years.
And this is a program that has many years to to run has as we've said we also anticipate right. Now. This is this is our one customer this category given our experience here, we're beginning to explore how we would expand into other population sequencing projects that could be in countries all over the world and so we think this actually could be a pretty nicely.
Thanks.
Business for us as we look out over the coming years.
Got it. Thank you that's very helpful. Thanks, guys.
Thank you Barry Thanks.
Your next question touched on the line up my message, though from BT <unk> Your line open.
Okay.
Hey, Mark Hey, guys. Thanks, Thanks for taking the questions.
My first one is just.
Kind of elaborating on that last question about pop seek.
Over the last several years, we've had clearly genomics, England all of us.
You know as you just alluded to I think at one point there are approximately 60 countries in the world with.
Population sequencing initiative, so certainly a lot of genomes for Exomes to go around.
You know you talk to John about potentially expanding looking for new opportunities and pop seek I can you give us a sense for whether or not you know your initial focus will be more on global government.
Or could there also be some with health systems, you know geisinger and you know healthy Nevada project have looked within health systems. So could you just give us a sense for how large could have an opportunity. You think this is and where you think some of the low to intermediate hanging fruit is.
Sure. Thank you for the question. So yes, we certainly see a lot of projects our sense is that they certainly there are national projects. What we find is there are a few countries that already have well established large scale sequencing infrastructure typically in academic settings in or whether it's the broda Institute in the U.S. or the Sanger set.
Everything going on that kind of thing, but actually it's not that many countries has so many of the countries that aspire to have this kind of a program they want to have it in their own country, because they're trying to build up they understand genomics is an important part of the.
Sure Hi Tech economy, but on the other hand, you know that they need to have people trained they need to have an away that this can be built and so often we find that these countries have funding for this kind of thing, but don't necessarily know where have anybody with the experience to know how to go about doing it at this scale. So we've been beginning to engage with.
Countries outside the United States and some of these programs are actually remarkably well funded even just from the government point of view.
Yeah, but but there what they're looking for somebody who actually has a track record where they can how about you being able to actually do the job and not essentially have to learn on the on the job and since we have already done. So many genomes. We're one of the few companies that would be in a position to do that I'd say that the you bring up about health systems I think that's the certainly a quick points what were.
Also interested in and we can increase about this as well is the role of pharma because often what you're trying to fine. In addition to the benefits for the patients who are sequence often this is actually research to try to understand how you advance.
Pharmaceutically and so the having the involvement pharmaceutical companies upfront and helping to figure out are going to prioritize this what the goals are and yes, helping to fund. This we think that actually make these are really quite meaningful in terms of their medical contribution and also you didn't help solve some of the financial equation.
To make this work overtime. So I can imagine there being consortia that involves governments and also health systems and also.
Pharmaceutical companies all working together you know with first analysis, perhaps though the company that's actually implementing this and setting up the capability wherever it needs to be geographically.
All those other stakeholders also participating in terms of their.
Expertise their use of the data and their funding of the of the program.
Great that's helpful and congrats for rolling out the liquid biopsy product.
Can you give us a sense obviously.
We're seeing a lot of liquid biopsy products not a lot, but some that are having a pretty significant impact.
Pretty early on so can you give us a sense for how impactful you think this product will be and then as you roll it out.
It seems like.
Especially the majority of your top 10 farmer.
Companies, probably we'll have some interest.
To what extent have you talk to these pharma companies.
You know many of them have probably already used to liquid biopsy solution. So can you just walk us through some of the conversations you've had with some of pharma partners about.
The incremental utility of looking at 20000 genes over some of the existing products.
Yeah, we have actually we have been under CDK talking with a number of our pharma partners for some time about this product I'd say, there's there's a lot of enthusiasm for it because it's a different kind of product I mean, they also understand that will take a little while the figure out how to learn it and what the best uses our but but I'd say, though.
One of the nicest phrasing has ever that I heard the other day from one of the as pharma was we need to not just look under the lampposts, where we've been looking for 30 years that we already know whats in it you have far haircuts and so forth. We you know what we need is to see the new biology that we haven't seen before we know that there are things, we don't understand because if we understood than we already.
I have solved a lot of these problems and so the ability to really almost for the first time be able to look all the way across all the genes and see what's changing and to do it at a price that's now not in the stratosphere.
That makes it something sort of opens up a new opportunity for them. So.
I think that the fact that theyve worked with other.
Small panels that are involved or liquid biopsies space gives them an understanding that the up this is practical it's possible, but I think they also feel like they've had blinders on and it's like can we now take the blinders off and actually as you know open it up and instead of looking through a strong and we actually see the whole view and see the whole landscape and so that's what we see as a lot of excitement about the potential of.
What are we going to see we see the whole landscape and.
So I think it'll be an exciting time in the next year or two as you see the discoveries that happened using this this new kind of capability.
Okay, and then on the bio pharma side with liquid biopsy no I recognize the market potential is significant especially when you look at global clinical trials.
But there are obvious use cases as liquid biopsies from for monitoring in the clinic.
So it's not Super clear to me what your intentions are on the E.
Generating clinical utility data potentially taking that through our clinical pathway.
Yeah, Great question. So I mean, you heard us mentioning that we're beginning to take our tissue based next through the FDA.
Thats part of building, a corporate capability and they already sort of at the 20000 Jane level with the FDA, They actually saying I think almost quite enthusiastic about what we're doing but you can imagine that they you know if we're going to head into clinical opportunities. Those will also be things, where we're going to want the appropriate.
Regulatory ER credentials as well and so that's part of what kind of how we look forward. If this certainly the potential for monitoring whether it's after surgical resection or if it's after and if you're monitoring a patient that's currently being.
Treated or even looking for recurrence of cancer that those are all things. We think that there will be two types of products, one will be ones, which have a fixed footprint.
And that's what our XOMA scale product.
We've introduced now is we haven't yet it's a huge footprint. We can look at all of the genes but.
But there isn't you know there's an expense to be able to to do that we think that when we look at some of these clinical opportunities that may be where the more personalized.
Product can fit in the ability to design a pay an essay that just captures the variance.
For that person, obviously, we have a great platform upfront to be able to identify the variance and for Medicare types. The exomes scale that we can handle what next will be great for finding.
Reasonable number variance for that purpose, but if you look at cancers like breast cancer and prostate cancer as I mentioned, there just aren't a lot of variance the mutational burden is low and so if you make a personalized essay with just a small number of variance you'll be limited by the number of molecules are available to look at.
They are being able to eventually.
Okay marry our population sequencing technical expertise in whole genome sequencing with what we're doing in cancer, we would anticipate being able to start looking at.
Finding the variance using cancer whole genome and that's the footprint is about 20 times larger and so in cases like that you can take these low mutational burden cancers or ones that are low shutters or ones, where you know that this you know the level of the tumor maybe really really tiny because you've tried to just take a little bit all by surgery and you might actually.
Successful with that so the levels are really super low. So if you ought to be maximally sensitive for that you may want to look at a thousand variance even several thousand variants and for that the power of whole genome to find that many variance, which you can then bake into a personalized say.
I think is likely to be unparalleled personnel us we'll be in a position to do both have both the extra home and the whole genome and we'll have both the tissue side of this and the liquid biopsy side of the so we think we think we're going to be in a position to do things both on the pharma side and ultimately on the clinical site.
That's great and I guess, maybe a question on the gross margins, obviously theres likely a lot of room for upside over the next several years.
You know given that you do.
Pretty darn deep sequencing of the genome and the Exosome.
Maybe John maybe strategically how should we think about gross margin expansion over time.
You know what the observation that you probably do some of the deepest.
Sequencing of anyone in the marketplace you can you get to 60, 70% gross margin over the next.
Three to five years.
I'll, let parent Aaron speak to the some of the specifics I will just picked up every two elements that one is scale makes an enormous difference that they did.
Operation like we have there's a certain fixed costs associated with that and then the early years of any company in the space you always see this with it as the volume grows you just amortize the fixed cost.
Much more efficiently. So I think that's one step the second step is for the last while maybe last several decades actually the cost of sequencing has continued to come down.
We are optimistic that theres, a lot of technological headroom to for that to continue to be the case and so it personnel as part of our intentional strategy has been we're usually designing essays not for the technology of today at the time, we're designing them were often designing them for the technology that we anticipate will be coming in the coming years.
Which will bring the costs down so often that's true when we bring out these products to start with you say Wow, you're using close to I don't know trillium bases of sequence on one example that could be kind of expensive. It is but the United a few years I don't think a clean basis cost as much as it does today and we see plants in the second quarter.
I want to say something like one and a half pedal bases just in three months and so you know that scales going to keep growing up we think of the cost of that is going to come down dramatically over time and the I think that just sort of heads isn't the right direction from a gross margin point of view is made up that's just my broad picture of inherent cuts.
Certainly speak more articulate to though some of the specifics Kerr Hello, Mark Yeah. So in terms of gross margin. So if you look back into 2019, you know we had gross margins in the mid 30% range and we actually hit 37% a year ago.
So simply put today, we're in the mid Twentys, primarily because of under utilization of labor and overhead and that's where John the script scale matters. So today when you look at.
Our BA business.
Very automated doesn't require a lot of labor and overhead. So most of the costs are variable versus fixed on the bio pharma side of our business. Most of the cost are gonna be fixed and so we're probably running you know call. It 50% of our total capacity on the bio pharma side of the business.
So volume matters and another way to look at it would be for every maybe incremental $1 million of bio pharma revenue it would add.
Close to 120 and up to 150 basis points, assuming similar mix as we saw here in Q2, and so you can see that.
By adding four or $5 million it gets us back into the 30% range pretty fast in terms of.
Longer term as John mentioned scale matters, so we see ourselves getting to.
50% gross margin as we get the scale, meaning 200 million a revenue or more.
Once we get to 300 million or so there's no reason why the gross margin can't exceed 60% in terms of deep sequencing that you mentioned you know today, our VA margins whole genome sequencing, it's very comprehensive sequencing and it's very profitable the gross margins are higher than corporate average and so.
I think we can get there and it's just going to be a matter of time with some volume.
Excellent. Thanks for those questions. Thanks for those responses and congrats on a good quarter. Thank you Mark Thank you.
Your next question comes from the line and send it dropper from Louise airline element.
Hi, Thanks, very much for taking my question a lot of my questions have been asked and answered. So maybe just a couple of quick ones.
First.
On the Dod business, you said was down 8%.
Obviously didn't stop the sequential revenue increase, but just maybe a little bit more context. The magnitude there and then as that business started coming back online or what did the mitigating factors and when would you expect that beginning back up to speed.
Yeah. So there's a tremendous customer that a lot of the work that they do and collecting samples for biobank there they're.
Collecting lives a sample lot of collecting them.
Hospitals from patients, who are having a surgical resection of tumors and.
That kind of supplementary activity was just shut down it in hospitals all around the world in the last six months here and so a lot of their ability to collect those samples, which essentially where prospective samples. You know came was very substantially cut back we do see that beginning to change get a sample collection is happening in.
Countries all over the world and other parts of the World actually are recovering from the pandemic, a little sooner than the United States and so some of the sample collection is that are happening in some of those other countries are actually beginning to continuing I won't speak for their business, but that our sense is that you know there.
As progress in those other countries and that in time as the U.S. gets passed this you know that's a business that will they will come back as well and we think it actually can be you know a great because it's part of the but do you think about the data strategy for business like US obviously, there are choices, where we could sequence and pay for everything and build our own database, we're doing some of that but part of our.
That is also helping other people who want to build their databases because they have specialized expertise of various kinds of this customer in particular they have.
Some areas in which they are really world leaders and so as they're able to get the samples back on again will be helping them to build their database. So that's a business I would expect too.
Easily recover 100% they'll probably have some catch up mode that they're going to want to do once they get to a point, where they can get back to two processing samples.
Great Thats really helpful and there may be one fund this final follow up.
Response to our fall to a question asked earlier about the size you talked about.
In a clinical trial it could be maybe 100 up to 1000 tech patients when I take about the big cancer clinical trials I'm thinking 3000, 5000 global patient.
Is there is only a sub segment of those patients at the next is applicable for the samples are applicable for they're only going to do a partial portion. We just trying to sort of match up the numbers you said when firstly when I think about a big cancer clinical trial. It yeah, I think about two four or 5000 global patients I'm, just trying to see whereas the difference.
Is there and the numbers thanks.
Sure Yeah, I I'd say that you know there can be trials of a lot of different sizes. We work with some people who as you know they're doing things in phase one and that they don't let the adult patients and some of them get up to the hasn't hundreds and then certainly by the thousand number comes to mind I'd I'd have to think about whether we've handled ones that are larger than that there's not a there's not a.
Capacity problem for us to be able to handle that so I mean, we've sequence 75000 human genomes for the VA. So if somebody has a clinical trial and they need us to sequence 5000 tumor samples that wouldn't be a problem I.
I think it's a question of how the individual pharma is handling it and so forth is in general we what we do see are all of the samples that they have collected in a given trial.
Got it okay. It's really helpful. Thanks for all particularly questions.
Okay. Thank you.
Your next question comes from the line up slaying Bakula, Rebecca from 80 lean tight satellite television.
Thank you good evening John.
This is all came from Pennsylvania.
I can't talk a plus impact most of.
Most of my questions have been asked but just couple of them. So.
You are talking in terms of future products.
Talking about how you coming up with the platforms can come it's going to combine book lab data and some informatics data.
And then yeah piece.
I'm glad to launch that in the fourth quarter of this year.
Outside of such and non are lot other milestones out there and after you can expect in the next six to 12 months.
Yes. So this is trying to I think they perhaps the piece you're referring to is our new neoantigen ranking capability and that's there. We yeah. That's so there that the data is actually not mostly sequencing data, it's mostly mass spectrometry beta and we've actually had to genetically engineer our own cell lines are on humans.
Cell lines to put you know just a single HL a into each cell line and then so see which peptides mine to them. So I'd say, that's an example of building content that content is then use for training neural networks and so this is they artificial intelligence part of what we do I had it not use.
Term artificial intelligence too much because it's probably overused, but it is we actually do have pretty advanced algorithms in that case and the really key thing is also having that data the laboratory data to do the training because nobody else has the kind of human cell lines that we have it took us years to figure out how to actually genetically engineered.
I wasn't hasn't grow properly with the right.
Features that we watch it and so forth so I'd say it's.
It's a content strategy, but ultimately that content is is data that it comes from having proprietary.
Developments, you know with human cell lines in the laboratory, so I think that.
That kind of concept as one we're not we don't have any other programs that I'd like to announce at this point, but obviously you can imagine if we feel like we've been successful with one of those kinds of things we would be open to exploring additional kinds of opportunities we can use machine learning and.
Quite a few different places and our informatics and sort of once you have a chance that gets good at that they they ultimately can see many different ways to apply it and so we don't always necessarily announced all those things. So we just end up with better performance, but we havent necessarily described all of those areas. If we if you're interested in that we could go back and look at.
Some of those scientific presentations, we've made a conferences and I think we may and that's the posters on some of those topics. They know that get out machine learning kinds of things and all the different areas that we have.
Applied machine learning to.
To optimize the algorithm so we have.
Okay. Thank you and then the last question for me is.
You know how do you see or discovery relationship that you know initiated that set up to grow over the next next couple of years and also do you plan to makes such additional relationships.
The discovery kind of moved relationship and.
The near future.
The other companies.
So I'm sure you're taking a sarepta.
Yes.
Yeah, Great, Yes, I think they Sarepta. One is it is is a great example of opportunities for us that are outside of the cancer area and it you know I think people just beginning to realize that this concept of neo antigens that we've been working with now for quite a few years is something where new antigens can be generated a it in.
Medical settings that are not cancer, and particularly as you start having genetically engineered autologous products being used as part of a drug therapy.
This gives a lot of room for all that genetic engineering ends up being like in cancer you'd call. It mutation and when you're making a drug you call check engineering and it sounds like is the thing, but it's the bull things where you're introducing.
Different genetic sequences into the body, which were not there naturally to start with and so those will look like mutations and they could spur.
Immune responses either ones you want are ones that you don't want and so being in a position where are you can.
You know how people think about that and have data to be able to do that we think can have opportunities.
Additional opportunities are outside cancer, there sarepta is quite a leading edge customer with us. So frankly, congratulations to them permitting at that the head of you know something of a new traffic.
I think that there will be additional opportunities like that it's probably too early to Christmas anything specific commercially on that but it is definitely an interesting area for us.
Thank you. Thank you John for taking all my questions Yeah happy too.
No no further questions at this thing I'd now like to turn the call I'll turn it back to Mr. John with these convenient.
Thank you operator, and I'd like to thank our customers for their business and partnership I also want to thank our employees for their hard work, particularly during this covered period of time in putting us in an excellent position for long term growth.
This concludes our call for today, we would like to thank everyone for attending and we look forward to talking with you again in another three months. Thank you.
This concludes todays conference calls you may now disconnect presenters please standby.
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