Q1 2022 Personalis Inc Earnings Call
Okay.
Good day, ladies and gentlemen.
And welcome to the personality.
First quarter 2022 earnings conference call at this time, all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
If anyone should require operator assistance please.
Press Star then zero on your Touchtone telephone.
As a reminder, this call may be recorded.
I would now like to hand, the conference over to your first speaker today that as Caroline corner Investor Relations. Please go ahead.
Thank you operator welcome to personnel for first quarter 2022 earnings call. Joining me on today's call are John West President and Chief Executive Officer, and Aaron Tachibana, Chief Financial Officer. All statements made on this call that do not relate to matters of historical facts should be considered forward looking statements within the meaning of U S security laws.
For example, any statements regarding trends and expectations for our financial performance 2022 cash use cash runway new orders product services technology milestones and business outlook. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations.
We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q for the first quarter of 2020 to be filed today personnel undertakes no obligation to update these statements except as required by applicable law.
A press release with our first quarter 2022 results is available on our website www dot personnel of Dot com under the investors section and includes additional details about our financial results. Our website also has our latest SEC filings, which we encourage you to review a recording of today's call will be available on our website by five PM Pacific time today, now I would like to turn the call.
To John for his comments on first quarter business highlights.
Thank you Carolyn personally I also continues to make progress on our strategic priorities with the aim of becoming a leading provider of the most comprehensive and extra oral cancer genomic test and ultimately, enabling a new standard of oncology care.
To help patients live better and longer lives.
In Q1, we grew our oncology revenue by 53% over the same period of the prior year.
Customer demand for our next offerings continued to be strong and new orders were again higher than the amount of revenue reported for the quarter.
Our pharmaceutical customers are increasingly seeing the value of our platform and incorporating it in their clinical trial designs right from the start and.
And approximately two thirds of our backlog is for prospective clinical trials.
In addition, we are making great strides in preparing our company for success in the clinical diagnostic market, which I will highlight later.
Our customer base continues to broaden as it has over the last year and a half with more than 60 customers that have ordered services for our next platform <unk>.
Including most of the top 10 global pharmaceutical companies, which we defined by their annual revenue level.
In Q1, we received and began processing samples for our first customer order for our comprehensively tumor informed liquid biopsy assay next personal from.
From a large global pharmaceutical customer.
As part of that pilot the analysis of the assay sensitivity among other capabilities is very favorable.
In addition, we are in discussions with several potential pharmaceutical customers about next personal features and feedback about our offering has been extremely positive.
We expect new orders for next personal to ramp throughout the year with a few million dollars or so converting to revenue this year with the potential for a significant acceleration in 2023 and beyond.
We believe our next platform provides biopharmaceutical customers with the most comprehensive analysis of tumor burden and biomarker identification available today.
And a better understanding of each cancer patients genetic profile.
We also believe that tissue and liquid biopsy is together can provide a more complete view leading to optimal therapy and treatment decisions at our tissue and liquid biopsy based offerings provide data on all of the approximately 20000 human genes.
The breadth and depth that notably differentiates us from competitive offerings.
Tissue samples give us access to RNA into the immune cells, which are infiltrated a patient's tour.
By analyzing liquid biopsy samples, we can provide information about a patient's tumor across multiple time points from small blood samples.
Next personal for example has been optimized for maximum sensitivity.
Particularly for when the amount of tumor DNA in the blood plasma is very low.
Such as an early stage cancer after surgical resection or in patients with complete response to therapy.
The largest segment. So this population are those who have or who have survived breast and prostate cancer.
To detect potential cancer recurrence, we can look at a patient's blood plasma for the mutational signature of their tumor.
But these two cancer types as such low mutational burdens that they can be difficult to detect.
We realized early on that we may be able to overcome this liquid biopsy sensitivity problem by leveraging our considerable high volume while genome sequencing experience and to date, we have processed more than 150000 whole human genomes in our laboratory.
Using tissue whole genome sequencing, we can identify 20 times more somatic variance to serve as the basis for personalized cancer assays.
Looking for tumors known mutations at up to 1800 physicians spread over the genome and being able to select cancer variants that have a low level of background sequencing errors, we gained tremendous sensitivity.
Our internal data confirms this approach can result in analytical sensitivity down to approximately a few parts per million.
This sensitivity advantage may translate into much earlier detection of a patient's cancer recurrence.
Once residual disease or recurrence is detected questions may arise about how best to treat a patient.
Our objective is to provide oncologists with information needed for them to advise on the optimal course of action for patient treatment.
Next personal therefore provides DNA sequencing coverage variance, which may indicate drug therapy options response to therapy and emergent resistance to therapy.
We consider this approach not just tumor informed comprehensive tumor.
And we have recently been issued U S patents for our novel methods in this area.
In addition, we have initiated several study collaborations with one of Europe's leading cancer research centers to utilize next personnel to better understand treatment response and resistance.
Patients with ovarian cancer and other cancer indications.
Our ultimate goal is not just to detect cancer, but to provide key information over the entire course of the patient's disease. We.
We believe this can be better for patients more informative for pharmaceutical customers and represents a larger business opportunity.
Personnel technological and scientific leadership has driven strong adoption of our offerings by pharmaceutical companies, who use our services to analyze the response of cancer patients in our clinical trials.
We believe that these same advantages can be important for all cancer patients not just those in clinical trials.
As a result, we are taking steps to build a clinical diagnostic business for therapy selection and monitoring.
We believe that the combined market potential of these opportunities may become approximately $30 billion in the U S over time.
I would now like to comment on our recent progress and some of our planned milestones regarding our clinical diagnostic efforts.
First we are continuing to build our regulatory clinical and reimbursement capabilities, we've been hiring employees with clinical and medical experience within the diagnostics setting and we will continue to hire and invest in this area.
In support of our new diagnostic business, we will incorporate FDA compliant protocols within our new facility and we remain on target to begin moving in during Q3 of this year.
Second we are making progress to complete the validation study for our next Dx test, which is our tissue based diagnostic offering based on our next platform to.
To apply for New York State regulatory approval.
We are also on track to submit data to the Palmetto multi X technology assessment process and hope to receive a favorable reimbursement really from <unk> later in the second half of 2022.
Okay.
Third we believe that is essential to work with world class medical institutions.
We have begun to test clinical patient samples using our next Dx test and are very excited about the opportunity to work with these were down cancer centers, including the Mayo clinic and the Moores cancer Center at UC, San Diego Health.
If we achieve a favorable reimbursement decision for our next Dx test for multi X as discussed earlier, we may also recognize revenue in the future from some of these collaborations.
Given the advanced nature of our next Dx test. We believe it is a good fit for high end cancer centers, which have been have a dual mandate for both clinical care and research.
We believe these collaborations also will provide us with access to a large number of cancer patients, which could be approximately 20% of the U S market.
If these key opinion leaders have a positive experience using our tests. We are optimistic that this will create an intended halo effect motivating broader use of our platform by other clinicians in the future.
Fourth we hired James Zoro to lead our clinical and commercial efforts to pursue business with health care systems and oncologists in the United States, which is our initial market focus Jamie.
James has more than 20 years of successful commercial experience with companies selling oncology genomic tests to clinics, including myriad genetics and gardens health.
Over the next 12 months he will focus on growing our clinical test volume as we also work to secure reimbursement for both next Dx This year and next personal in 2023.
In addition personnel was recently accepted into the blood back consortium, which indicates additional support for our ability to help lead and accelerate the development of liquid biopsy assays that can help cancer patients.
Although we still have work to do we believe that we will be well positioned for entry into the clinical diagnostic market using our comprehensive tissue based next Dx test in Q3 of this year.
In addition, we're also planning a laboratory developed test or LDP version of our liquid biopsy based next personal test.
We expect clinicians.
We expect clinicians who begin using our next Dx test May later also use our next personal test since the two can provide complementary information.
We expect that the path to reimbursement for our next personal Lvg will also begin NVA assessment by the Palmetto <unk> program.
We will continue to provide updates about our clinical diagnostic progress as we go forward.
In summary, our team has done a terrific job executing on our strategic priorities and growing our oncology business. Despite the challenging challenges from the ongoing pandemic.
Adoption of our next products has been excellent and we continue to drive further adoption and increased penetration with existing customers. We.
We have compelling products for both the Biopharma and clinical diagnostic test markets.
And we have a strong balance sheet with capital to invest in our growth initiatives and believe this puts us in a strong position for both near and long term growth.
With that I will now hand, it over to Aaron for our financial results.
Thank you John and good afternoon, everyone.
During my prepared remarks, I will provide details about our financial results for the first quarter of 2022 and guidance for the full year.
Total company revenue for the first quarter of 2022 was $15 $2 million.
<unk> pharma and all other customers accounted for revenue of $11 7 million in the first quarter, a 53% increase over the same period of the prior year.
The year over year increase in oncology revenue was driven by the continued adoption of our next platform, which accounted for more than 65% of our oncology revenue in the quarter.
In the first quarter, we continued to build backlog with customer orders exceeding reported revenue levels by more than 50% and we are seeing a larger portion of our orders that are for prospective clinical trials compared with retrospective.
For the first quarter, the VA MVP revenue of $3 $5 million with 73% lower compared with $13 2 million for the same period of the prior year and the decline was consistent with our expectations.
The VA MVP unfulfilled orders were $4 1 million at the end of the first quarter and we expect the unfulfilled orders to convert to revenue during the second quarter.
Gross margin was 28, 1% for the first quarter compared with 35, 6% for the same period of the prior year.
The year over year decrease of 750 basis points was primarily due to the expected under absorbed overhead costs from the 73% lower revenue volume from the VA MVP.
Over the next 12 to 18 months, we do expect some gross margin variability due to the headwinds from the lower VA MVP volume.
Investments in new capabilities, such as dedicated production lines for FDA approved offerings.
Providing diagnostic tests, while we work to increasingly secure reimbursement expanding in China and others.
Longer term, we expect our gross margins to increase as we achieve scale by growing our oncology revenue, which has the higher margin profile between our businesses.
Operating expenses were $32 6 million in the first quarter compared with $19 9 million for the same period the prior year R&D.
R&D expense was $17 1 million in the first quarter compared with $9 5 million for the same period last year and SG&A expense was $15 5 million in the first quarter compared with $10 4 million in the same period last year.
The increase in R&D expense was for new product development hiring employees to build our clinical and medical infrastructure and sample test expenses preclinical validation work.
The increase in SG&A was due to commercial expansion and continuing to enhance our infrastructure.
Net loss for the first quarter was $28 2 million compared to net loss of $12 4 million for the same period of the prior year.
The net loss per share for the first quarter was 63.
And the weighted average basic and diluted share count was $45 million compared with a net loss per share of <unk> 29.
And at a weighted average basic and diluted share count of $42 3 million for the same period of the prior year.
Now onto the balance sheet.
We finished the first quarter with a strong balance sheet with cash and short term investments of $266 $5 million.
In the first quarter, we used $25 million of cash due to the net loss working capital needs and capital equipment purchases.
We've reduced our expected 2022 cash usage by approximately $10 million from our prior estimate of $140 million a few months ago.
To approximately $130 million.
This includes a one time investment of approximately $45 million for the construction and fit up of our new facility and this amount is net of $15 million for tenant improvements from the landlord.
We are managing and investing our cash prudently and have almost two five years of cash on the balance sheet.
We have many growth initiatives to invest in but given the current economic environment.
We are prioritizing investments to ensure we can extend our cash runway as far out in time as possible.
In addition, we do have borrowing capacity available should we need it since we do not have any debt.
Now I'd like to turn to guidance.
Beginning in early January of this year, we noticed a slowdown with customer sample shipments to us and we continue to see delays in sample flow in our current quarter.
With Covid variance continuing to spread globally we.
Like our peers have seen slower and reduced patient enrollment and clinical trials.
Given that more than half of our Biopharma work is now for prospective clinical trial projects.
The delayed and reduced patient enrollment is having a bigger impact on our near term revenue than before when we use.
When most of our business with for retrospective projects.
It is not entirely clear when patient sample shipments to us will accelerate.
But given the customer orders continued to be strong and our backlog is increasing.
We are cautiously optimistic that our biopharma and other customer revenue may resume sequential quarterly growth in the second half of 2022.
For the full year of 2022, we expect.
Total company revenue to be in the range of $62 million to $67 million.
And we expect oncology revenue from Biopharma and other customers to be in the range of $55 million to $60 million with a larger portion of the revenue coming in the second half of the year.
Net loss is expected to be in the range of $110 million to $115 million.
Now I will turn the call back over to the operator to begin the Q&A session.
Operator.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key we ask that you. Please limit yourself to one question and one follow up one moment for our question.
Our first question comes from Derik de Bruin with Bank of America.
Hi, Good afternoon. This is Sean on for Derek.
First of all I wanted to ask about.
The hiring you mentioned that youre hiring those with regulatory and clinical expertise and.
In addition to the extra head count what sort of wage pressure are you seeing.
Yes, I would say this is Sean.
A very important area for us to invest in and we do see it being a very competitive market for hiring and Thats certainly there is waste.
Wage pressure that comes along with that I think everybody sees that across the country in personnel is no different in our areas. If anything is probably more competitive than many other businesses face.
Got you and.
Yes.
Sure.
Hi.
You are talking about the second half sales ramp.
Could you just speak to the dynamics of what.
I'm, giving you the confidence of.
Bringing the sales back on in the second half and.
Perhaps if you could also speak on the Biopharma lab activity in the U S versus O U S.
How the Shanghai lab is progressing that would be great. Thank you.
Thanks for the question Jon This is Aaron.
Yes, so in terms of what's giving us confidence about the second half of the year is basically with patient enrollment for clinical trials being slower or reduced the revenue is not going to be lost it's just pushed out in time and so we do see that with our backlog, increasing and customer order demand being strong we know that.
Customers want to.
Sequence the samples and get the data so they can get on with their work with these clinical trials are just going to take a little bit of time, and so things are moving out to the right.
A few months or so so that's what's giving us the confidence is really the demand environment. The orders are strong.
In terms of the lab environment tier so most of the sequencing we are doing today or processing test is done in Menlo Park in our lab here.
We are building up the capability in Shanghai, China, and that's going really really well the challenge right now for the last 10 weeks or so has been that Shanghai has been on lockdown. So our employees have been instructed to stay home and so we haven't been able to operate inside of the lab, but.
If all goes well over the next couple of months, it's our anticipation that will be.
Qualifying the lab with our first customers and then hopefully being able to process samples later this year and realizing revenue maybe a small amount this year and into 2023.
I would say on that.
Topic, Shanghai, just that it's been I think our original business hypothesis, there that this would be particularly attractive to international pharmaceutical companies has definitely been proven out we are seeing a lot of interest in it from major pharma, but many of whom operate worldwide and.
It's not unusual for them to have.
Clinical trials, where they are recruiting and many different <unk> that could be recruiting in 25 countries, China might just be one of them, but if we couldnt handle those samples in China, we might not get any of that business and so we do see I'd say, a halo effect, where we see orders and revenue in the United States, because we essentially qualify it.
As a fully international vendor.
With their capability in China, So I think that.
That is that it is working.
Is delaying the.
Conversion of that into revenue.
But the business thesis is working and I think we can continue to be very optimistic about the potential of that I think we've made the right choice with.
Building out in China.
Great.
Thank you for that if I could just squeeze in one more.
With that backlog.
Growing.
As the wait time.
For the client.
Has there been an increase in that as well.
Yes, I think that if you.
Talk about wait time for us.
Probably in the past, we had more business with analysis of samples from retro retrospective clinical trials for the samples already existed.
So the delay time between when we received a purchase order and when the samples right here to be sequenced it wasn't that long.
Now that we're having more and more of our business it's actually.
Very good to be being baked into these clinical trials right from the beginning so we have a long stream of samples that will be coming but it does mean that the timeframe when we receive a purchase order to when it turns into revenue.
Is longer than in the past because of that.
The delays that are happening with many pharmaceutical companies in terms of just enrollment in our clinical trials because the hospitals that they operate in and often are very distracted with COVID-19 that delay, which has been written up in the financial times in other places.
We see that impacting the enrollment in the <unk>.
Prospective clinical trials running sooner.
Actually they will enroll and we'll have all the samples, but it does increase the delay.
Gotcha, Thank you I'll jump back into queue.
Thanks, John .
Our next question is from Patrick Donnelly with Citi.
Hey, guys, taking the questions Hey, how are you.
Maybe just on the next personal side and you talked a little bit about the progress. There can you just talk about milestones, we should keep an eye out for over the next few quarters and maybe just a little deeper dive on the progress on that front.
Yes, I think what we're finding is that the.
Many of the people who have been developing <unk> talk about how sensitive they are and so forth.
We actually look at the numbers a lot and we're.
The mile ahead of most folks in this space, but.
What we find is when we talk with customers that there is almost <unk>, but then we show them that there is some of the data that we have and people get it.
We've talked about completing a.
Our pilot project with a pretty major pharmaceutical company here recently and I think they are pretty.
Im impressed with that so my expectation is that we'll begin to see those turn into larger scale orders, we actually have some that were <unk>.
With customers on now so I think that will be still the samples have to arrive and so forth. But later this year and certainly into next year I think you could see us having significant revenue that we don't currently break that out but in time I think that's a major growth driver for us.
Also.
Initiating a number of collaborations as we mentioned one in the prepared remarks.
So thats going on in Europe .
And I think as those.
Make progress, we'll be talking more and more about the results of those you'd see both things like conference posters, but also publications coming out.
With that kind of.
Data some of those projects are.
Leveraging banked samples from clinical studies that already happens so.
Our ability to generate that data is faster in some cases, we are also initiating studies with collaborators.
Debate that it takes some period of time, because the study has to actually happen prospectively. So I think youll see.
Both of those kinds of announcements coming out perhaps.
Later on this year or next year, we talked about when we have the LDP version of that product and I think that'll be an important step for us we do expect that.
The clinicians who start ordering our next Dx test are likely to also want to use the next personnel test I think theres a good tie in between those.
As we're ramping our clinical diagnostic efforts.
I think the first revenue from that will be from next Dx, but I think we see the potential for quite substantial pull through.
On the <unk>.
And then maybe some other things you can look for the launch of next personal was initially directed towards pharma.
Engagement has been really really good and strong thus far.
The expectation here is that orders will ramp throughout the back half of this year.
Revenue might be minimal in 2022, but in 2023, our expectation is to really ramp revenue with biopharma as well from the next person.
No that's really helpful.
And then maybe just in terms of the Covid impacted <unk> I know you guys had guided for a bit of a headwind. There can you just talk about how that came in relative to expectations. And then are you still seeing kind of delays on the sample side related to Covid, how should we think about that progressing as the year goes.
Yes.
In terms of what we saw earlier in Q1 with the <unk> variant spreading we did see some slowdown in sample shipments to us.
Our customers actually wanted to get the samples to us, but the problem was with the supply chain and people being able to get the work done had some challenges and we're seeing the same thing right now.
Through the current quarter, we're in we're in and that's why in terms of the guide we've been a little bit more cautious than than we may have been a few months ago in terms of what we see going forward.
Right, Yeah, and I guess on the guide I mean, clearly you guys had a pretty strong backlog I mean is it just the ability to kind of execute convert that I mean, it seems like the backlog is continuing to build so it's more caution given the backdrop versus the actual demand side is that fair.
Exactly and more of the backlog today is for prospective clinical trial work versus retrospective and so basically we're reliant upon.
Trials opening up in patient enrollment accelerating and things of that nature to get samples to us.
We think it's just going to take a few months before that maybe picks up again.
But the backlog has been growing nicely and customer orders have not slowed down at all and that's why we do have some confidence that in the back half of this year, we could get back to accelerated growth I'd say competitively, we're doing quite well I think the order.
<unk>, we're feeling really good about it as just a question of.
Timing on the revenue.
Great. Thank you guys.
Thank you Patrick.
Our next question comes from Max Masucci with Cowen.
Hi, good afternoon.
John I'm curious if you've had a chance to review the draft guidance. The FDA issued on Monday related to the use of circulating tumor DNA.
Early stage solid tumor drug development it would be great to hear any initial thoughts you haven't dropped.
And then how you see it factoring into the patience of Biopharma.
And over the next couple of quarters.
Thanks for the question, Yes, we actually did look at that.
As an updated version of guidance survey issues, if I recall last year at some clients. So they're kind of incremental updates, but I think we do see.
Circulating tumor DNA as being a major opportunity and part of the reason that we've built next personal degree. So comprehensive is that it gives us more opportunities in the.
In the pharma space I think we have the most sensitive.
<unk> test, but we have built into that also the ability to look for things like emerging resistance mutations and second primaries in the stores. So I think we can be much more informative.
If a pharma company has patients in a clinical trial and you have some patients respond and some not I think we can provide much more detailed data on that then you would get from just a conventional small panel on the liquid biopsy side or from something Thats just a March Hs, we think the combination of MRV.
And a panel that can pick up things like emerging resistance mutations will be a powerful combination for pharma and you don't have to have two separate sets of blood plasma that year that got us into two different testing companies you can do it all with one integrated tests so.
We think pharma is going to be a great opportunity for them.
Got it.
We're also seeing accelerating pace of advancements in spatial single cell platforms.
Jane <unk>.
Revealing some some valuable insights related to the tumor microenvironment and metabolism subsequently neo adjuvant therapy research.
Curious to hear how you're thinking about some of these breakthroughs on the specialty research tools side, how that could translate into into demand for next personal particularly for neo adjuvant and adjuvant therapy monitoring applications.
Yes, so I think that the.
You mentioned, particularly special so special would be mostly on tissue based samples and I'd say I think that there are some.
There is certainly a scientifically very interesting I think our view is that they're also they tend to be pretty low throughput in terms of samples that will probably improve over time, but today, they're pretty low throughput from that standpoint, we our view on the tumor microenvironment as we use.
Transcriptome sequencing and depot evolution methods to sort out how many different types of all the different types of immune cells have infiltrated the tumor. So we get a lot of that same kind of information, but in a more high throughput fashion.
And then in a.
What we've been learning as that.
We have a lot more information that we can get by looking more at the detailed time course of evolution of how a patient is responding to the drug because a lot of times the things that make a difference in terms of one patient's response versus another or changes that happen.
After that first.
Tissue sample was collected so theres nothing in that tissue sample that could tell you what's going to happen, but if there are mutations that happened later, particularly in response to.
Therapeutic pressure, then that can be very different from patient to patient and so we've really been doubling down on.
Have really informative.
Liquid biopsy results. So we can look at a lot of time points and so it's not just quantifying the tumor over time, we're looking sort of for the usual kinds of mutations but to be able to much more comprehensively understand the tumor over time and again, we are pharma is definitely interested in that really rich information as opposed to.
Perhaps just a more one dimensional test.
Great final quick <unk> first for Erin.
Are there any regions, where you're seeing the biggest impact in terms of delayed enrollment prospective trials and if there's any additional detail around the level set guide for the year and what that what's that what that's assuming for the pacing of a rebound in enrolment that'd be great and then last one for you John .
Yes next personal it can be helpful to biopharma companies and again in a range of ways, but do you expect.
Earlier next personal customers to be using the test, yes, mostly firm.
Identifying MRV positive enrolled enrollees and speeding up that enrollment or is it more about benchmark in the Cte DNA clearance rate suggest efficacy and disease free survival.
Even determining how frequently a patient needs to be surveilled with radiographic imaging after adjuvant, they complete adjuvant therapy regimen.
Great to hear whats specific use case, you think will be driving most of the demand in the early days.
Yes. This is Aaron thanks for the question, Matt So in terms of the geographies that we found to be a little bit weaker so with what's been going on.
In the Eastern European region, that's had an impact so we have seen some impact in the European side.
In addition, there has been a little bit of slowness here in the U S. As well so I would say we've seen a couple of.
These two large geographies being impacted in terms of the second half of the year guide so.
In total.
I think our guide is relatively conservative now we actually brought down the guide tiny bit in terms of a lower end.
Again contemplating this slowness that we've seen.
We're optimistic, but we're being cautious to primarily because we do rely on patient samples to be sent to us before we can do any work we've got.
Part of the equation and place the demand environment from the customers had been very strong.
The fact of the matter is they want work to be done in terms of testing on patient samples, we just have to get the samples in.
In house, and so once things start to pick up and flow a little bit over the next couple of quarters.
We believe that we're in a good position for good.
Good second half year in terms of the split of the revenue. So more of the revenue is going to be in the second half of the year. So it's probably.
I don't know.
<unk>, 560% that's towards the back half of the year.
Half of the year versus the first half.
So then maybe you also had some questions there about the.
Use cases that pharma would have forward <unk> personal and obviously some of it is.
<unk> recurrent, but I think part of what we are beginning to see is emerging as use cases.
Because of the difference in sensitivity.
We have seen cases, where.
We can pick up the fact that the patient is still has residual disease quite early.
When the adjuvant treatment might be starting and sometimes when the patient is under adjuvant treatment. The tumor doesn't grow you end up with something that would be considered.
Stable disease, though disease hasn't gone away, but it isn't necessarily growing either and then.
Have changes that gradually occur in the tumor and a year later the tumor begins to move and change and all of that is happening down at.
Yes.
So free DNA levels that would be way below the detection limits of a conventional <unk> test and so during that whole period of time using a conventional MRI do test youll, just see not detected not detected not detected any kind of don't know what's going on and you may not have to do in terms of our understand what's happening with the patient's response to.
So the drug because we can actually see the tumor down at this low level and we can kind of keep an eye on it down there. It gives us the ability to see if there's things where it's gradually increasing or decreasing that is still see all of that.
And then essentially if there are changes to know where it came from otherwise for a less sensitive test. It's all just kind of invisible and all you'll get as.
These negative results that there was nothing there. So we do see that there is.
There is almost like this whole subterranean world of.
Of tumors that are down at these really low, particularly when the.
<unk> is being actively treated with the drug.
For the disease.
It doesn't necessarily completely clear the disease it might look like with a regular test, but we can actually see that it is still there which is why it recurs later.
And we can measure what that is and see how that is different in different patients. So I think what we're finding is that sort of having opened up a new worldwide.
Lowering the sensitivity limits by factor of 10 to 100 over what people who've had before suddenly there is a lot of new things that they can see and it's much more informative than just waiting for like when was the recurrence and in many cases, what other groups might have called a recurrence actually reflects them just being that the cancer plan that got large enough that they can do.
Detected, but actually we've been able to see that it was there all along and so we have a very different outlook on things that you know that the cancer is there and it's just at a low level. That's a very different idea from what you think might actually be completely gone.
So.
I think that we'll see that's definitely opening up People's ideas, we do see a lot of creativity of people thinking about different trial designs and ways to use this that some of which we haven't even thought of ourselves.
Once we started talking with pharma customers. So I think it's <unk>.
Maybe at a time of a lot of innovation in terms of different approaches to using this technology biopharma.
Even that they sort of suddenly have access to this.
Unusual level of sensitivity.
Great. Thanks for taking the questions.
Great. Thank you thanks, Matt.
Our next question is from Mark Massaro with BT.
Yes.
Hey, guys. Thank you for the questions. My first one is a three parter.
It's great to see the initial pharma customer for next personal can you just walk us through.
Maybe the funnel you have with pharma in and how many sales are bids that people you have calling on pharma there.
The second part is as it relates to things like analytical validity.
Clinical validity and clinical utility.
Where are you in the evolution of putting that data together for next personal.
Then the final one is.
You showed really promising data for next personal at ACR I think one part per million, you've shown 1% to three parts per million.
Which is 10 to 100 times higher than other methods I guess can you speak to when we might be able to see sensitivity and specificity data.
For next personal and.
Do you have anything planned for <unk> later this year early next year.
So, we'll obviously have more and more data as we go forward there are.
Studies will have things coming out at a variety of conferences I don't think we've announced our <unk>.
Plans yet.
We won't speak to that.
Today, but we have a whole series of things going on that will generate data of different kinds.
Initially the fastest thing to generate data longitudinal data.
Retrospective samples so samples that have been backed by investigators who were already looking at other things in the past, where they still have additional blood plasma available and as we engage with them and began running those we'd expect to bring those out to the.
At conferences, whether it's with posters or ultimately publications as.
As quickly as we can there quite a few of those there's been we've engaged with a lot of key opinion leaders in the space that we're actually quite experienced with.
<unk>.
Sure.
Mardi testing in the past using other technologies and we've seen a lot of interest for people to get their hands on next personal and sort of.
Could I be first to generate data and publish on that please.
That's definitely there's I'd say.
Oiler part at this point.
Some of that will generate more.
Analytical validity data and clinical validation the clinical utility typically would require interventional studies, that's a longer but definitely a prospective interventional study that would be longer and would require.
The <unk> out so we're probably.
I don't think we have plans that we wanted to discuss on that yet.
Yes, it's clearly on our roadmap I think we see the sensitivity lets us think about cancer types.
Most other people aren't approaching I talked on the script about.
Breast and prostate cancer, they tend to have very low mutational burden. So if you only use an exome upfront for tumor informed approach that just arent that many variance and they also tend to be cancer types that are detected pretty early mammography actually does a great job of that in breast cancer for example, but.
If you are a small tumor and it's not shedding very much. The signal is really low and so we think that can be an area that we can really excel at and so we're looking at.
What's the best way to demonstrate that with.
With clinical.
Data.
I would also say that our current product is in this one to three parts per million range. We do think that there is potential in the future of this would require additional products even further along.
To go below $4 million and so that would be more out on the on the R&D and other things, but I wouldn't treat this as sort of the ultimate end of the line I think the kinds of things that we're doing.
Have room to be extended and go even further.
I think that also opens up the applications will look at in terms of the funnel and you were asking about the size of our business development team.
I think the business development team is more than double what it was when we went through the IPO process, but we've now spoken with almost every pharma customer that we already had which was a pretty large fraction of the oncology focused pharmaceutical world and I'd say there is interest at <unk>.
Most every single one so different people are at different stages in their projects.
That are either ready to start which could lead to orders soon or as I say, that's going to be great, but I am not going to have a project coming for six more months. So there's different timing there, but I don't think we're limited by the size of the business development team because again there is the <unk>.
Total number of pharmaceutical companies that are developing oncology drugs is not that large in the world and obviously there is a much larger group of biotech companies, but even so even with that we engaged with a lot of those folks. So I think we have pretty good coverage.
<unk> potential customer universe, and the next step is just making our way through generating data and doing pilots.
Engaging with people, but I'd say the initial responses.
It will definitely get it this is not kind of the same old thing.
Okay, that's super helpful.
My second question is more along the lines of some investors ask.
Personnel is going to win and the comprehensive genomic profiling market. When you have players like <unk> and gardens.
And Carrington Tempus and others. So I know you've talked about your differentiation you have been.
Certainly pursuing.
And and building a highly comprehensive coverage of different analytes and <unk> been one of the first to talk about tumor micro environment and immune repertoire, but I guess how would you.
How do you expect to.
Essentially become a market leader in clinical when folks really have been using you for research applications.
In what ways do you think you can sort of cross.
Cross the bridge, if you will and become one of these market leaders what do you think your core sources of differentiation.
Yes, so I'd say the mechanism is.
We've kind of talked about this before as well.
Begin with the thought leaders began with the Kols at the high end centers. This is where we're working with people like the Mayo clinic and so forth. These are some of the leading institutions in the world. These are the people who write the NCC guidelines and then.
If there is good adoption, there and buying from from that experience and that can lead once once you get to guidelines then.
That's the road map to the broader community oncologists bucket. So that's kind of the mechanism in terms of the differentiation.
The.
So the platform as we talked about were developed over a decade ago and were really built for the aero when the drugs that were involved were mostly just the classic targeted therapies. So you are looking for an egfr mutation of our K Ras mutation or that kind of thing I think we now see.
Checkpoint inhibitors are probably over 30% of the worldwide revenue in oncology therapeutics and so can you just can't ignore the aspect of the immune system and the mechanisms of neo antigens, and so forth and so over time that sort of stood this relentless drum beat of.
That's such a key piece of the of the therapeutic or momentum that these either small panels that don't even can't even see the.
Neo antigens.
Our issue and even if somebody has a broader platform where they look at all 20000 genes. If they have no ability to know if there is only 1% of the mutations that are actually going to create an immune response and you have no way of picking out what that is then.
Also not very useful I think.
The.
The key adoption first is the adoption of the <unk>.
Drugs that have this completely different mechanism of action that is now getting to be pretty substantial and so in time as we have biomarkers like me ops.
Really inform on that and can guide the right kinds of clinical decisions it will be.
That leads to that that's the differentiation that leads to adoption and that's the same as when you mentioned and foundation medicine, where they started back in 2009.
Most people have been using Sanger sequencing for 25 years now.
Now here was next Gen sequencing and they had to go through the same kind of thing. They initially work with pharmaceutical companies.
Companies are they worked with a lot of the key opinion leaders.
The CCN centers and eventually ended up in the CCN guidelines and so forth. So I think they went through that same process. They just.
Started.
12 years ago, but it is getting to be pretty outdated.
Technology now.
So our technology is as more modern in that regard, but that also means we're not as far along that roadmap, but its the same roadmap.
Garden's also took the liquid biopsy process.
Actually through that same approach they began working with MD Anderson.
And expanded out to others. There. So again work with the key opinion leaders first gets it again, the <unk> guidelines and then broaden out from there. So we're kind of what are the next waves of technology like that and that would be the approach we're taking.
Okay. John Thanks, Thanks for the color I'll hop back in the queue.
Okay. Thanks.
Our next question is from Mike Matson with Needham <unk> co.
Thanks.
Yes, just a follow up to your.
Our remarks, there John just about the working these cancer centers.
I understand the.
You need to get in front of the Kols.
Okay.
Gold your kind of brand reputation but can.
Can you maybe just talk about how the.
That works from a financial perspective are you.
They're using your tests are you getting paid for them or.
Are they getting if they're paying you are eating the cost are they getting reimbursed from there from the insurance.
With patients hover.
So I guess I can answer that in general the.
The people that were working with at those centers the centers don't pay for it it's generally.
Patients insurance that would pay for it. So we mentioned taking our next Dx platform through the Mol Dx the Palmetto Dx process.
We're optimistic about that leading to a favorable reimbursement decision.
It could be end of this year.
About 50% of all cancer patients in the U S are over 65 and still qualify for Medicare So getting that kind of a reimbursement decision early on would be.
Important to us so that would be the financial mechanism would be.
Coverage by them.
The patient's insurance.
The fact that they happen to be being treated at one of these world class centers those mix doesn't change that reimbursement based private insurance.
We expect to see some reimbursement from private insurance.
Early on but that's probably a long ramp to gradually get one prime.
Payer after another two.
Support the product line I think there is more buying now.
Years ago, It was treated as being brand new technology, but next gens, but not that new anymore, and I think most of them understand the technology and the benefits.
Thank.
You can certainly see a path where there is.
Very least as sort of non inferiority and still being able to match the same kind of reimbursement pricing.
It would be kind of the mechanism, but then with a highly differentiated products. So part of what we've done is we've leveraged the scale of our laboratory running everything on the highest end overseas. So we ended up with.
<unk>, where we can generate a lot more data.
And still have it be.
Cost competitive so it gives us the ability to have a differentiated product and still leverage the reimbursement decisions in the payment amounts that others have already.
Negotiated with CMS.
Okay understand.
I guess that was.
<unk> sort of in the interim but.
I guess it won't be that one until you have reimbursement.
With multi acts so.
Okay, and then can you just talk about how you are planning to come to market.
Our clinical diagnostic tests.
Are you I assume you're planning to build some kind of sales force that we would call on the actual oncologists, but.
You also mentioned you hired James Zoro to we'd kind of like.
Enterprise sale, if you will at the health care system. So I guess is it.
A combination of those two sorts of approaches are.
Yes, James James Sylvia.
Hiring and building the sales force that will be calling on oncologists and the oncologists that will call on to start with we will tend to be people out.
Some of these high end.
Cancer centers and high end medical institutions, but there also are some pretty leading.
People in a more of a community setting as well. So I mean, you have to know who is who their but we expect it to be a direct sales approach with a.
Nationally distributed.
Our sales team and.
We will be building that over the.
The next year here and I think we'll talk more about that as we go forward, but I would expect to be having tests ordered.
We think we have talked about that being kind of a mid year kind of launch that big.
Things, we'd be talking about in Q3, I expect it will be receiving.
Test orders commercially that will be billing insurance firm.
Okay got it.
And then finally just erinn.
Aaron I heard your comments on gross margin.
But one thing I don't think you said was.
You have this new facility. So I imagine it's bigger is there going to be kind of.
Additional overhead costs.
That are going to lead to less.
Absorption.
Yes.
As you move in there.
It hurt your gross margin I guess is that like another kind of headwind there.
Hi, Mike. So so that's correct we are in the process of constructing a new facility.
It's our.
Target or we anticipate being able to start to move in.
Late Q3 early Q4.
It will take a couple or a few quarters by the time, we're fully moved into the new facility.
So the answer is yes, there will be some headwinds.
On gross margin coming from the new facility as well because we will have.
In the near term, we will have basically our current lab in Menlo Park will have a new facility.
Fremont that we're building out so yes, there will be some dilutive aspects to gross margin.
Okay got it thank you.
Sure. Thanks for the question.
Our next question is going to be Kevin.
With Oppenheimer.
Hey, thanks for taking our questions.
If theres no Terra was the largest contribution to revenue in the first quarter.
Maybe kind of a.
A couple of related questions here first can you remind us.
In general terms the level of activity from the Terra in the first quarter 'twenty one.
As we think about 'twenty two guidance here.
I guess really kind of how much visibility do you have on kind of how to think about.
The trends from Natera.
Yes.
Kind of longer term, how should we think about that.
High quality customer.
Sort of.
Continued sustainable piece of the revenue model.
Hi, Kevin I'll take that question. So in terms of Natera. They were approximately 27% of our total revenue in Q1, a little over $4 million in terms of we have forecast and projections from them. We have tried to work on as far forward as we can for purchase order.
So we can build backlog with them in terms of the exact.
Amount that's built into our guide for 2022 from the Terror, we haven't really disclosed that we're not going to.
Say that specifically, but in terms of.
Just looking at.
The Q1 level in the prior two quarters.
Kind of improve hasnt been average by looking at those different periods.
That's probably a fair assessment of where things might be in terms of.
Our backlog continuing to increase a lot of that is coming from our biopharma or pharmaceutical customers.
So in terms of.
Turning on to clinical trials again in getting those patient samples to flow once that happens that revenue should accelerate.
It's hard to say exactly what percentage of the total revenue in the Terra will be longer term, but our focus is to really do well with next personal and our own product offerings and continue to drive growth from that perspective, <unk> is a great partner and they've got a great offering, but there's room for both of the products that fit into the marketplace.
No great appreciate that.
Appreciate the update on operations in China, as well and the tremendous strategic value that those investments can provide.
Both near and long term, but in terms of a meaningful direct revenue contribution from activities.
China.
Yes, how should we think about it.
Hi brain.
To meaningful revenue contribution.
Kind of have line of sight on that.
At this point.
So good question. So we haven't guided a specific number in terms of China revenue, but just giving you some directional guidance. So here in 2022, it's really about customer qualification at the lab.
Once the.
Things open up and Shanghai will get back at it but it's our anticipation will get customers qualified this year.
We might have some small revenue.
Pilot revenue.
Revenue should start to ramp in 2023, we.
We do have orders already.
And this is direct revenue in China, and then beyond 2023, we believe that.
We're going to be able to significantly ramp revenue in China. If you look at the number of patient samples that are from China. It's a large number. In addition, Jon is continuously talked about the amount of business. We receive here in the U S from our global pharmaceutical partners because of our capability in China and.
<unk>, we're going to be able to process samples on a global basis. So.
We haven't given that specific number but again that is quite large in terms of that contribution.
I would just add one more item, that's coming up that sort of turned out to be interesting and this is our first in the room.
Motivation for getting started in China. Some of the large western pharmaceutical companies, we work with specifically asking us to do that but having gotten set up and getting going there and bringing the next platform there.
We have business development staffing now.
We're beginning to find interest from and I think there is commercial potential with some of the pharmaceutical companies that are.
Just solely in China.
No.
That's a different category of revenue, but I think that's an interesting area for us as well.
Thanks for taking my questions.
Thanks, Kevin.
Again, if you have a question. Please press star and then one on your Touchtone telephone.
Our next question is going to be from Sean Lee with H C. Wainwright.
Good afternoon, guys and thanks for taking my questions.
In the prepared remarks, you mentioned that you expect to see some diagnostics.
So did the market into Q3 of this year I was wondering what are some of the key milestones between now and then they get through before.
To start marketing.
Great. Thanks.
You are beginning to work with.
A variety of customers.
Tired or our U S sales manager for that area. So it will be.
Be hiring our sales team, we already have relationships with a number of institutions, including we've announced the Mayo clinic, where we'd expect there to be.
<unk> set a flow of patients.
Samples that would begin to grow in.
Tests that we would run and then as we have.
Reimbursement results, then that would lead to the.
Revenue from that so that's kind of the those are the steps that are involved here, but I think as we as we.
Again that will be happy to keep updating you as we go through the quarters here and I think people are pretty excited about getting on with that and having that be.
Hey.
<unk>.
Substantial part of our revenue as we go forward.
Great. Thanks.
I'm not showing any further questions ladies and gentlemen, thank you for participating in today's conference. This concludes today's program you may all disconnect everyone have a great day.
Thank you.
Goodbye.
Thank you.
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