U.S. Markets open in 8 hrs 18 mins

Edited Transcript of PSNL.OQ earnings conference call or presentation 13-Nov-19 10:00pm GMT

Q3 2019 Personalis Inc Earnings Call

MENLO PARK Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Personalis Inc earnings conference call or presentation Wednesday, November 13, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Aaron L. Tachibana

Personalis, Inc. - CFO

* John Stephen West

Personalis, Inc. - Co-Founder, CEO, President & Director

================================================================================

Conference Call Participants

================================================================================

* Doug Schenkel

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Kevin Michael DeGeeter

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* Xiaoxiao Ma

BofA Merrill Lynch, Research Division - Associate

* Yih-Ming Tu

Morgan Stanley, Research Division - Research Associate

* Caroline V. Corner

Westwicke Partners, LLC - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Third Quarter 2019 Personalis Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Ms. Caroline Corner of Westwicke. You may begin, ma'am.

--------------------------------------------------------------------------------

Caroline V. Corner, Westwicke Partners, LLC - MD [2]

--------------------------------------------------------------------------------

Thank you, operator. Welcome to Personalis' Third Quarter 2019 Earnings Call. Joining me on today's call are John West, President and Chief Executive Officer; Aaron Tachibana, Chief Financial Officer; and Clinton Musil, Chief Business Officer. This call will include forward-looking statements, including statements regarding the markets in which we operate, including potential market sizes, trends and expectations for products, services and technology, trends and demands for our products, Personalis' expected financial performance, expenses and position in the market. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our current expectations. We encourage you to review our most recent filings with the SEC, particularly the risk factors described in our 10-Q filing for our third quarter ended September 30, 2019.

The forward-looking statements we provide during this call, including projections for future performance are based on our reasonable beliefs and expectations as of today. Personalis undertakes no obligation to update these statements, except as required by applicable law.

Our press release with our third quarter 2019 results is available on our website www.personalis.com under the Investors section and includes additional details about our financial results. Our website also has our latest SEC filings, which we encourage you to review. A recording of today's call will be available on our website by 5:00 p.m. Pacific Time today.

Now I'd like to turn the call over to John for his comments on third quarter business highlights.

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Caroline, and welcome, everyone, to our third quarter earnings call. As you can see from our press release, in the third quarter of 2019, we generated revenues of $17.2 million, up 47% from $11.7 million in the same quarter last year. We received our largest VA MVP order ever, increasing our unfulfilled orders with the VA MVP to approximately $82.5 million. In Q3, Personalis set another overall revenue record, and it was our 13th consecutive quarter of sequential revenue growth. We are raising our revenue guidance for the full year 2019 and are projecting over 70% revenue growth for 2019 over 2018.

Before I dive further into our progress for the quarter, I'd like to address our biopharma business as it's an area where we see a clear, long-term opportunity. Our biopharma revenue in Q2 was $7.3 million, an all-time record. But in Q3, it declined to $4.3 million. This quarter-to-quarter variation in our pharma revenue is, in part, a consequence of the [growth] of clinical trials, you might call them waves or campaigns conducted by our large biopharma customers. Given our customer concentration, these campaigns [and] individual customers lead to surges of samples for us to process.

As we have seen historically, and noted prior to our IPO, biopharma customer revenue can increase or decrease based on the number of samples we received from large retrospective projects. Customers performing retrospective studies often send us large batches of samples from storage, resulting in the surges of revenue and then gaps. While customers performing prospective projects send us samples from patients as they steadily enroll in clinical trials often over the course of a year or 2, which results in steadier streams of revenue.

Given our customer concentration, the choppiness from large retrospective customers not only affects us on a quarter-by-quarter basis but for longer periods as well. As you will see in our 10-Q, our largest biopharma customer, Pfizer, continue to generate revenue above 10% of our total in Q3, and at lower level than previous quarters. We continue to see strong engagement from Pfizer and believe the step down in revenue is driven by the particular sequence of clinical trials previously contracted for analysis with our services.

It's important to note that our biopharma orders from the third quarter exceeded revenue as current customers continue to demonstrate strong interest in converting to our newest platform and new customers continue to adopt. I'm glad to announce that we are in advanced discussions with 4 multinational biopharma companies who were not customers in 2018. We expect that winning large additional customers and diversifying our customer base will drive growth and reduce choppiness over time. It will take time for new customers to complete pilots because of the extensive data validation work they typically do. They then need to sign up for projects and send us samples from patients in clinical trials for processing before we recognize material amounts of revenue. Long term, we are very optimistic about the potential of additional customers contributing to revenue growth and decreasing quarterly choppiness related to the particular sequence of a single customer's clinical trials and the shipments of samples to us.

Starting about the time of our IPO, we initiated a significant expansion of our commercial team, including a new business development-level outreach focused particularly on large pharma. This initiative is headed by our new ImmunoID NeXT platform, which has capabilities to comprehensively report on both the cancer cells and the immune cells in a single tiny tumor sample. We have increased the size of our sales and business development group by over 30%, hiring new commercial staff with experience at some of the top companies in our field, including Illumina, Foundation Medicine, Guardant and QIAGEN.

Moving on to our performance in the population sequencing part of our business, I'm happy to report that we have seen exciting growth. We received our largest VA MVP order ever increasing our unfulfilled orders with the VA MVP to approximately $82.5 million. We expect to convert this to revenue over the next 1.5 years.

Our opportunity to serve the VA MVP has grown substantially since we started working together in 2012, such that the VA MVP now represents our largest single source of revenue. Growth of the VA MVP appears well positioned to continue. The VA MVP project is one of the largest population sequencing efforts in history, with 800,000 enrollees to date as collections continue at a rate of approximately 100,000 a year. Since 2013, Personalis has sequenced over 40,000 VA MVP samples. With our newest task order in hand, the cumulative value of our task orders received to date from the VA MVP has increased to approximately $145 million. Our population sequencing business with the VA MVP continues to be a significant growth driver for us. We value this business tremendously given the gross margins and significant long-term potential. Our engagement with the VA MVP has enabled us to invest in technology and build considerable scale and automation, allowing us to deliver high-quality genomic information both to the VA MVP and other customers. We look forward to maintaining our important relationship with the VA MVP as they continue to deliver on their ambitious goals.

Next, I would like to touch on the potential for whole genome sequencing in cancer, we believe our large volume with the VA MVP makes us one of the highest production commercial DNA sequencing centers in the United States. In Q3, for example, we sequenced well over 10,000 whole human genomes. This volume, and our years spent developing laboratory automation methods and large-scale data management systems, has made this a financially attractive business and put us in a great position to compete for additional large-scale whole genome sequencing business, including in cancer.

Some of our non-VA MVP oncology customers are increasingly looking to whole genome sequencing and analysis. Our experience with the VA MVP in whole genome sequencing makes us an attractive partner. I'm happy to announce that we are using our extensive experience and advanced technology for optimal whole genome sequencing to offer a whole genome sequencing product for customers studying cancer, and we have begun sending data to our first customer.

Now that I have provided some background, I can discuss our important progress from the third quarter in detail and outline our goals. As I mentioned, in the third quarter of 2019, we grew revenue 47% over the same quarter last year. Growth was driven by the VA MVP, which we -- as we have noted, continues to send us larger orders as we expand our population sequencing platform. Our growth from the VA MVP was offset somewhat by the biopharma business, where we had less revenue in Q3 than in the second quarter. However, I'd like to reiterate that our biopharma orders from the third quarter exceeded revenue. As current customers continue to demonstrate strong interest in converting to our newest platform and new customers continue to adopt. Many of our customers are beginning to do more prospective analysis, which should create less quarter-to-quarter volatility over time.

Within our biopharma business, our personalized therapy customers who generally place prospective orders continue to be a strong source of order flow. Despite strong early adoption with new customers, it will take time to convert customers to high volumes. As Aaron will discuss later in the call, we expect 2020 top line revenue to be driven primarily by the VA MVP with more moderate pharma growth. We expect to see accelerating biopharma revenue growth through 2020 as new large pharma and biotech customers complete pilots of NeXT and move into larger studies, and we launched our liquid biopsy product. We expect order flow that is materializing for NeXT will translate to revenue growth increasingly through 2020.

We have many initiatives underway to ensure we have the right products, infrastructure and people in place to drive the growth we are guiding to. Let me update you on a few of those now. First and foremost, we continue to work to drive adoption of our platform by establishing and expanding relationships with both current customers and new biopharma customers. Our sales and business development group has grown by over 30%. Importantly, we are engaging multinational pharma companies who were not customers in 2018 with the new NeXT platform.

We are now completing the validation of our diagnostic to be used by biopharma customers in clinical trials, which we believe will launch before year-end. We are working to accelerate development of our liquid biopsy product offering biopharma customers a comprehensive view of 20,000 genes using plasma samples from patients with cancer. This remains on track for launch in 2020. Interest in the use of liquid biopsies to complement data from tissue biopsies, continues to grow, and our conversations with customers about our initial product are positive.

We also continue to add automation as we scale our operational know-how, growing capacity in a very efficient manner. Our scientific and commercial teams recently had a strong presence at SITC with presentations of 3 scientific posters and a commercial exhibit demonstrating compelling evidence of the value of our platform.

And finally, during the third quarter, I'm pleased to report that we added Karin Eastham to our Board of Directors. Karin joined us in September 2019 and has over 35 years of financial and operations management experience, primarily with life sciences companies. She is currently a Board member of 3 additional public biotech companies, including Nektar Therapeutics, Geron Corporation and Veracyte. Also, she was previously a Board member for Illumina for approximately 15 years. We are thrilled to welcome Karin and look forward to leveraging all of her expertise as we continue to build our business.

In closing, I would like to emphasize that the parts of our business, VA MVP and biopharma work together as an integrated whole. Our management focus is on the growth and eventual profitability of that combination. Given our ability to orchestrate the 2 pieces together, we are confident that total revenues will continue to grow.

The big picture of our business is that we see incredible medical value in the very large-scale genomic data and analysis, we are able to generate for our customers, whether in population studies, research, pharma or diagnostics.

With that, I will now hand it over to Aaron for more details on our financial results and guidance.

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thank you, John. Revenues for the third quarter of 2019 were $17.2 million, up 47% from $11.7 million in the same period of the prior year. The $17.2 million was a new record high for quarterly revenues. The third quarter revenue growth was driven by an increase in volume for testing and analytical services provided to the VA MVP, partially offset by a decrease in biopharma volume. In the third quarter, VA MVP accounted for $12.9 million or 75% of the total revenues and the remaining $4.3 million or 25% of the mix was primarily from biopharma customers.

As mentioned during our last call, the acceleration of the VA MVP sample flow over the last several months created a backlog of samples that we need to process. For the third quarter, VA MVP revenue of $12.9 million was 51% higher than $8.5 million last quarter and 98% higher than $6.5 million for the same period last year. Recently, we announced receipt of our third VA MVP's task order for up to $38.1 million into the current contract. We ended the third quarter with $82.5 million of VA MVP unfulfilled orders, and based upon current estimates, we expect the unfulfilled orders to convert to revenue over the next 1.5 years. Biopharma and all other customers accounted for revenues of $4.3 million for the third quarter of 2019 compared with $7.3 million for the second quarter and $5.2 million for the same period last year.

As John mentioned, our pipeline of potential new projects and new customers continues to grow. And for the third quarter, biopharma new orders were significantly higher than the $4.3 million of revenue we reported.

The sequential and year-over-year decline in revenue during Q3 was due in part to the lumpiness we see in both customer ordering and sample processing. In the first half of 2018 and also in Q1 of 2019, we received large orders from a few customers for which samples were processed during the middle of 2018, up through Q2 of 2019, while in the third quarter, we did not process samples from as many large projects. As we have noted, the conversion of orders to revenue can take place in as little as 2 to 3 months for some orders, while others, particularly prospective projects can take longer.

Gross margin was 32.8% for the third quarter compared with 37.3% last quarter and 38.5% in the same period of the prior year. The VA MVP gross margins were solid and much higher than the corporate average reported for the third quarter. The VA MVP being higher volume for -- and 1 service offering has been automated and does not require a significant amount of labor to process samples compared with biopharma. We expect to automate the manual biopharma processes over time, leveraging capability and know-how from the VA MVP business.

The third quarter gross margin decrease was primarily due to the underutilization of direct labor and overhead from the lower biopharma volume and also the mix of customer projects within biopharma. In addition, the lower biopharma volume in the quarter also led to cost inefficiencies from smaller production runs, which resulted in higher per sample cost.

I would like to mention that going forward, we may continue to see gross margin variability as there are a few moving parts, such as sample processing volume, sample receipt linearity from the customer and capacity utilization of labor and equipment.

Operating expenses were $11.4 million in the third quarter compared with $6.2 million for the same period of the prior year. R&D expense was $5.3 million in the third quarter compared with $3.6 million for the same period last year. The majority of the increase in R&D was attributed to headcount growth and lab supplies for new product development. We continue to invest heavily in R&D in order to bring new products to market expeditiously.

As John mentioned, we are excited about the launch of our liquid biopsy product in 2020 and continue to invest in that area. SG&A expense was $6.1 million in the third quarter compared with $2.7 million for the same period last year. The primary reason for the increase was related to headcount growth and expenses related to being a public company.

Net loss for the third quarter was $6.9 million compared with a net loss of [$3.6] million for the same period last year. The net loss per share for the third quarter was $0.22, and the weighted average basic and diluted share count was $31.1 million compared with a net loss per share of $1.19 and a weighted average basic and diluted share count of $3.1 million for the same period last year.

The number of shares last year is significantly lower because it did not include the conversion of approximately 18.5 million shares of preferred stock, nor did it include the 9.1 million shares from the recent initial public offering.

Now on to the balance sheet. We exited the third quarter with a strong balance sheet and cash and short-term investments of $127.3 million. During the third quarter, we repaid the high-cost debt of $20 million. Third quarter cash flow from operations was [a use of] $9.6 million, and we paid $3.7 million for capital equipment additions.

Our business is capital efficient and is a fee-for-service model in which customers generally prepay a portion of the order value upfront. Our top priority is to increase revenue, and we will prudently invest in resources for those areas that will lead to biopharma revenue growth. With a strong cash position of $127 million, we have sufficient runway to operate over the next couple of years.

Now on to our guidance for 2019, and our new guidance for 2020. Please note that we will be providing annual guidance only. For the full year of 2019, we have increased projected revenues to now be in the range of $64.5 million to $65 million, representing a 71% annual increase at the midpoint of our guidance over the full year of 2018. Full year 2019 biopharma revenues are projected to be in the range of $21 million to $21.5 million, and the VA MVP to be approximately $43.5 million. For the full year of 2020, we project revenues to be in the range of $77.5 million to $83.5 million with biopharma revenues to be in the range of $21 million to $25 million and the VA MVP to be in the range of $56.5 million to $58.5 million for the full year of 2020.

Now I will turn the call back over to the operator, Catherine, to begin the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from David Lewis with Morgan Stanley.

--------------------------------------------------------------------------------

Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [2]

--------------------------------------------------------------------------------

This is Edmund on for David. Just 2 quick ones for me. First, in terms of your biopharma traction. Can you give us a little more detail on how your customers are [adopting] to the new product? And how much longer do you think it will take before it actually kicks in? And in terms of your whole genome sequencing, can you provide more details on that [one as well] ?

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [3]

--------------------------------------------------------------------------------

Yes. This is John West. I'll take a first shot at that, I think others may want to chime in as well. I'd say in terms of the biopharma traction of our new platform of NeXT, I think we're really pleased with the reception to it. We see very common responses that people find it amazing and they actually didn't think it was even possible to do something like that. So I think in that regard, it's impressive. We also see broad understanding of the importance of having such a comprehensive capability to look both at the cancer cells, all 20,000 genes [with] the cancer cells, also the immune cells that are in a tumor at the same time from a single sample. So I'd say the [buy-in] to where we're headed there, I think, has been great. As with all of these kinds of things in a clinical trial setting it's important for a pharma to have not only our validation, but often to do their own validation. So there's a time process for that to go through. But I'd say so far, we're actually quite happy with the response to the initial product there.

I'd say, you asked also about our whole genome sequencing business. I think that's an area we've been approached. We actually had thought that whole genome sequencing in cancer would be further in the future. But what we find is that there are customers who are looking to build data sets that may have really a long lifetime to them. And so the view that 10 years from now, you may still be using this data means you really want to build in as much future [proofing] as possible. And so that's often where genome comes in is trying to build in something that has a very long lifetime to it, to the data. So it ends up being a slightly different customer application than the analysis of clinical trials that we see up front, but because of Personalis' extensive experience with whole genome sequencing and our experience working with these very difficult cancer samples, we've actually been able to respond to that and launch that kind of capability.

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [4]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [5]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [7]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yih-Ming Tu, Morgan Stanley, Research Division - Research Associate [8]

--------------------------------------------------------------------------------

Yes. Any color on the pacing or in terms of when it's actually -- the actual impact on revenue. When it's going to happen? Or any additional detail on that?

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [9]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And our next question comes from Derik De Bruin with Bank of America.

--------------------------------------------------------------------------------

Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [11]

--------------------------------------------------------------------------------

This is Ivy for Derik today. So just 2 questions. One, in terms of the bio pharma traction NeXT. For the customer orders, I wanted to see if you've seen an increase in terms of the amount of services, like how much beyond the whole genome sequencing are you seeing? And second one, on gross margin. I wanted to see if there's any granularity on the GM trends for the rest of the year and maybe into 2020.

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [12]

--------------------------------------------------------------------------------

Well, why don't we do the gross margin one first. Aaron if you can speak to that.

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [14]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [15]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [16]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Xiaoxiao Ma, BofA Merrill Lynch, Research Division - Associate [17]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [18]

--------------------------------------------------------------------------------

Yes, so this is Aaron, Ivy. So in terms of the [$21] million to $25 million. 2019, we're going to do a little over $21 million. And so as we've seen over the past 3, 4 months, the biopharma business is relatively choppy. It's lumpy, primarily because of the ordering and the sample process and types of volumes. And what we've learned over the past several months is that it does take time to be able to go drive adoption. We really feel and believe that we have the most comprehensive tool or platform in the industry. [No other] folks are not looking at 20,000 genes.

In terms of the product itself, it does take time for the customers to evaluate, to really get their heads around it, because they're using smaller panels today, and they're using a piece of tissue sample that's cut up and sent to multiple vendors. We're trying to get the biopharma customers to send us tissue sample and we do all the work, and that's the end of it. And in terms of getting them to that state, it does take time. And so what we've been doing is we've been adding to our sales force. We've tweaked our go-to-market strategy by adding business development resources to be able to go have this discussion with the chief science -- scientist [level] in biopharma. And we're seeing that it's working. We're getting great traction. However, it takes time. And so in terms of the guide, we've kind of built some of that into our guide in terms of it's going to take some time. But we do feel bullish that we're going to drive this adoption. It's just going to take a little bit of work and time.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Our next question comes from Doug Schenkel with Cowen and Company.

--------------------------------------------------------------------------------

Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [20]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [21]

--------------------------------------------------------------------------------

2019 is going to be -- our guide was $21 million to $21.5 million, so in the low $21 million range. And our guide for 2020 is $21 million to $25 million. So up a little bit.

--------------------------------------------------------------------------------

Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [22]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [23]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [24]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [25]

--------------------------------------------------------------------------------

Sure, Doug. Let me a shot at it, and then I'll pass it over to John to follow-up. And thanks for the question. But in terms of where we're at today. So what we've learned is it does take time to drive change and drive adoption inside of biopharma, especially large pharmaceutical companies. And we've proven we can win. We've had a couple of very, very large customers that you've seen in our filings in the past, right? We've been adding sales and business development resources because we found that just what we had before, before the IPO, we were a private company, so we didn't have a lot of capital to be able to go invest in a lot of different areas, but now we do. And so we're investing in additional sales and business development resources to be able to go continuously have additional discussions, have multiple discussions inside of a pharmaceutical company where we're already doing business. Because, again, we believe we're underpenetrated in the accounts that we're at today. Once they see the data -- they have to go through data validation and look at what's coming out of the [next] platform compared to the ACE platform. And once they get through that validation, we feel very strongly that we're going to be able to drive that adoption. It just takes time, it's not something that just happens in 1 or 2 months. It takes several months of discussions, dialogue, and again, we're trying to drive change, where they're going to provide us with the 1 tissue sample, and we're going to do all of the work versus than choosing a supplier to do a piece of the work, say, RNA or a DNA piece, right? They want us to do the whole amount of work. And so that's kind of what's taking time.

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [27]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [28]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Doug Schenkel, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [29]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [30]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And our next question comes from Kevin DeGeeter with Oppenheimer.

--------------------------------------------------------------------------------

Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [32]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [33]

--------------------------------------------------------------------------------

Sure. This is John. So the -- I would say, when we talk about the 30% growth at the time of the IPO, we were probably in the range of 14 to 15 people in that group. We actually have a road map for a pretty substantial increase in our commercial organization. It's one of the things we've really wanted to do, that the IPO has now made possible. I'd say it's also a little different from perhaps a conventional product sales force where you might -- I think you referred to, how many sales reps you have? We actually have a lot of different kinds of people involved in our commercial organization. We obviously have people who are seasoned sales executives, but we also have a group of really amazing PhD-level field application specialists who work out in the field with our commercial people engaging scientifically with our customers.

We've recently added a new capability of inside sales people who work from our home office here, but they can engage with customers. And we've also added this new business development capability. Again, we're working with people, particularly big pharmaceutical companies at many different levels and it's absolutely crucial for us to have people who can work with the scientists who are working on the ground with individual clinical trials, but it's also important for us to engage with the senior management of those companies and thinking about where are they going with this kind of platform. Personalis, in many ways, is looking to customers and talking with them about making a pretty dramatic change in how they think about their data, going from a few hundred genes, mostly focused on cancer driver genes to [transition] where you're really looking at the genetics of immuno-oncology, which is 20,000 genes and the complete immune cell repertoire. And so it's a -- it's actually quite a substantial scientific change, and so we need to be able to engage at that level as well. So when we think about how we're staffing this, it's sort of not purely -- it's a sales rep model selling, let's say, like instrument business as I've run before. But it's a pretty broad commercial and scientific team that's engaging with those customers. I think you will see continued growth in the commercial side of our company as we go through next year. It's our biggest challenge. We've been actually -- we've hired quite a few people since the IPO, but it is very selective, trying to find people with the right skills is [always] a challenge. So I think you'll see that continue to grow over the coming quarters.

--------------------------------------------------------------------------------

Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [34]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Aaron L. Tachibana, Personalis, Inc. - CFO [35]

--------------------------------------------------------------------------------

Yes, that's a good question, Kevin. So in terms of gross margin. So if you go back to Q2 of 2019, our gross margins were over 37%. And that was with biopharma being over $7 million of revenue. So you can see that having biopharma dropped by 40% in terms of volume, had a significant impact on margins. As we go out into 2020, there will be the possibility of lab expansion. We're out of space in some regards in some areas. And so we will be expanding a little bit. And as you expand, that could be a small headwind into margins.

In terms of automation, so the VA is a highly automated process, and it requires very few people to process what we did, what, $12.9 million last quarter. So in terms of the biopharma side of the business, we are working on automation there as well, and that will come to fruition probably throughout 2020.

--------------------------------------------------------------------------------

Kevin Michael DeGeeter, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [36]

--------------------------------------------------------------------------------

Great. And then just if I can sneak one more in. With regard to -- you called out, I believe 4 or 5 discussions with large pharma companies that are ongoing that you think are [going] in a positive manner. Is the introduction of either the companion diagnostic or liquid biopsy sort of important in driving either one or any of those [real chips] forward into kind of more revenue visibility? Or is your view that with the [next] platform and the promise of an expanded product offering in 2020 that you have the products in the market now to get those discussions over the goal line. It's just a question of time.

--------------------------------------------------------------------------------

John Stephen West, Personalis, Inc. - Co-Founder, CEO, President & Director [37]

--------------------------------------------------------------------------------

I think it's primarily a question of time and the build-out we've talked about commercially. The products, the newer products that we just mentioned, and I think we're pretty excited about those. But again, to be realistic in terms of the timing with pharma from adoption through to revenue. Some of those things like liquid biopsy, might be more substantial drivers of revenue in '21. And so I don't think we're going to set big expectations as far as that's concerned from a revenue standpoint. I think it is going to be an exciting year for us and getting that product out of the initial engagement in it. But from a purely financial guidance standpoint, I think we're trying to be careful about thinking about that volume on those products likely to be maybe more of a 2021 event.

I think we're pretty happy with the products we have out there. There are [incremental] improvements in the products. You've seen us release new versions of the capability around the NeXT platform, where, for example, initially, we reported on the TCR beta later[on at] the TCR alpha and other features I think that kind of incremental improvement, which just keeps on adding value to the platform. I think you could expect to see some of those kinds of things as we continue through next year. But largely, I feel like we have the platform we need. We're going to be working on executing with it.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

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