Personalis, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Personalis provides advanced genomic testing, sequencing and data-analysis services for precision oncology, pharmaceutical research, enterprise diagnostic partners and population-sequencing programs. The company reports one operating segment. This filing covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
During the quarter, Personalis completed the move of laboratory operations to its Fremont, California facility, launched NeXT Personal as a clinical laboratory-developed test, and continued clinical-evidence collaborations focused on immunotherapy monitoring, breast cancer and lung cancer.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Revenue | $18.2 million | $14.9 million | $53.8 million | $48.3 million |
| Gross profit | $3.5 million | $2.5 million | $13.0 million | $11.0 million |
| Gross margin | 19.1% | 16.7% | 24.2% | 22.8% |
| Loss from operations | $(30.8) million | $(27.3) million | $(86.0) million | $(83.4) million |
| Net loss | $(29.1) million | $(26.5) million | $(81.7) million | $(82.2) million |
| Net loss per share | $(0.60) | $(0.58) | $(1.71) | $(1.81) |
- Q3 revenue increased 23%; nine-month revenue increased 11%.
- Q3 cost of revenue increased 19% to $14.8 million, while research and development increased 12% to $16.7 million. Selling, general and administrative expense declined 19% to $12.0 million.
- Q3 results included a $5.6 million noncash impairment of the Menlo Park lease right-of-use asset. Nine-month results included $4.0 million of restructuring and China-closure charges.
- Cash, cash equivalents and short-term investments totaled $120.7 million at September 30, 2023, down from $167.7 million at December 31, 2022. Working capital was $115.7 million.
- Net cash used in operating activities was $42.8 million for the first nine months, compared with $53.5 million in the prior-year period. Investing activities provided $24.7 million, primarily from net maturities of marketable securities.
- Total debt was $0.4 million, all current. The company had $46.9 million of present-value operating lease liabilities and $80.6 million of undiscounted future operating lease payments.
- Personalis stated that existing cash, cash equivalents and short-term investments, together with anticipated operating cash flows, are expected to fund near-term needs for at least the next 12 months, although additional financing may be required sooner than expected.
Revenue mix and material changes
| Revenue category | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Pharma tests and services | $8.0 million | $7.3 million | $20.4 million | $22.2 million |
| Enterprise sales | $7.8 million | $7.4 million | $24.7 million | $18.4 million |
| Population sequencing | $2.4 million | — | $8.4 million | $7.6 million |
| Other | $0.04 million | $0.1 million | $0.3 million | $0.2 million |
- Enterprise revenue benefited from higher Natera sample volumes; samples processed increased more than 50% in Q3 and more than 110% for the nine-month period. A May 2023 agreement reduced fixed prices but added minimum volume commitments through at least Q1 2024.
- Pharma revenue varied with clinical-trial timing and nonrecurring projects. Nine-month revenue declined 8% as the company shifted away from lower-margin projects.
- Population-sequencing revenue is entirely from the VA Million Veteran Program. Selling prices declined approximately 50% in 2023, offset by higher sample volumes. Remaining unfulfilled VA MVP task orders were $8.2 million, which the company expects to recognize within the next 12 months.
- Customer concentration increased risk: Natera represented 43% of Q3 revenue and 46% of nine-month revenue; VA MVP represented 13% and 16%, respectively. The top five customers represented 80% of nine-month revenue.
- Personalis sold 1.3 million shares under its ATM facility during the first nine months, generating $2.6 million net proceeds. Approximately $97.3 million remained available under the facility at September 30, 2023.
Guidance, outlook, risks and unusual items
- Management expects research and development expense to stabilize over the medium term, with clinical-validation spending offset by workforce-reduction and China-closure savings. SG&A is expected to remain near its lower post-restructuring level.
- Capital expenditures were expected to be approximately $8 million in 2023 and $4 million to $6 million annually in 2024 and 2025.
- The company expects to complete dissolution of its China subsidiary by the end of 2023; additional costs are not expected to be significant.
- Personalis remains loss-making, with an accumulated deficit of $442.1 million, and expects additional losses for the foreseeable future.
- The company is pursuing two patent-infringement actions against Foresight Diagnostics. Four inter partes reviews were instituted against patents in the first action, the district-court litigation was stayed, and Foresight sought consolidation and a continued stay. The outcome and financial impact cannot yet be estimated.
- Regulatory risk increased following the FDA’s October 2023 proposed framework to phase out enforcement discretion for laboratory-developed tests. If finalized as proposed, certain tests could require premarket approval by October 2027.
- Key risks include dependence on Natera and VA MVP, fluctuating sample volumes, reimbursement uncertainty, regulatory changes, reliance on Illumina and other suppliers, facility and power disruptions, cybersecurity and genomic-data privacy exposure, intellectual-property litigation, continuing operating losses and potential equity dilution.
- Disclosure controls and procedures were deemed effective as of September 30, 2023, and management identified no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Natera’s minimum-volume commitments offset lower pricing and whether customer concentration declines.
- The timing and value of future VA MVP renewals and task orders after the $7.5 million 2023 order.
- Operating cash-burn trends relative to the $120.7 million investment and cash balance, including the timing of any additional financing.
- Commercial adoption, reimbursement progress and regulatory implications for NeXT Personal and other clinical tests.
- The outcome, duration and litigation costs of the Foresight patent disputes and related inter partes reviews.
- Progress in subleasing the Menlo Park facility and the potential effect on future lease costs and cash flow.