Personalis, Inc. 2023 Second-Quarter Form 10-Q Summary
Business context and reporting period
Personalis provides genomic testing, sequencing, and data-analysis services for precision oncology, pharmaceutical and biopharmaceutical research, enterprise diagnostic applications, and population-sequencing programs. The company reports one operating segment. This filing covers the three and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Key commercial relationships include Natera for tumor analysis used in minimal residual disease testing and the U.S. Department of Veterans Affairs Million Veteran Program for whole-genome sequencing. Personalis is focusing evidence-generation efforts on immunotherapy monitoring, breast cancer, and lung cancer indications.
Financial performance and liquidity
| Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 |
|---|---|---|---|---|
| Revenue | $16.7 million | $18.2 million | $35.6 million | $33.5 million |
| Gross profit | $4.8 million | $4.3 million | $9.5 million | $8.6 million |
| Gross margin | 28.7% | 23.5% | 26.8% | 25.6% |
| Loss from operations | $(25.3) million | $(27.9) million | $(55.2) million | $(56.2) million |
| Operating margin | (151.8)% | (152.9)% | (155.2)% | (167.9)% |
| Net loss | $(24.0) million | $(27.5) million | $(52.6) million | $(55.8) million |
| Net loss per share | $(0.50) | $(0.60) | $(1.11) | $(1.23) |
- Second-quarter revenue declined 8%, primarily from lower pharma-services and population-sequencing revenue. Six-month revenue increased 6%, driven by enterprise sales.
- Revenue mix in the second quarter was pharma tests and services of $6.1 million, enterprise sales of $7.4 million, population sequencing of $3.0 million, and other revenue of $0.2 million.
- Natera represented 44% of second-quarter revenue and 47% of six-month revenue. VA MVP represented 18% and 17%, respectively. Merck represented 10% of second-quarter revenue.
- Six-month operating expenses included $4.0 million of restructuring and other charges, including $3.1 million for a workforce reduction and $0.9 million related to closing China operations.
- Research and development expense increased 10% in the second quarter and 3% for the first six months, reflecting clinical evidence generation, collaborations, and Fremont facility costs.
- Selling, general and administrative expense decreased 24% in the second quarter and 16% year to date, largely due to the workforce reduction.
- Interest income increased to $1.5 million in the second quarter and $2.7 million year to date because of higher investment yields.
- Cash, cash equivalents, and short-term investments totaled $137.2 million at June 30, 2023, compared with $167.7 million at December 31, 2022. Working capital was $132.4 million.
- Cash used in operating activities was $26.2 million for the first six months, compared with $38.7 million in the prior-year period. Investing activities provided $33.3 million, principally from net maturities of marketable securities.
- Capital expenditures were $6.5 million for the first six months. Management expects approximately $8 million of capital expenditures for 2023 and $5 million to $7 million in each of 2024 and 2025.
- Total debt was $0.8 million at June 30, 2023, down from $2.6 million at year-end 2022. Operating lease liabilities totaled $48.0 million, including $40.3 million long term, with $83.0 million of future minimum lease payments.
Material changes versus the prior comparable period
- Pharma tests and services revenue fell 16% in both the quarter and first six months, reflecting project timing, nonrecurring prior-year work, and a shift away from lower-margin projects.
- Enterprise revenue increased 7% in the quarter and 53% year to date as Natera sample volumes increased approximately 40% and 85%, respectively. In May 2023, Personalis entered into a new Natera agreement with lower fixed prices but minimum volume commitments through at least the first quarter of 2024.
- Population-sequencing revenue declined 26% in the quarter and 21% year to date because of the timing of VA MVP sample fulfillment. Personalis expects to recognize the remaining $3.1 million of its initial $10.0 million VA MVP task order in the third quarter of 2023.
- The VA MVP exercised the first of four one-year renewal options under the September 2022 contract, extending the renewal period from September 30, 2023 through September 29, 2024.
- Personalis substantially completed a workforce reduction affecting nearly 100 employees in the first quarter and is closing its China operations, with dissolution expected by year-end 2023.
- The company continued transitioning operations to its approximately 100,000-square-foot Fremont facility. A power-related disruption affected use of the facility from January through April 2023, but regular electrical service was restored.
- Personalis sold 0.9 million common shares under its at-the-market facility at a weighted-average price of $2.12 per share, receiving $1.9 million net proceeds. Up to $98.1 million remained available under the facility at June 30, 2023.
Outlook, commentary, risks, contingencies, and unusual items
Management stated that existing cash, cash equivalents, short-term investments, and anticipated operating cash flows are expected to fund near-term capital and operating needs for at least the next 12 months. This assessment depends on assumptions regarding demand, operating expenses, capital requirements, and cash usage. The company expects continued losses for the foreseeable future and may seek additional equity, convertible debt, credit facilities, or other financing if needed.
- Revenue remains highly concentrated. Natera accounted for 47% of six-month revenue, while the top five customers accounted for 82%. Natera's agreement is nonexclusive, and its new pricing arrangement reduces prices in exchange for minimum volume commitments.
- VA MVP renewals and sample-delivery timing remain uncertain beyond the first renewal period and can cause significant period-to-period revenue fluctuations.
- The company relies on limited or sole-source suppliers, including Illumina for sequencers and related reagents. Supply interruptions, pricing changes, or required platform changes could disrupt operations.
- Clinical diagnostic expansion faces regulatory, reimbursement, clinical-validation, and market-adoption risks. The company currently markets tests primarily as laboratory-developed tests and notes potential future FDA or foreign regulatory requirements.
- Personalis is pursuing patent-infringement litigation against Foresight Diagnostics. Foresight filed counterclaims and four inter partes review petitions. The USPTO granted review of two asserted patents in June 2023 and the other two in August 2023. The district-court litigation was stayed, and the company filed a second infringement complaint in June 2023. The filing states that the outcome and financial impact cannot yet be estimated.
- Potential additional China-closure costs are not expected to be significant, according to management.
- The company faces risks related to cybersecurity, privacy and genomic data, laboratory operations, power and facility disruptions, intellectual property, reimbursement, regulatory compliance, employee retention, macroeconomic conditions, and access to capital.
- Disclosure controls and procedures were assessed as effective as of June 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 sample volumes and minimum commitments offset lower pricing and how the relationship affects gross margin.
- The timing and value of future VA MVP task orders and renewal periods after the first renewal.
- Operating cash burn, capital expenditures, and the duration of the stated liquidity runway.
- Progress toward profitability following the workforce reduction, China exit, and Fremont transition.
- The status and potential cost of the Foresight patent litigation and inter partes review proceedings.
- Regulatory and reimbursement progress for NeXT Personal, NeXT Dx, and other clinical diagnostic offerings.
- Exposure to customer concentration, sole-source suppliers, long-term facility leases, and potential future equity dilution under the ATM facility.