Good day, ladies and gentlemen, and welcome to the Personalis 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 is Caroline Corner, Investor Relations. Please go ahead.
Thank you, operator. Welcome to Personalis' 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 fact should be considered forward-looking statements within the meaning of U.S. securities laws. For example, any statements regarding trends and expectations for our financial performance, 2022 cash use, cash runway, new orders, products, 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 2022 to be filed today.
Personalis undertakes no obligation to update these statements except as required by applicable law. Our press release with our first quarter 2022 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 P.M. Pacific Time today. Now I'd like to turn the call over to John for his comments on first quarter business highlights.
Thank you, Caroline. Personalis continues to make progress on our strategic priorities with the aim of becoming a leading provider of the most comprehensive and actionable cancer genomic tests, and ultimately enabling a new standard of oncology care that could 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 approximately two-thirds of our backlog is for prospective clinical trials. In addition, we're 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, including most of the top 10 global pharmaceutical companies, which we define 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 a large global pharmaceutical customer. As part of that pilot, the analysis of the assay's sensitivity, among other capabilities, is very favorable. In addition, we are in discussions with several potential pharmaceutical customers about NeXT Personal's 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 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 patient's genetic profile. We also believe that tissue and liquid biopsies together can provide a more complete view, leading to optimal therapy and treatment decisions, and our tissue and liquid biopsy-based offerings provide data on all of the approximately 20,000 human genes. A breadth and depth that notably differentiates us from competitive offerings. Tissue samples give us access to RNA and to the immune cells which have infiltrated a patient's tumor.
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 in early-stage cancer, after surgical resection, or in patients with complete response to therapy. The largest segments of 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. These two cancer types have 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 whole genome sequencing experience.
To date, we have processed more than 150,000 whole human genomes in our laboratory. Using tissue whole genome sequencing, we can identify 20 times more somatic variants to serve as the basis for personalized cancer assays. By looking for a tumor's known mutations at up to 1,800 positions spread over the genome, and being able to select cancer variants that have a low level of background sequencing errors, we gain 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 of variants which may indicate drug therapy options, response to therapy, and emergent resistance to therapy. We consider this approach not just tumor-informed, but comprehensive tumor-informed. We have recently been issued a U.S. patent 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 Personal to better understand treatment response and resistance in 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 believe this can be better for patients, more informative for pharmaceutical customers, and represents a larger business opportunity.
Personalis' 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 their clinical trials. We believe that these same advantages can be important for all cancer patients, not just those in clinical trials. 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. We are continuing to build our regulatory, clinical, and reimbursement capabilities. We've been hiring employees with clinical and medical experience within a diagnostic 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 a validation study for our NeXT Dx test, which is our tissue-based diagnostic offering based on our NeXT Platform, to apply for New York State regulatory approval. We are also on track to submit data to the Palmetto MolDX technology assessment process and hope to receive a favorable reimbursement ruling from MolDX later in the second half of 2022. Third, we believe that it's 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 renowned 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 from MolDX, 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 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 Azzaro to lead our clinical commercial efforts to pursue business with healthcare systems and oncologists in the United States, which is our initial market focus. James has more than 20 years of successful commercial experience with companies selling oncology genomic tests to clinics, including Myriad Genetics and Guardant Health. Over the next 12 months, he will focus on growing our clinical test volume as we also work to secure a reimbursement for both NeXT Dx this year, and NeXT Personal in 2023. In addition, Personalis was recently accepted into the BloodPAC 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 LDT, version of our liquid biopsy-based NeXT Personal test. 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 LDT will also begin via assessment by the Palmetto MolDX 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 challenges from the ongoing pandemic.
Customer adoption of our NeXT products has been excellent, and we continue to drive further adoption and increase penetration with existing customers. 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 detail 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. Biopharma 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 was 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 12-18 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 of the prior year.
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 for clinical 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 with the net loss of $12.4 million for the same period of the prior year.
The net loss per share for the first quarter was $0.63, and the weighted average basic and diluted share count was 45 million, compared with the net loss per share of $0.29 and a weighted average basic and diluted share count of 42.3 million for the same period of the prior year. Now on to 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 $20.5 million of cash due to the net loss, working capital needs and capital equipment purchases. We reduced our expected 2022 cash usage by approximately $10 million from our prior estimate of $140 million a few months ago, down 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 2.5 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 variants continuing to spread globally, we, like our peers, have seen slower and reduced patient enrollment for 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 most of our business was for retrospective projects. It is not entirely clear when patient sample shipments to us will accelerate, but given the customer orders continue 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-$67 million, and we expect oncology revenue from biopharma and other customers to be in the range of $55 million-$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-$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 touch tone 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 John on for Derik. First of all, I wanted to ask about the hiring. You mentioned that you're hiring those with regulatory and clinical expertise. In addition to the extra headcount, what sort of wage pressure are you seeing?
Yes. I'd say, this is John, it's a very important area for us to invest in, and we do see it being a very competitive market for hiring, and that certainly there is wage pressure that comes along with that. I think everybody sees that across the country and, you know, Personalis is no different in our area. If anything, it is probably more competitive than many other businesses face.
Gotcha. You're talking about the 2H sales ramp. Could you speak to the dynamics of what's giving you the confidence of bringing the sales back on in the second half? Perhaps, if you could also speak on the biopharma lab activity in the US versus OUS and how the Shanghai lab is progressing. That'd be great. Thank you.
Thanks for the question, John. This is Aaron. Yeah, 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 gonna be lost. It's just pushed out in time. We do see that with our backlog increasing and customer order demand being strong, we know that customers want to, you know, sequence these samples and get the data so they can get on with their work and with these clinical trials. It's just gonna take a little bit of time, and so things are moving out to the right, you know, a few months or so. That's what's giving us the confidence. It's really the demand environment. The orders are strong.
In terms of the lab environment here, you know, most of the sequencing we're doing today or processing tests 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, you know, for the last 10 weeks or so, has been that Shanghai has been on lockdown. Our employees have been, you know, instructed to stay home, and so we haven't been able to operate inside of the lab. If all goes well over the next couple of months, it's our anticipation that we'll be, you know, qualifying the lab, you know, 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 the topic of 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're seeing a lot of interest in it from major pharma, but many of whom operate worldwide. It's not unusual for them to have clinical trials where they're recruiting in many different countries. They could be recruiting in 25 countries. China might just be one of them. If we couldn't handle the samples in China, we might not get any of that business. We do see a halo effect where we see orders and revenue in the United States because we essentially qualified as a fully international vendor with the capability in China.
I think that is working. COVID 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 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, how's the wait time for the clients? Has there been an increase in that as well?
Yeah. I think that if you talk about wait time, for us, you know, in probably in the past we had more business with analysis of samples from, you know, retrospective clinical trials, so the samples already existed. The delay time between when we received a purchase order and when the samples arrived here to be sequenced wasn't that long. Now that we're having more and more of our business, it's actually. It's 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 time from 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 their clinical trials because the hospitals that they operate in often are very distracted with COVID. That delay, which has been written up in the Financial Times and other places, is, we see that impacting the enrollment in the prospective clinical trials running sooner. You know, they'll eventually 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.
Hi, Patrick.
Thanks for taking the questions. Hey, how are you? Maybe just on the NeXT Personal side, you talked a little bit about the progress there. Can you just talk about, you know, milestones we should keep an eye out for over the next few quarters and, you know, maybe just a little deeper dive on the progress on that front?
Yeah. I think what we're finding is that the many of the people who have been developing MRD tests talk about how sensitive they are and so forth. You know, we actually look at the numbers a lot, and, you know, we're a mile ahead of most folks in this space. What we find is when we talk with customers that there's this, you know, almost incredulity, but then we show them that, you know, some of the data that we have, and people get it. That's, you know, why we've talked about completing a pilot project with a pretty major pharmaceutical company here recently. You know, I think they're pretty impressed with that. My expectation is that we'll begin to see, you know, this turn into larger scale orders.
We actually have some that we're talking with customers on now, so I think that'll be, you know, still the samples have to arrive and so forth. You know, later this year, and certainly in next year, I think you could see us having significant revenue from that. We don't, you know, currently break that out, but in time, I think that's a major growth driver for us. We're also initiating a number of collaborations. We mentioned one in the prepared remarks that's going on in Europe. 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 happened.
You know, our ability to generate that data is faster. In some cases, we are also initiating studies with collaborators where it may then take some period of time because the study has to actually happen prospectively. I think you'll see both of those kinds of announcements coming out perhaps later on this year or next year. We'll talk about when we have the LDT 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 just to also want to use the NeXT Personal test. I think there's a good tie-in between those.
As we're ramping our clinical diagnostic efforts, I think, you know, the first revenue from that will be from NeXT Dx, but I think we see the potential for quite substantial pull-through on the MRD side.
Maybe some other things you can look for. The launch of NeXT Personal was initially, you know, directed towards pharma, and 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. You know, revenue might be minimal in 2022, but in 2023, our expectation is to really ramp revenue with biopharma as well from NeXT Personal.
No, that's really helpful. Maybe just, you know, in terms of the COVID impact in 1Q, 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? 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?
Yeah. Patrick, in terms of what we saw earlier in Q1, you know, with the Omicron variant spreading, we did see some slowdown in sample shipments to us. You know, our customers actually wanted to get the samples to us, but the problem with the supply chain and people being able to get the work done had some challenges. We're seeing the same thing right now, you know, through the current quarter we're in. That's why in terms of the guide, you know, we've been a little bit more cautious than we may have been a few months ago, you know, in terms of what we see going forward.
Right. Yeah. I guess on the guide, I mean, clearly you guys have the pretty strong backlog. I mean, is it just the ability to kind of execute and 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. More, the backlog today is for prospective clinical trial work versus retrospective. Basically, we're reliant upon, you know, trials opening up and patient enrollment accelerating and things of that nature to get samples to us. You know, we think it's just gonna take a few months before that maybe picks up again. The backlog has been growing nicely, and customer orders have not slowed down at all, right? That's why we do have some confidence that in the back half of this year, we could get back to accelerated growth.
Yeah. I might say competitively, we're doing quite well. I think the order side is we're feeling really good about. It's 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, 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 for early-stage solid tumor drug development. It'd be great to hear any initial thoughts you have on the draft, and then, you know, how you see it factoring into the pace of biopharma demand over the next couple quarters.
Yeah, thanks for the question. Yeah, we actually did look at that. It's an updated version of guidance that they issued, if I recall, last year at some point, so there are kind of incremental updates. I think we do see circulating tumor DNA as being a major opportunity. Part of the reason that we built NeXT Personal to be so comprehensive is that it gives us more opportunities in the pharma space. I think we have the most sensitive MRD test, but we have built into that also the ability to look for things like emerging resistance mutations and second primaries and so forth.
I think we can be much more informative if a pharma company has patients in a clinical trial, and you have, you know, some patients responding and some not. I think we can provide much more detailed data on that than you'd get from just a conventional small panel or on the liquid biopsy side or from something that's just an MRD test. We think the combination of MRD and a panel that can pick up things like emerging resistance mutations will be a powerful combination for pharma. You don't have to have two separate sets of blood plasma that you're then gonna send to two different testing companies. You can do it all with one integrated test. We think pharma is gonna be a great opportunity for that.
Got it. We're also seeing, you know, accelerating pace of advancements in, you know, spatial, single-cell platforms and advanced imaging that's revealing some valuable insights related to, you know, the tumor microenvironment and metabolism and, you know, subsequently neoadjuvant therapy research. Be curious to hear how you're thinking about some of these breakthroughs, you know, on the specialty research tools side and how that could translate into demand, you know, for NeXT Personal, you know, particularly for neoadjuvant and adjuvant therapy monitoring applications.
Yeah. I think that you mentioned particularly spatial, so spatial would be mostly on tissue-based samples. I'd say I think that there are some. I mean, they're certainly scientifically very interesting. I think our view is that they're also. They can be pretty low throughput in terms of samples. That will probably improve over time, but today they're pretty low throughput from that standpoint. Our view on the tumor microenvironment is we use transcriptome sequencing and deconvolution 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.
You know, in a way, what we've been learning is that there's probably a lot more information that we can get by looking more at the detailed time course of evolution, 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 are changes that happen after that first tissue sample was collected. There's nothing in that tissue sample that could tell you what's going to happen. If there are mutations that happen later, particularly in response to therapeutic pressure, then you know, that can be very different from patient to patient. We've really been doubling down on how to have really informative liquid biopsy results, so we can look at a lot of time points.
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. Again, you know, pharma is definitely interested in that really rich information as opposed to, you know, perhaps just a more one-dimensional test.
Great. Final just quick two-parter. First for Aaron. Let's see. Are there any regions where you're seeing the biggest impact in terms of, you know, delayed enrollment for prospective trials? If there's any additional detail around, you know, the level set guide for the year and what that is, what that's assuming for, you know, the pacing of a rebound in enrollment, that'd be great. Last one for you, John. You know, NeXT Personal can be helpful to biopharma companies, again, in a range of ways. You know, do you expect the earlier NeXT Personal customers to be using the test, you know, mostly for, you know, identifying MRD positive enrollees and speeding up that enrollment?
You know, is it more about benchmarking the ctDNA clearance rate, you know, that suggests efficacy and disease-free survival? Or, you know, even determining, you know, how frequently a patient needs to be surveilled with radiographic imaging, you know, after adjuvant, they complete adjuvant therapy regimen. Would just be great to hear, you know, what specific use case you think will be driving most of the demand in the early days.
Yeah. This is Aaron. Thanks for the question, Max Masucci. In terms of the geographies that we've found to be a little bit weaker, with what's been going on in the Eastern European region, you know, that's had an impact. We've seen some impact in the European side. In addition, there has been a little bit of slowness here in the U.S. as well. I would say, you know, we've seen a couple of these two large geographies being impacted. In terms of the second half of the year guide, in total, I think our guide is relatively conservative now. You know, we actually brought down the guide a tiny bit in terms of a lower end. You know, again, it's contemplating the slowness that we've seen.
We're optimistic, but we're being cautious too, 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 in place, right? The demand environment from the customers have been very strong. So the fact of the matter is they want work to be done in terms of tests on patient samples. We just have to get the samples here in-house. You know, 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 a good second half here. In terms of the split of the revenue, so more of the revenue's gonna be in the second half of the year.
It's probably, you know, I don't know, 55%-60% that's towards the back half of the year or second half of the year versus the first half.
Maybe you also had some questions there about the use cases that pharma would have for NeXT Personal, and obviously some of it is, you know, you're just detecting recurrence. I think part of what we were beginning to see as, you know, emerging as a use case is that because of the difference in sensitivity, we have seen cases where that we can pick up the fact that the patient still has residual disease quite early, when the adjuvant treatment might be starting. Sometimes when the patient is under adjuvant treatment, the tumor doesn't grow. You end up with something that would be considered stable disease. Disease hasn't gone away, but it isn't necessarily growing either.
Then, you know, you can have changes that gradually occur in the tumor, and you know, a year later, the tumor begins to move and change. All of that is happening down at you know, cell-free DNA levels that would be way below the detection limits of a conventional MRD test. So during that whole period of time using a conventional MRD test, you just see not detected, not detected, not detected, and you kind of don't know what's going on, and you may not know what to do in terms of or understand what's happening with the patient's response to 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, you know, if there's things where it's gradually increasing or decreasing, the idea is to be able to see all of that and then, you know, eventually, 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 get is, you know, these negative results that there was nothing there. We do see that there's almost like this whole subterranean world of tumors that are down at these really lows, particularly when the patient is being actively treated with a drug for the disease. It doesn't necessarily completely clear the disease.
It might look like it with a regular test, but we can actually see that it's still there, which is why it recurs later. We can measure what that is and see how that's different in different patients. I think what we're finding is that by sort of having opened up a new world by, you know, lowering the sensitivity limits by, you know, a factor of 10-100 over what people have had before, suddenly there's a lot of new things that they can see, and it's much more informative than just waiting for, like, when was the recurrence. In many cases, what other groups might have called a recurrence actually reflects them just being that the cancer finally got large enough that they could detect it, but actually we've been able to see that it was there all along.
You have a very different outlook on things if you know that the cancer is there and it's just at a low level. That's a very different idea from if you think it might actually be completely gone. 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 hadn't even thought of ourselves, once we started talking with pharma customers. I think it's maybe a time of a lot of innovation in terms of different approaches to using this technology by pharma, given that, you know, they sort of suddenly have access to this unusual level of sensitivity.
Great. Thanks for taking the questions.
Great. Thank you.
Thanks, Max.
Our next question is from Mark Massaro with BTIG.
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 and how many sales or biz dev people you have calling on pharma there? The second part is, you know, 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? The final one is, you know, you showed really promising data for NeXT Personal at AACR, I think 1 part per million. You've shown 1-3 parts per million, which is 10-100 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? You know, do you have anything planned for ASCO or, you know, later this year or early next year?
That we'll obviously have more and more data as we go forward. There are studies. We'll have things coming out at a variety of conferences. I don't think we've announced our ASCO plans yet, so I probably won't speak to that today. We have a whole series of things going on that will generate data of different kinds. You know, initially, the fastest thing to generate data, particularly longitudinal data are retrospective samples. Samples that have been banked by investigators who are already looking at other things in the past, where they still have additional blood plasma available.
As we engage with them and begin running those, we'd expect to bring those out to you know at conferences, whether it's with posters or ultimately publications, as quickly as we can. There are quite a few of those. We've engaged with a lot of key opinion leaders in this space that we're actually quite experienced with, MRD testing in the past using other technologies. We've seen a lot of interest for people to get their hands on NeXT Personal and sort of be you know first. "Can I be first to generate data and publish on that, please?" That's definitely the, I'd say, a boiling pot at this point. You know, some of that will generate more analytical validity data and clinical validation.
The clinical utility typically would require interventional studies. You know, that'd have to be a prospective interventional study. That would be longer and would require the LDT to be out. We'll probably, you know, I don't think we have plans that we wanna discuss on that yet, but it's clearly on our roadmap. I think we see the sensitivity lets us think about cancer types that most other people aren't approaching. I talked on the script about breast and prostate cancer. They tend to have very low mutational burden. If you only use an exome upfront for a tumor-informed approach, there just aren't that many variants. 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.
You know, if you have a small tumor and it's not shedding very much, the signal is really low. We think that can be an area that we can really excel at. We're looking at what's the best way to demonstrate that with clinical data. I'd also say that, you know, our current product is in this 1-3 parts per million range. We do think that there is potential in the future. This would require additional products even further along, to go below 1 part per million. That's that'd be more out on the R&D end of things. 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 to 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 is a pretty large fraction of the oncology-focused pharmaceutical world. And I’d say there’s interest at almost every single one.
You know, different people are at different stages and have projects that you know are either ready to start, which could lead to orders soon, or others say, "That's gonna be great, but I'm not gonna have a project coming for six more months." You know, there's different timing there, but I don't think we're limited by the size of the business development team because again, there's the total number of pharmaceutical companies that are developing oncology drugs is not that large in the world. Obviously, there's a much larger group of biotech companies. Even so, even with that, we've engaged with a lot of those folks. I think we have pretty good coverage of the potential customer universe.
You know, the next step is just making our way through generating data and doing pilots and, you know, engaging with people. But I'd say the initial response is, people definitely get it. This is not kind of the same old thing.
Okay, that's super helpful. You know, my second question is more along the lines of, you know, some investors ask you know, how is Personalis going to win in the comprehensive genomic profiling market when, you know, you have players like FMI and Guardant, and, you know, Caris and Tempus and others? I know you've talked about your differentiation. You know, you've been you know, certainly pursuing, and building a highly, comprehensive coverage of different analytes, and you've been one of the first to talk about tumor microenvironment in the immune repertoire. You know, I guess, how would you know, how do you expect to, essentially, become a market leader in clinical when, you know, folks really have been using you for research applications?
I mean, in what ways do you think you can sort of cross the bridge, if you will, and become one of these market leaders? What do you think your core sources of differentiation are?
Yeah. I'd say, I mean, the mechanism is, and I think we might have talked about this before as well is, you know, begin with the thought leaders, begin with the KOLs at the high-end centers. This is why we work 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 NCCN guidelines. Then, you know, if there's good adoption there and buy-in from that experience, then that can lead. Once you get to guidelines, then that's the roadmap to the broader community oncologist bucket. That's kind of the mechanism.
You know, in terms of the differentiation, some of the platforms you talked about were developed over a decade ago and were really built for the era when the drugs that were involved were mostly just the classic targeted therapies. You're looking for an EGFR mutation or a KRAS 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 you just can't ignore the aspect of the immune system and the mechanisms of neoantigens and so forth. Over time, that's just this relentless drumbeat of that's such a key piece of the therapeutic armamentarium that, you know, these either small panels that can't even see the neoantigens are an issue.
Even if somebody has a broader platform where they look at all 20,000 genes, if they have no ability to know, you know, if there's 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 it's also not very useful. I think, you know, the key adoption first is the adoption of the drugs that have this completely different mechanism of action that's now getting to be pretty substantial. In time, as we have biomarkers like NEOPS that really inform on that and can guide the right kinds of clinical decisions, it will be. You know, that leads to. That's the differentiation that leads to adoption.
That's the same as, you know, when you mentioned Foundation Medicine, when they started back in 2009, you know, most people had been using Sanger sequencing for 25 years. You know, now here was next-gen sequencing, and they had to go through the same kind of thing. They initially worked with pharmaceutical companies, and they worked with a lot of the key opinion leaders at the NCCN centers, and eventually ended up in the NCCN guidelines and so forth. I think they went through that same process. They just, you know, started 12 years ago, but it's getting to be pretty outdated technology now. Our technology is more modern in that regard, but that also means we're not as far along that roadmap.
It's the same roadmap that, you know, Guardant also took the liquid biopsy process, you know, essentially through that same approach. They began working with MD Anderson and expanded out to others there. Again, work with the key opinion leaders first, get to, again, the NCCN guidelines and then broaden out from there. We're one of the next waves of technology like that, and that would be the approach we'd take.
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 & Co.
Thanks. I guess just as a follow-up to your remarks there, John, just about you working with these cancer centers, you know, I understand the need to get in front of the KOLs and build your kind of brand reputation. Can you maybe just talk about how, you know, that works from a financial perspective? You know, if they're using your tests, are you getting paid for them or are they getting? If they're paying you, are they just eating the cost or are they getting reimbursed from the insurance, you know, that the patients have or?
Yeah. No, I can answer that. In general, the people that we're working with at those centers, the centers don't pay for it. It's generally the patient's insurance that would pay for it. We mentioned taking our NeXT Dx platform through the MolDX, you know, the Palmetto MolDX process. We're optimistic about that leading to a favorable reimbursement decision, you know, could be end of this year. About 50% of all cancer patients in the U.S. are over 65 and so would qualify for Medicare. Getting that kind of a reimbursement decision early on would be important to us. That would be the financial mechanism, would be coverage by the patient's insurance.
The fact that they happen to be being treated at one of these world-class centers doesn't change that reimbursement base. Private insurance, we expect to see some reimbursement from private insurance early on, but it's a long ramp to gradually get one, you know, one private payer after another to support the product line. I think there is more buy-in now. I mean, starting years ago, it was treated as being brand-new technology, but next gen is not that new anymore. I think most of them understand the technology and the benefits. I think the
You can certainly see a path where there's at the very least a sort of non-inferiority, and so being able to match the same kind of reimbursement pricing would be kind of the mechanism, but then with a highly differentiated product. Part of what we've done is we've leveraged the scale of our laboratory. We're running everything on the highest end NovaSeq. We end up with a position where we can generate a lot more data and still have it be cost competitive. It gives us the ability to have a differentiated product and still leverage the reimbursement decisions and the payment amounts that others have already negotiated with CMS.
Okay, understand. I guess I was thinking sort of in the interim, but I guess it won't be that long till you have the reimbursement, you know, with MolDX. Can you just talk about, you know, how you're planning to kind of market your clinical diagnostic tests? You know, are you? I assume you're planning to build some kind of sales force that would call on the actual oncologist, but you also mentioned you hired James Azzaro to lead kind of like the enterprise sale, if you will, of the healthcare system. I guess, is it, you know, a combination of those two sorts of approaches or?
Yeah. James will be hiring and building the sales force that we'll be calling on the oncologist. The oncologist that we'll call on to start with will tend to be people at some of these high-end cancer centers and high-end medical institutions. There's some pretty leading people in more of a community setting as well. I mean, you have to know who's who there. You know, we expect it to be a direct sales approach with a nationally distributed sales team. We'll be building that over the next year here.
I think, you know, we'll probably talk more about that as we go forward, but I'd expect to be having tests be ordered. You know, we think we've talked about that being kind of a midyear kind of launch, that the things we'd be talking about in Q3. I expect we'll be receiving test orders, you know, commercially that we'll be billing insurance for.
Okay. Got it. Finally just, Aaron, I heard your comments on gross margin. One thing I don't think you said was, you know, the. You have this new facility, so I imagine it's bigger. Is there gonna be, you know, kind of, you know, additional overhead costs, you know, that are gonna lead to, you know, less absorption, you know, as you move in there and hurt your gross margin, I guess? Is that like another kind of headwind there?
Hi, Mike. That's correct. We are in the process of constructing our new facility. It's our target, or we anticipate being able to start to move in late Q3, early Q4. You know, it'll take a couple or a few quarters by the time we're fully moved into the new facility. The answer is yes, there will be some headwinds on gross margin coming from the new facility as well because we will have. You know, in the near term, we'll have basically our current lab in Menlo Park, we'll have a new facility in, you know, Fremont that we're building out. Yes, there will be some dilutive aspects to gross margin.
Okay. Got it. Thank you.
Sure. Thanks for the question.
Our next question is gonna be from Kevin DeGeeter with Oppenheimer.
Hey, thanks for taking our questions. If Natera was the largest contribution to revenue in the first quarter, maybe kind of a couple related questions. Yeah, first, can you remind us, you know, in general terms, you know, the level of activity from Natera in the first quarter of 2021? As we think about, you know, 2022 guidance here, you know, I guess really kinda how much visibility do you have on kinda how to think about, you know, that the trends from Natera and, you know, just kinda longer term, you know, how should we think about, you know, that, you know, high quality customer, but, you know, as sort of a continued sustainable piece of the revenue model? Thanks.
Hi, Kevin. I'll take that question. In terms of Natera, they were approximately 27% of our total revenue in Q1, a little over $4 million. You know, we have forecasts and projections from them. We try to work on as far forward as we can for purchase orders, so we can build backlog with them. In terms of the exact amount that's built into our guide for 2022 from Natera, we haven't really disclosed that, and we're not going to say that specifically. In terms of just looking at the Q1 level and the prior two quarters, you kind of infer maybe some type of an average by looking at those different periods.
You know, that's probably a fair assessment of where things might be. In terms of our backlog continuing to increase, a lot of that's coming from our biopharma or pharmaceutical customers, right? In terms of turning on the clinical trials again and getting those patient samples to flow, once that happens, you know, that revenue should accelerate. You know, it's hard to say exactly what percentage of the total revenue in Natera 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. Natera is a great partner. They've got a great offering, but there's room for, you know, for both of the products to fit into the marketplace.
No, great. Appreciate that. Appreciate the update on operations in China as well and the, you know, tremendous strategic value that those investments can, you know, provide, you know, both near and long term. In terms of a meaningful direct revenue contribution from activities, you know, in China, I mean, yeah, how should we think about, you know, a timeframe, you know, to meaningful revenue contribution? Do we kinda have line of sight on that, you know, at this point?
Good question. We haven't guided a specific number in terms of China revenue, but just giving you some directional guidance. Here in 2022, it's really about customer qualification of the lab, you know. You know, once the things open up in Shanghai, you know, we'll get back at it. You know, it's our anticipation we'll get customers qualified this year. We might have some small revenue, you know, pilot revenue, but revenue should start to ramp in 2023. We do have orders already. This is direct revenue in China. Beyond 2023, we believe that we're gonna be able to significantly ramp revenue in China. If you look at the number of patients and samples that are from China, it's a large number.
In addition, John has 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 because we're gonna be able to process samples on a global basis. You know, we haven't given that specific number, but again, that is quite large in terms of that contribution.
Can I just add one more item that's coming up that sort of turned out to be interesting, and this is that our first and the real motivation for getting started in China was 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 found that we have, you know, business development staffing now inside China. We're beginning to find interest from, and I think there's commercial potential with some of the pharmaceutical companies that are based solely in China. You know, that's a different category of revenue, but I think that's an interesting area for us as well.
Thanks for taking our questions.
Thanks.
Thanks.
Again, if you have a question, please press star and then one on your touch-tone 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 efforts into the market in the Q3 of this year. I was wondering what are some of the key milestones between now and then that you need to get through before you're able to start marketing them?
Great. Thanks. We're beginning to work with a variety of customers. We've just hired our new U.S. sales manager for that area, so you know, he'll be hiring a 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 a steady flow of patients, samples that would begin to grow and tests that we would run. As we have reimbursement results, that would lead to the revenue from that. Those are the steps that are involved here. I think as we begin that, we'll be happy to keep updating you as we go through the quarters here.
I think people are pretty excited about getting on with that and having that be a, you know, 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.