Good day, ladies and gentlemen, and welcome to the Personalis third quarter 2021 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' third quarter 2021 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, new orders, products, services, and technology. 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 third quarter of fiscal year 2021 to be filed today and our 10-K for fiscal year 2020.
Personalis undertakes no obligation to update these statements except as required by applicable law. Our press release for our third quarter 2021 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 11 A.M. Pacific Time today. Now I'd like to turn the call over to John for his comments on third quarter business highlights.
Thank you, Caroline. Personalis continues to grow, driven particularly by our oncology business. In Q3, revenue from our oncology business grew 50% over the same period of the prior year. It has increased sequentially over each of the last eight quarters. New orders received in Q3 were more than three times the amount of revenue for the quarter. In addition, more than half of the orders are for prospective clinical trials. Our pharmaceutical customers are increasingly seeing the value of our platform and incorporating it in their clinical trial designs right from the start. We expect our oncology revenue to become the largest part of our revenue in Q4 of this year, and based upon the midpoint of our updated guidance, a sequential increase of 57%.
Our pharmaceutical customer base has broadened substantially over the last year, and that contributed meaningfully to the record orders we received in Q3. Our partnership with Natera has also continued to grow, and in Q3, it was 10% of our total revenue. Natera's adoption of our NeXT Exome gives them access to its relatively large footprint for identifying somatic variants for their Signatera MRD test. It also lets Personalis participate in a part of the MRD market, which is complementary to our own product, NeXT Personal, which we plan to launch next month. We see a lot of opportunity in the MRD market and are pleased with our progress to date. We also continue to make progress in Asia. Our plans to establish a lab and commercial operations in China are continuing well.
We have now hired about 10 employees, and our team has begun to qualify our laboratory in Shanghai. We have received significant pharmaceutical customer orders, and those customers are now pursuing local regulatory approvals. We expect to begin working with customers within a few months and be in a position to recognize revenue in 2022. In Japan, we also have several major international pharmaceutical companies that are now ordering NeXT, further supporting our efforts to expand in China. In Asia, our NeXT Platform provides biopharmaceutical customers a better understanding of each cancer patient's genetic profile. Both tissue and liquid biopsies together can provide the most comprehensive view, leading to the optimal therapy and treatment decisions. Both our tissue and liquid biopsy-based offerings provide data on all of the approximately 20,000 human genes.
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're able to provide information about a patient's tumor across multiple time points from small blood samples. When used together, we believe our oncology platforms provide our customers with the most comprehensive analysis of tumor burden and biomarker identification available today. At Personalis, we actually plan two liquid biopsy products for two different applications. NeXT Personal has been optimized for maximum sensitivity, particularly for when the amount of tumor DNA in 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 have survived breast and prostate cancer.
To detect potential cancer recurrence, we can look in a patient's blood plasma for the mutational signature of their tumor. These two cancer types have such low mutational burden that they can be difficult to detect. We realized early on that we would be able to overcome this liquid biopsy sensitivity problem by leveraging our considerable high-volume whole genome sequencing experience. 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 fingerprint at over 1,000 loci and being able to select cancer variants which have a low level of background sequencing errors, we gain tremendous sensitivity. Our internal data now confirms this approach can result in sensitivity down to a few parts per million. This sensitivity advantage may translate into much earlier detection of a patient's cancer recurrence.
We believe this can be a leading technology for some very large market opportunities, and we'll have more to say about that when we formally launch the product next month. NeXT Liquid Biopsy, our whole exome liquid biopsy product, is optimized for late-stage cancers, where the amount of tumor DNA in the blood is higher and tumors may be increasingly complex. For that application, the rich information from an exome can provide much more insight. We continue to make encouraging commercial progress with NeXT Liquid Biopsy. Notably, in Q3, we received a $multi-million order for the use of our tissue and liquid biopsy full exome products together, each at multiple time points. Personalis has also filed patents related to liquid biopsy methods for many years, and in Q3, we received two new patents in this area.
We believe that our liquid biopsy-based products will contribute increasingly to revenue in 2022. Personalis' technological and scientific leadership has led to strong adoption by pharmaceutical companies who use it 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. As a result, we are taking steps to build a clinical diagnostic business for therapy selection and monitoring. We believe that the combined market potential of these opportunities is approximately $30 billion in size in the United States, and we'd now like to comment on our recent progress. First, we are continuing to build our regulatory, clinical, and reimbursement capabilities. We have been hiring employees with clinical and medical experience within a diagnostic setting, and we will continue to hire and invest in this area.
Recently, we announced the hiring of Bob Bruce as Vice President, Reimbursement Strategy and Execution. Bob has extensive experience with reimbursement, and he brings over 25 years of experience, including since 2015 as VP of reimbursement at Clinical Genomics, where he was instrumental in obtaining reimbursement for their MRD test, which will be particularly relevant as we launch our NeXT Personal LDT offering. Also, in support of our new diagnostic business, we will be incorporating FDA-compliant protocols within our new facility, which we plan to move into within a year or so. To build a strong clinical diagnostic business, we believe that it is important to work with world-class medical institutions. To that end, we recently announced a collaboration with the Mayo Clinic.
This collaboration establishes us as a preferred provider to the Mayo Clinic for clinical diagnostic and research sequencing and analysis services using our NeXT Dx test, particularly in the area of immuno-oncology. In addition, the Mayo Clinic will be able to use aggregated, de-identified patient data for research that may lead to development of new and improved treatments and systems that will ultimately benefit cancer patients. We're excited about the opportunity to work with the renowned Mayo Clinic to focus on helping cancer patients live better and longer lives, a mission and vision that we both share. 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 NeXT Dx test and a planned LDT version of our NeXT Personal test. I'd now like to update you on the population sequencing part of our business.
In September, we received a task order from the VA MVP of approximately $10 million. Although this is less than in pre-COVID-19 years, we believe that the VA MVP remains committed to the program, which has been underway since at least 2011. Since early 2020, the VA has cared for a tidal wave of COVID cases, been a major contributor to COVID vaccine clinical trials, vaccinated millions of veterans, and launched research initiatives related to COVID. We believe that this contributed to them deferring an expected 2021 sequencing RFP and extending our work for them with the task order we just received. I am proud to say that we have continued our strong execution during the last year and a half during the COVID pandemic.
Since it began, we have needed to deal with some consumable shortages, but we have been nimble and also implemented more rigor and focus around our supply chain, which has kept us in a good position to continue driving revenue growth. In summary, we continue to execute extremely well in growing our oncology revenue. Customer adoption of NeXT has been excellent, and our pipeline of compelling new products is rich. We believe we have the capital required 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 morning, everyone. We had another great quarter and achieved a new record revenue level for oncology. During my prepared remarks, I will provide detail about our financial results for the third quarter of 2021, and our guidance for the fourth quarter and the full year. Total revenues for the third quarter of 2021 were $22.3 million, up 3% from $21.7 million for the prior quarter, and up 12% from $19.8 million for the same period of the prior year. Aside from the VA MVP, biopharma and all other customers accounted for revenues of $8.6 million in the third quarter, representing a 5% sequential increase and a 50% increase over the same period of the prior year.
This was our fourth consecutive quarter with a year-over-year increase of more than 50% in non-MVP revenue and highlights a couple of key points. First, customer orders that we have won over the past year and a half are converting to revenue. Second, the new order amounts continue to exceed revenue reported each quarter and increases our backlog. This provides us with confidence that our Biopharma revenue will continue to increase in the future. Also, our current Biopharma revenue is mostly from tissue samples. As we ramp our liquid biopsy offerings, we expect this to accelerate growth due to the multiple time points, or in other words, the number of tests per patient.
For the third quarter, the VA MVP revenue of $13.7 million was higher by 1% from last quarter and was 3% lower compared with $14.1 million for the same period of the prior year. The VA MVP unfulfilled orders were $12.9 million at the end of the third quarter, and based upon current estimates, we expect the unfulfilled orders to convert to revenue during Q4 of this year and Q1 of 2022. Gross margin was 36.2% for the third quarter, compared with 37.7% for the prior quarter and 26.9% for the same period of the prior year.
The year-over-year increase of 930 basis points was primarily due to operating leverage from the 50% increase in biopharma and non-MVP volume, customer mix, and lab efficiency improvement. Over the next couple of years, we do expect some gross margin variability due to headwinds from investments in new capabilities, such as dedicated production lines for FDA-approved offerings, running diagnostic tests while we work to increasingly secure reimbursement, adding more capacity, expanding in China, and others. Longer-term, we expect our gross margins to increase as we achieve scale and with our oncology revenue becoming a larger portion of total revenue. Operating expenses were $25.8 million in the third quarter, compared with $15 million for the same period of the prior year.
R&D expense was $13.6 million in the third quarter, compared with $7.2 million for the same period last year, and SG&A expense was $12.2 million in the third quarter, compared with $7.8 million for the same period last year. The increase in R&D expense was for new product development and continuing to build our clinical and medical infrastructure. The increase in SG&A was due to commercial expansion, continuing to enhance our infrastructure, and public company costs. Net loss for the third quarter was $17.7 million, compared with the net loss of $9.5 million for the same period of the prior year.
The net loss per share for the third quarter was $0.40, and the weighted average basic and diluted share count was 44.5 million, compared with the net loss per share of $0.27 and a weighted average basic and diluted share count of 35.5 million for the same period of the prior year. Now on to the balance sheet. We finished the third quarter with a strong balance sheet with cash and short-term investments of $305.2 million. In the third quarter, we used approximately $23.7 million of cash due to the net loss, working capital needs, and capital equipment purchases.
We expect our full year 2021 cash usage to increase from the mid-$40 million range in 2020 up to a level of approximately $85 million due to investing in many growth initiatives. Now I'd like to turn to guidance. We continue to drive oncology revenue growth through our pharma partnerships and the adoption of our NeXT Platform. Our backlog in this area has increased significantly and gives us confidence about our future potential growth. For the fourth quarter of 2021, we expect total company revenues to be in the range of $20.2 million-$20.4 million, and we expect biopharma and all other customer revenues, excluding the VA MVP, to be in the range of $12.5 million-$14.5 million, representing a year-over-year growth rate of approximately 77% at the midpoint.
Net loss is expected to be in the range of $22 million-$23 million, and the weighted average basic and diluted share count is expected to be approximately 45 million. For the full year of 2021, we expect total company revenues to be approximately $85 million, and we expect biopharma and all other customer revenues, excluding the VA MVP, to be in the range of $37 million-$39 million, up from our prior guidance of $34 million-$35 million, representing an annual growth rate of 69% at the midpoint. Net loss is expected to be in the range of $67 million-$68 million due to the increase in expenses and the weighted average basic and diluted share count is expected to be approximately 45 million.
We plan to provide 2022 full year revenue guidance during our next earnings call when we report our fourth quarter and full year 2021 results. 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 star then the number one 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 your first question. Your first question comes from the line of Tejas Savant with Morgan Stanley.
Hi, this is Neel Ram on for Tejas Savant. Just had one question on the MVP. Now that you're out of the procurement period, has there been any recent dialogue with the VA on the potential for another task order, looking at March 2022?
Yes. This is John. Thanks very much for your question this morning. We haven't yet. I think it's a little bit early for that. In general, the VA would look at a new request for proposal. Historically, that would be something we'd start to see activity on in, you know, May or June of next year, if they were going to do something for the next fiscal year. I haven't heard anything else other than that.
Got it. One other question, and this is related to your comments on consumables. Can you provide us with some color on how you're managing supply chain disruptions, and any initiatives to manage inventory on hand while working through backlog, in 2022? Do you foresee this having any impact to gross margins?
Yes. This is John. I think we've commented on it in prior quarters, actually starting back in early 2020, when we started to see the pandemic sort of beginning to ramp up. We actually invested a fair amount in additional inventory, and it wasn't necessarily a huge dollar amount, but it was a lot of physical material because we know that many of the things that can slow you down or be a problem are small, you know, low-cost items like plastic pipette tips. We had, frankly, a wall of boxes of pipette tips and other items like that to make sure we didn't run out, and we've been able to continue production.
We have seen issues where this issue of shortage of lab qualified plastic has led to delays from some of our reagent suppliers because they have the reagent, but they don't have a bottle to put it in. We've been navigating around that. In general, we've increased our safety stocks substantially, and we've been very active from a purchasing standpoint, so we've been able to stay on track. It's certainly been something we've had to spend a lot more time and effort on. So far, fingers crossed, it's in fact been going well, and we've been able to keep up production each quarter. It's definitely a very active area for us.
Got it. That's it for me. Thank you.
Great. Thanks.
Your next question comes from the line of Kevin DeGeeter with Oppenheimer.
Hey, good morning, Kevin.
Hey, great, thanks. Hey, good morning. Maybe just two quick ones from us. As we think, you know, 2022 and beyond on kind of R&D spend and the investments and, you know, the build-out for clinical diagnostics, should we think about, you know, a need for, you know, somewhat larger clinical trials around either NeXT Personal or MRD or kind of some of the other, you know, clinically oriented, you know, diagnostic tests to support, you know, reimbursement and the commercial model there?
I think that given the performance of the Personalis product and the fact that it's in some ways breaking new ground, that it will make sense for us to have clinical studies that demonstrate that. I'm not sure that will be required to achieve initial reimbursement, but we do expect there'll be studies like that, and that's part of the reason that we're partnering with the Mayo Clinic. I mean, you almost can't imagine a better place to work with than the Mayo Clinic. They have about 12,000 cancer patients per year, just of almost every type of cancer. I think they'll be a terrific partner in that, and I think it will help us to conduct studies like that on a relatively efficient and expeditious basis.
Yes, absolutely, we look forward to working with them. I would expect that we'll have other partnerships with other high-end medical centers that we'll be able to announce over time, as well.
Can you provide an update on the company's China lab expansion and ex-US biopharma? I guess, you know, if you want to comment on POPSEQ as well, but, you know, specifically, you know, the China lab, how's that build-out going?
Yeah. I think the lab build-out has gone well. We have a good team there now. We're now beginning to process non-customer samples just to show that we can get the exact same results in Shanghai as we do in Menlo Park. I think a key thing to understand about the China area is that we've ended up receiving some orders from large international pharmaceutical companies where, you know, something like 95% of the value of the order will be processed in our lab in California and perhaps 5% will be processed in Shanghai. The fact that we were able to do the part and sign up to deliver the identical product in Shanghai has been instrumental in us actually receiving those orders.
If you look at revenue actually run in the Shanghai lab, you know, that will take some time to grow and will be probably relatively modest in the early period of time, but that doesn't mean it isn't having a material impact on our overall results because it helps us win these international clinical trials where some of the recruiting sites have to be in China. I don't know if that helps you there, but we are seeing a lot of positive feedback, particularly from the larger pharmaceutical companies that do operate in many countries in parallel and where China is important for them.
Great. Thanks for taking my questions.
Great. Thank you.
Again, if you have a question, please press star then the number one on your touch tone telephone. Your next question comes from the line of Patrick Donnelly with Citi.
Hey, guys. Thanks for taking the questions. Maybe one on the oncology orders. You're obviously encouraging traction there. You know, I know when you talked about the VA, you know, a couple of months ago, you talked about, you know, what growth we could expect for 2022. You know, has the momentum increased since then? I mean, again, clearly the numbers came in really strong. 4 Q, it doesn't feel like you need a whole lot of orders to hit the numbers you talked about, but would love to just talk through the setup there and how you're feeling about the numbers.
Yeah. I'd say we're feeling great about Q4. I mean, you saw us predicting now with the new guidance at the midpoint that quarter-on-quarter growth in our oncology business will be at 57%, so that's a pretty strong ramp, 77% year-on-year. I think we're feeling great about that. These are things that have been coming together for some time. We have a number of large pharmaceutical companies that have really been scaling up pretty rapidly for us there. I think we had expected over time that the oncology business would become the largest part of our business for the long term relative to the population sequencing.
To some extent, with you know the way that this has played out with orders, the order we received from the VA was lower than I think we had thought was possible for this year. On the other hand, the orders from the pharma side have been you know almost a tidal wave. I think that's been you know the two of those offset each other to some extent. I think we're basically just turning that corner sooner than we thought we would, and actually that's a good place to be. We're excited about the growth of the cancer business. That's you know the biggest part of our company for the future and an enormous available market.
Just to elaborate on that a little bit, Patrick.
Yeah, go ahead.
In terms of what John just went through, if you go back a year and a half to two years ago, a large order for us was a couple hundred thousand dollars and we had a significant concentration with just a couple of large pharmaceutical partners. If you look at the third quarter, we had three times the new orders come in compared to revenue we reported. If you look at the mixture of those orders, we had several customers that were multi-millions of dollars of orders in that batch. In addition, we had several customers who had hundreds of thousands of dollars of orders.
In terms of the penetration that we've been after over the last couple of years with the adoption of the NeXT Platform, it's working and, you know, we've got most of the large top 10 pharmaceutical companies as our customers today, and we're focused now on deeper penetration with all of them, and we believe we have a long ways to go, and we're really excited about where we're at today. Going into the fourth quarter and then into next year, we're not providing guidance for 2022 just yet, but, you know, we're very confident that we can grow at least 50% in 2022 because of all the order traction we've seen to date.
That's really helpful. Thanks, Aaron. Maybe kind of following up on that, you talked about the VA. It sounds like your expectation, given where the backlog is, basically we should assume, you know, it's kind of fully done by 1Q. Beyond that, should we just model essentially nothing? Is that kind of the message going out? Just wanna make sure we're thinking about the model right for next year.
Yeah. In terms of the VA MVP, we've got enough backlog right now that'll be fulfilled here in Q4 and then into Q1. The RFP process, like John had alluded to, would come out in the summertime. You know, the second, third, and fourth quarter right now, I think from a modeling standpoint, it's safe to model you know, zero basically. We'll know more, you know, if we win in the next contract in the summertime. You know, we've been a partner, a good partner for the last nine years or so, and we're very confident that when an RFP process comes out, we'll be able to win, but we just don't know the size or scale of that. Right now I think it's prudent to be conservative.
Very helpful. Thank you, guys.
Sure. Thanks, Patrick.
Your next question comes from the line of Arthur He with H.C. Wainwright.
Hi, good morning, everyone. This is Arthur.
Good morning.
Calling in for RK. Thank you for taking my question. I believe if I recall correctly, Aaron mentioned for the oncology business, about 50% are from the tissue biopsy. Could you give us more color on the coming new order in terms of mix of tissue and the liquid biopsy? How is your internal thinking driving more the liquid tissue biopsy b usiness?
I would say at this point. Go ahead .
Oh, Arthur, I was just going to clarify. We didn't say 50% has come from liquid biopsy. I think what we've said is, you know, in terms of the growth that we've seen, it's been substantial. Most of the business we've had to date has been from tissue. We have done a great job here in the third quarter and the last couple of quarters with orders for liquid biopsy, our exome-scale liquid biopsy. We believe that going forward is really the great opportunity for us to scale with liquid biopsy, our exome product as well as our MRD NeXT Personal that's going to be coming out next month. Right. Very little liquid biopsy to date.
Okay, I see. Is there any trend you guys see through the new order for the mixer?
This is John. I guess one thing I might want to highlight is that we actually see customers ordering both of them together. I think in some other companies, because they don't have a tissue product, they'll sometimes portray liquid biopsy as just being an alternative to tissue biopsy. Actually, you get different information from liquid biopsy compared to what you get with tissue, and they're both valuable. We've seen. I think we highlighted one of our customers ordered for a set of clinical trials that they're running. They're combining both the liquid biopsy and the tissue biopsy at multiple time points each through the clinical trial. You can see with the tissue biopsy, you see things like RNA, and you can see the immune cells that have infiltrated the tumor.
Those are things you can't see with a liquid biopsy. The liquid biopsy is obviously a way easier way to get multiple time points. We find that, and I think we encourage this, that customers use the two of them together. Each one complements the other. I think you'll see, since we actually have both, that you know the capability to use them together actually is a real advantage for customers, and so we think we'll see somewhat more of that.
Okay, thank you. Thank you for the color.
Yeah, thank you.
I'm not showing any other questions at this time. 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.