Personalis, Inc. (NASDAQ:PSNL) Q3 2022 Earnings Conference Call November 2, 2022 5:00 PM ET
Company Participants
Caroline Corner – Investor Relations
John West – President and Chief Executive Officer
Aaron Tachibana – Chief Financial Officer
Conference Call Participants
Max Masucci – Cowen
Vivian Bais – BTIG
Joseph Conway – Needham
Arthur He – H.C. Wainwright
Operator
Good day, ladies and gentlemen and welcome to the Personalis Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this call maybe recorded. I would now like to hand the conference over to your first speaker today, Caroline Corner, Investor Relations. Please go ahead.
Caroline Corner
Thank you, operator. Welcome to Personalis’ third 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 facts 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 this year and longer term, cash runway, revenue expectations and timing, new orders, products, services, technology, the timing of data publications, clinical and regulatory milestones, the outcome and timing of reimbursement decisions, future collaboration activities, cost expectations and our market opportunities, 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, including the special note regarding forward-looking statements and risk factors described in our 10-Q for the third quarter of 2022 filed today. Personalis undertakes no obligation to update these statements, except as required by applicable law.
Our press release for the third 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 third quarter business highlights.
John West
Thank you, Caroline. In Q3, all of our revenue came from our oncology business, which was up 73% over the same period from the prior year. Going forward, we expect the centerpiece of our oncology business to be our MRD test, NeXT Personal. Given its importance for our future and the progress we have made since Q2, I will focus today on this revolutionary new platform. I believe that NeXT Personal is the most sensitive and most richly informative cancer MRD test in the world. Although we see a lot of potential for this platform and advanced pharmaceutical clinical trials and that adoption has already begun, this platform is ultimately intended to provide key information for oncologists to use in making decisions for the treatment of individual cancer patients.
When we began the development of NeXT Personal, we completely rethought what was needed. While other MRD platforms detect cancer recurrence earlier than radiology, we believe that was not good enough. Patients being monitored with first generation MRD assays often received negative results for a year or more only to have the cancer eventually rise again above the limit of detection. During that initial year, the patient actually has cancer, but the test is not sensitive enough to detect it. We asked ourselves what sensitivity would it take? Using published data from earlier technologies, we extrapolated back to the point just after surgical resection and calculated what level the tumor signal and the blood plasma might have been. In one case after another, we found that sensitivity at a part per million should be able to make the detection.
Detecting tumor DNA and blood plasma at a part per million is a daunting challenge, requiring a sensitivity improvement of as much as 100 fold. Sequencing the blood plasma more deeply will not help, because there are only a few 1000 copies of the genome in a typical plasma sample. To detect the cancer signature at a few part per million requires at least a few million molecules, each spanning unknown tumor mutational signature. We realized that we would need to combine the signal from over 1000 different positions in the genome and sequence a few 1000 unique molecules at each of those to amass the data required from a few million total molecules. It is not easy to find thousands of mutations in a single tumor sample. From our experience, sequencing tens of thousands of cancer exomes, we knew that would not be enough.
According to the American Cancer Society, by far the largest number of cancer survivors people at risk of cancer recurrence are those who have had breast or prostate cancer. Those two cancer types, in particular, have low rates of tumor mutation. We realized that the only way to consistently identify the thousands of mutations we needed from these cancers was to use whole genome sequencing of the tumors.
Personalis first worked on this problem and filed our foundational patents about a decade ago. At that time, deep whole genome sequencing was very expensive, but we believe the cost would come down. Over the years, we also drove down our own cost of whole genome sequencing by the automation and optimization that we implemented sequencing whole human genomes for the VA Million Veterans Program. Personalis has now sequenced over 150,000 whole human genomes a number that we believe is more than any other for-profit U.S. company. We have leveraged this experience to pioneer whole genome tumor informed MRD testing and achieve our goal of part per million sensitivity.
When we planned our MRD test, sensitivity was not the only dimension we re-imagined. While sensitivity is essential for the initial detection of cancer recurrence and an MRD test can be used to monitor the growth of the recurrent cancer, just monitoring on its own is not good enough. Physicians will need information about a recurrent cancer to decide how to fight it. For example, what would be the best first line therapy? Is the patient responding to the first line therapy? Is the tumor developing resistance to the therapy? And if so, what options are there for second line treatment? Is the cancer detected even a recurrence at all or could it be a new cancer with different characteristics from the original?
To help physicians fight recurrent cancer and frankly to deserve ongoing test reimbursement after a recurrence has been detected, we realized that integrating tumor characterization capabilities into our test could make an MRD result much more actionable. To address the questions just mentioned, in a sensitive MRD assay, we pioneered a method to combine tumor agnostic content, which is the same for every patient with tumor informed content, which is different for every patient in a single assay. Our software combines these two data types and we synthesize all of this content together in a custom assay designed for each patient.
Presentations about MRD often focus on detection of recurrence after surgical resection and that is a huge need. But metastatic patients can also benefit from a sensitive MRD assay. This may seem counterintuitive, since metastatic cancers can be much larger than early stage cancers and shed much more DNA into the blood plasma. What we and others have found though is that the amount of tumor DNA in a patient’s blood plasma can drop dramatically in an initial response to therapy. It can fall by more than a factor of 100 in just a few weeks. In one published study using an earlier technology, patients responding to immunotherapy fell below the limit of MRD detection and stayed there, sometimes almost 2 years before regrowth of the cancer finally brought the MRD signal back above the limit of detection. Just as in the case with surgical resection, the patients had cancer the whole time, but the MRD assay was not sensitive enough to detect it.
In the advanced diagnostics field, to help talented leaders often are drawn to what they perceive to be the next big opportunity. In planning for our diagnostic business, Personalis has recruited new leadership in medical affairs, clinical development, reimbursement, diagnostic sales, marketing, lab operations, and general management. As we have recruited, our advanced MRD platform, NeXT Personal, has been an amazing magnet, drawing some of the best talent from leading companies across our industry.
While it is a broad group, I would like to highlight in particular, our recent addition at Chris Hall as Senior Vice President of our Diagnostic business. From 2010 through 2019, Chris progressed from Chief Commercial Officer to COO, and ultimately President at Veracyte. For almost a decade before that, he held leadership roles at Berkeley HeartLab, which was acquired by Celera Diagnostics. This is a great addition to our senior management team. Welcome, Chris.
Like top management, key opinion leaders in our field are also attracted to transformational new technologies. Over the last year, we have found KOLs to be increasingly drawn to our NeXT Personal MRD platform. We have signed and are executing on a growing set of collaborations and expect to be testing thousands of plasma time points across many different cancer types and stages. We expect to announce more of these collaborations in the coming months.
Quite a few of these collaborations involve sets of longitudinal patient samples, which have been collected over many years. We anticipate that data from these collaborations will lead to important publications and conference presentations in 2023. We expect these publications to lay an important foundation for our future reimbursement applications. Initial data from our collaborations is beginning to be generated and the results show exactly what we anticipated. We see patients whose entire MRT MRD trajectories for below the limits of detection of earlier technologies at which we can detect with our part per million sensitivity. In some cases, tumors appear to be beginning the process of escape from immunotherapy that at a level that would not normally be detected yet. We also see mutations which indicate that if immunotherapy does fail, targeted therapy could be a second line possibility.
In addition to academic and non-profit KOLs, we should have seen early pilots in pharma now lead to larger scale adoption. Two pharma have placed orders over $1 million each. We have seen that interest in our platform is growing at pharma in the United States, Europe and China. Notably, we see a growing interest in the use of NeXT Personal in clinical trials of personal cancer vaccines and other personalized neoantigen targeted therapies. Personalis has worked with the majority of companies in that field since 2016 and although early clinical results were challenging, more recent results seem to be rekindling interest and investment.
Long-term, we expect the largest market for our MRD test to be in clinical diagnostics and plan to launch it as a lab developed test or LDT in 2023. We have been building a commercial team to support that and now have regional sales leadership all across the United States. We launched the latest LDT version of our NeXT Dx Test in late September and have an initial flow of orders and are beginning to invoice payers. We anticipate a MolDx submission in early Q1 and are optimistic that we will receive initial approval in Q2.
Looking to the future, we predict diagnostics as our largest opportunity and our MRD platform, NeXT Personal, as the centerpiece. In it, we are pioneering personalized diagnostics, designed and synthesized individually for each patient at a level we have never seen before attempting. Each test targets over 4,000 genetic loci and over 2000 of those are personalized to the patient being tested. The mutations which cause cancer are personal and the fight against the cancer is also a deeply personal one.
Appropriate to our company name, Personalis, we are now creating cancer diagnostic tests, which are highly personal as well. Given the importance of this strategy to our future, we have initiated an evolution of our company brand as we enter into the clinical market. Please join us at the SITC conference in Boston next week for our first preview. Given its strategic importance, I have focused so far today on our MRD assay, NeXT Personal and the launch of our diagnostic business to support it.
Before I hand this over to Aaron for our financial results, I’d like to mention three other areas of progress. First, in Q1, we recognized approximately $1.5 million of revenue from an exome-scale liquid biopsy project for a leading global pharmaceutical company. Interestingly, as we work with KOLs on our MRD test, NeXT Personal, we find they often ask to combine its deep sensitivity with the breadth of our liquid biopsy exome test at select time points and our tissue-based ImmunoID NeXT Platform as a starting point.
Second, in September, we were awarded an exclusive 5-year contract and an initial $10 million order from the Veterans Administration Million Veterans Program. Personalis has been the sole provider of whole genome sequencing to the VA MVP for 10 years. The VA MVP has also begun to enroll veterans into the program once again after a break during the pandemic. And they are now up to approximately 900,000 enrollees, with a stated goal of enrolling the 1 million veterans in 2023. After the contract was awarded, we were notified that the contract is under protest by a competitive bidder. Assuming a favorable outcome, we expect to begin receiving samples within a few months and we expect to recognize revenue from the most recent order in the first half of 2023.
Third, I want to briefly comment on the exciting wave of breakthroughs in DNA sequencing technology that have been announced this year and how that can help Personalis drive costs lower in the future as we run very large assays. We have mentioned being an early access customer of Ultima Genomics, which is at the forefront of realizing the $100 genome. In addition, Illumina recently announced their NovaSeq X Plus sequencer that will have twice the throughput of the current NovaSeq platform at an approximately 60% lower cost per base.
We have placed one of the first orders for our system so that we can test and evaluate it once it becomes available. This matters because most Personalis products are large scale, using either deep exome or whole genome sequencing. We built our platform expecting that the throughput and cost of sequencing will decrease over time. As that happens and because of the size of our platform, we think we can benefit more than other companies with products that use much less sequencing than ours. New sequencing platforms focused on high throughput at lower costs potentially give us opportunities to reduce the cost of our large assays and they are an important part of our plan to improve our gross margins.
In summary, we see our MRD test, NeXT Personal, which takes the personalization of cancer diagnostics to a much more advanced level as patients and oncologists will want to see the best test to actively manage their cancer. We believe that we have the best MRD test for the clinical market and that is why we believe we will win in the marketplace. It will build on the base we have built with our pharma and other customers and is beginning to take off with customers, new company leaders and KOLs. We have a strong balance sheet to support this and look forward to telling you more in the quarters to come.
With that, I will now hand it over to Aaron for our financial results.
Aaron Tachibana
Thank you, John and good afternoon everyone. During my prepared remarks, I will provide detail about our financial results for the third quarter of 2022 and guidance for the full year. Total company revenue for the third quarter of 2022 was $14.9 million and decreased 33% compared with the same period of the prior year, which was expected due to the $13.7 million decline of VA MVP revenue. The entire $14.9 million was from our oncology business, which continued to perform well, with revenue increasing by 73% over the same period of the prior year. The year-over-year increase in oncology revenue was driven mostly by the volume increase from Natera, which accounted for half of our oncology revenue in the quarter.
Gross margin was 16.7% for the third quarter compared to 36.2% for the same period of the prior year. The year-over-year decrease of 19.5% was primarily due to the expected under absorbed overhead costs from the decrease in revenue volume from the VA MVP and also an increase in expenses to support our growing oncology revenue volume. Within our production laboratory, we use more direct materials and sequencing equipment capacity for the VA MVP whole genome samples, while our oncology business requires a higher proportion of labor and overhead expenses, such as direct and indirect labor, lab supplies, facility footprint and other related costs compared with the VA MVP.
Over the next couple of years, we expect some gross margin variability due to the fluctuate VA MVP volume, investments in new capabilities, such as dedicated production lines for liquid biopsy offerings, providing diagnostic tests, while we work to increasingly secure reimbursement expanding in China, adding our new facility and others. However, we expect our gross margins to increase longer term as we achieve scale by growing our oncology revenue.
Operating expenses were $29.7 million in the third quarter compared to the $25.8 million for the same period of the prior year. R&D expense was $14.9 million in the third quarter compared with $13.6 million for the same period last year and SG&A expense was $14.8 million for the third quarter compared with $12.2 million for the same period last year. The increase in R&D expense was for product development, building 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 third quarter was $26.5 million compared with a net loss of $17.7 million for the same period of the prior year. The net loss per share for the third quarter was $0.58 and the weighted average basic and diluted share count was $45.9 million compared with a net loss per share of $0.40 and a weighted average basic and diluted share count of $44.5 million for the same period of the prior year.
We finished the third quarter with a strong balance sheet with cash and short-term investments of $192.8 million. In the third quarter, we used $40.7 million of cash due to the net loss, working capital needs, construction of our new headquarters facility and capital equipment purchases. We continue to work on extending our cash runway as far out in time as possible and as of the end of the third quarter we have more than 2 years of cash on the balance sheet.
Our 2022 full year cash use adjustment is approximately $120 million, which we have reduced from $140 million at the beginning of this year. This amount includes a one-time investment of approximately $38 million for the construction and setup of our new facility and this amount is net of $13 million for tenant improvements from the landlord. We expect approximately $4 million of building costs to be paid in early 2023 and we expect $2 million of that amount to be reimbursed by the landlord. Although our liquidity is very good, we continue to manage and invest our cash prudently.
Now I’d like to turn to guidance. In the first half of this year, our revenue was impacted by slower and reduced patient enrollment for clinical trials due to COVID. Despite these headwinds, we remain on track to achieve oncology revenue results that are within our original guidance range. For the full year of 2022, we expect total company revenue to be in the range of $63 million to $64 million and we expect oncology revenue from biopharma and other customers to be in the range of $55.5 million to $56.5 million. No additional VA MVP revenue beyond the $7.5 million recognized in the first half of 2022. And net loss is expected to be in the range of $111 million to $114 million.
We are planning to provide our 2023 guidance on our fourth quarter and full year 2022 conference call. At that time, we should have more clarity about the VA MVP. And importantly, we expect to have a better sense of recovery trends for biopharma customer clinical trial enrollment and the ensuing sample shipments. We look forward to providing more information at that time.
Now, I will turn the call back over to the operator to begin the Q&A session. Operator?
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from Tejas Savant with Morgan Stanley. Please go ahead.
Unidentified Analyst
Hi, this is Neil on for Tejas. Recently, you cautioned of tightening budgets among large pharma customers. Would you characterize this as a broad-based dynamic you are seeing among these customers and are you seeing any more pronounced issues amongst smaller or mid-sized biotechs? And amidst the evolving macro backdrop, any high level color you can share with us on how you are thinking about this trend having a potential impact on growth or sample shipments in ‘23?
John West
Hi, Neil. Thanks for the question. Yes. So in terms of what’s been happening recently with the recessionary concerns and the overall macro backdrop, we have seen a slowdown with biopharma demand primarily because of their budget concerns and them watching their spend. In addition, it’s definitely been a little bit tougher for the smaller biotechs who maybe have cash constraints or have to go raise additional money to be able to move forward with trials and projects. So, we have seen that over the last several months here. In terms of when it will start to improve right now based upon what we do see, it is continuing today. And so, it’s our anticipation this could go on into early 2023, but hopefully things start to turn around. And cancer is something that is a global problem, it needs to be solved. And drug discovery is an important aspect of what pharmaceutical companies work on. And we believe we have a great tool and platform to help them with it. And so, hopefully this is a short-term dynamic that we are dealing with.
Unidentified Analyst
Understood. And on a related note, some of your peers have noted customer slowdowns in clinical trial as it relates to staffing shortages. Are you seeing any sort of similar dynamic impacting some of these sample shipment delays or any of your own hiring efforts?
Aaron Tachibana
Yes. So the sample shipments coming back in from trials, it’s definitely slower as well, primarily because when you look at our backlog to-date, two-thirds of our backlog is for prospective clinical trials, meaning patient enrollments and sample collection have to occur before we can do work on these projects. And so, with some of the things that have gone on with staffing shortages starting from the pandemic, it’s been going on now for several months and so that’s another reason for some of the constriction or the tightening in terms of sample flow to us.
John West
I would say that the – I just probably I agree with everything that Aaron has said here. I think that pharma has multiple different needs. And one of the areas we are seeing a lot of interest in now is pharma focus on clinical trials that affect drugs being used in earlier stage cancers, for example, on an adjuvant basis after surgical resection. So, I think as people are beginning to understand the capability of our NeXT Personal platform, even if next year is a more difficult overall budget environment, I think the strength of our new product will help us there in pharma. We are beginning to see pharma go through pilot studies with NeXT Personal. And as you mentioned, we are beginning to see some larger scale take up in that. I think, as more pharma get through that, that pilot stage, I think that can lead to growth next year even if the overall market area is a bit constricted because of recessionary issues.
Unidentified Analyst
Got it. And then one last for me, so one of the other new entrants in the MRD space recently saw some pushback with the FDA requesting for additional clinical data in order to secure coverage. Do you foresee this response having any implications on your efforts as you proceed the MRD opportunity?
John West
Yes, this is John. I think that the performance of our test and the richness of its information are quite different from some of the other platforms, so obviously be careful about that. And it’s part of the reason that we have set up such extensive collaboration so that we will have real thorough data. I think, we are looking at thousands and thousands of samples that are going to be processed. And to some extent, the scale of laboratory that we built when we were working with the VA MVP puts us in great shape to be able to handle such large sample volumes. But I think the FDA and also the insurance companies will be looking for extensive published peer reviewed data. And I think with the collaborations that we have set up, I think we are going to have some fantastic data and some amazing publications. I think we may be in a different position from some of the other companies in this space.
Unidentified Analyst
Great. Appreciate the time.
Operator
Thank you. [Operator Instructions] Our next question comes from Max Masucci from Cowen. Please go ahead.
Max Masucci
Hey, good afternoon. Thanks for taking the questions. John, one for you to start, I am just curious how you are thinking about the ideal timing or strategy around refreshing or updating your sequencing infrastructure and just understanding that it takes time to complete the infrastructure upgrade. Just curious if we look say a few years down the road, is there anyway that we can sort of ballpark where the per sample gross margin ceiling could improve too or just generally how it compares to what you are seeing today?
John West
Yes, that’s a great question. I would say,the timing as you know we are working with the Ultima Platform and that’s still not been commercially released. Our understanding is that maybe released on a full-blown basis in the middle of next year. So that may help us quite a bit. Just to put it in context, our current sequencing costs on the high end NovaSeq platforms that we already have would be the equivalent of about a $500 genome. So going from a $500 genome down to $100 gene would be an 80% reduction in our sequencing cost. And for many of our products, sequencing is the largest single element of cost of goods sold. So, an 80% reduction in a prime cost like that could be very substantial. We did order one of the first of the new Illumina NovaSeq X Plus systems back when the original NovaSeq came out, we ordered 10. In this case, we just ordered one this sort of see how it goes and compare it with the Ultima system, we have been hearing that, that maybe delivered in February. I think our expectation is these new platforms usually take a little while to have the issues get shaken out of them. And frankly to compare the two platforms, but let’s say by this time next year, I would expect Illumina will actually be delivering on the large flow cell that they expect for the X Plus system. And that’s what really will bring the cost down. So somewhere at that point that will probably have early access to something like that. So I am guessing that by the time that the costs really comes down on those Illumina systems, to the extent that we take our products to that platform, you could be seeing improvements in gross margin that might begin in early ‘24. Similar kind of thing, if we ended up bringing some of the products on to the Ultima Platform, but it could be quite a substantial reduction in cost of goods sold given how much sequencing we put in, that’s intentional that we have designed our products to be the cancer diagnostic tests of the future not to be designed around the HiSeq or something from the past, which many of the competing products are. So I think those – as those new sequencing platforms come out and we can really get them into production, I think they will help us substantially from a gross margin standpoint.
Max Masucci
Great. That’s fantastic. And I know it’s only been about a month since you announced the partnership with Olink. But I would just – it would be great to hear where you see the proteomics technology like the PA technology sort of addressing any key limitations of the core MRD platform. And then if you just take a look at some of the differentiating factors of NeXT Personal compared to some of the other MRD platforms that are out there whether you see differences in the value of the synergies that can be had as we start to sort of work proteomics into the equation in a more meaningful way for MRD?
John West
That’s right. Yes, I would say, proteomics would be something that would be pretty exploratory for us. I can’t say we have anything to say publicly about that saying we are interested in. We will certainly work with that. But it’s not the centerpiece of what we are doing. I think on the MRD side, the different – the two key differences are dramatically higher sensitivity, which means cancer recurrence maybe detected like a year earlier than with some other platforms, so really substantial difference for patients. And in addition, the fact that our MRD assay isn’t just an MRD assay, it’s not just measuring whether the cancer has recurred or not, it’s not just quantifying it, but it’s providing deep characterization of the tumor. We know that many tumors have a lot of dynamics to them that there may be certain subclones that are changing relative to others and that may substantially affect the successful treatment. You may see resistance to the therapy that the patient has put on that opportunities to use a different therapy. And so that richness of data to guide, the actual decisions of the oncologists, not just detecting or not detecting is really pretty transformationally different. I think we are pretty much the only test that – tumor informed test that has that kind of capability and the tumor agnostic tests just aren’t really sensitive enough. So I think it’s a – we have the best of both worlds in that regard. I think it’s an important difference. And we put a lot into that about half of the content of NeXT Personal is not aimed at MRD, it’s aimed at characterizing the tumor and seeing how the tumor is changing dynamically. And I think that will turn out to be a really winning strategy for us.
Max Masucci
Great. And then I will sneak one final one in here. And I will acknowledge and have been probably front running this question by at least a year, but be great to hear your opinion. So I mean, we are starting to see the next phase of development and optimization of MRD monitoring platforms. Now, I guess, one obvious anecdote would be rising interest and acceptance that we have seen for MRD approaches that employ upfront whole genome versus whole exome sequencing, but there is rumblings of potential integrations of long read technologies and whatnot. So if you look at your IP portfolio, it would just be great to hear which aspects of the platform you feel are best protected, most defensible things of that sort?
John West
Sure. I think that the two key areas that we are focused on from an IP standpoint have been the use of our whole genome sequencing upfront to identify the largest number of variants. We have talked a bunch about that. And then also IP around the combination of what we would call fixed and variable content, the fixed content being the tumor agnostic content and the variable being the personalized content to do with that individual. So those are two real centerpieces. We have IP that covers a variety of other things. But I think if you focus on those two pieces, those would be the most helpful. I’d say in terms of long read sequencing, probably not so useful in the MRD space, because again, MRD is mostly being measured from cell-free DNA and most of the cell-free DNA molecules average about 165 bases long. So even though it would be the long read technologies are admirable, the molecules just aren’t long enough to require it. So, I think it’s part of the reason that we have focused on some of the very high throughput, shorter read platforms like Ultima Genomics, because I think liquid biopsy is an enormously important tool going forward and it’s pretty much all short molecules. And so I think that’s more important for us at least in oncology than the long read platforms.
Max Masucci
Great. Well, thank you, as always, for the great color. Appreciate it.
John West
Thanks Max.
Operator
Thank you. [Operator Instructions] Our next question comes from Patrick Donnelly with Citi. Please go ahead.
Unidentified Analyst
Hi, this is Lizzie on for Patrick. Thanks for taking my question. I was just wondering I think last quarter you mentioned that you are opening a new a new Shanghai facility, the beginning of next quarter and you expect to see revenues kind of accelerate through 2023? Is that kind of the same timeline we should think about just given the recent lockdown trend? Thank you.
Aaron Tachibana
Yes, so we don’t anticipate any revenue here in 2022. We believe it’s going to accelerate into 2023. In terms of the expectations, we haven’t given formal guidance or an estimate to share, but revenues are going to be moderate in 2023 and then ramped from there.
John West
I’d say that one of the things that’s important to understand about our initiative in China has been that it was really all driven by pharmaceutical companies saying that they really needed to have a capability to run international clinical trials where they are recruiting patients all over the world and from anywhere in the world other than China, they can just ship the samples to us and that works fine. But they are not allowed to ship samples out of China. So they asked us to open a facility in China where we could handle the samples just directly in China return the data to them in China. What that’s enabled though is for large international trials, where maybe that only 5% of the patients are actually being enrolled in China, the other 95% are outside of China. But because we can do that 5% in China, we get the entire deal. And so we have seen revenue, we haven’t recognized revenue actually processed in China yet, but we have had millions of dollars worth of orders from pharmaceutical companies where we wanted in part, because we had – we could handle that small percentage that’s in China. And so the larger part of our revenue that will be in a sense, caused by us having or the benefit of us having a China operation will actually be recognized here in California.
Unidentified Analyst
Great. Thank you. That’s interesting. And then on the supply chain, I think last quarter, you said that this quarter there will be some alleviation. Do you – is that still the same way to think about as we head into Q4 and into 2023, as well. I am just going off with the labor question earlier. Thank you. And that’s it for me.
John West
I am sorry. Can you clarify the question gain? We didn’t quite understand.
Unidentified Analyst
Yes. Just anything on what you are seeing on supply chain. I think you may have touched a little bit on this on when you spoke about labor as well. I was just wondering if you could elaborate on that. Were you able to hear me?
John West
Yes. Now, we have got it. Thank you very much.
Unidentified Analyst
Okay. Thank you.
John West
I think we have supply chain issues substantially a couple of years ago when COVID first started. But I would say it’s probably pretty much back to normal at this point. I don’t see that being a restriction for us. And many of the issues that we had in the past because of reagents that were used for RNA, because the primary vaccines were made from RNA, a lot of those reagents suddenly had shortages and some of the last [indiscernible], but that’s kind of the thing of the past. At this point, we are generally able to get what we need, and I don’t see supply chain as being a limiting factor for us.
Unidentified Analyst
Great. Thank you.
Operator
Thank you. [Operator Instructions] Our next question comes from Mark Massaro from BTIG. Please go ahead.
Vivian Bais
Hi, guys. This is Vivian on for Mark. Thanks for taking the question. So, could you give us a sense for what factors drove the gross margin during the quarter? How we should think about modeling for 2023 and any potential list, maybe contemplating some VA revenue coming back on? Thanks.
Aaron Tachibana
Sure. So, in terms of the gross margins, Vivian, in terms of the Q3 dynamics compared to a year or so ago, the 20 point decline or 19.5 point decline was predominantly from volume. Although we had a little bit of expenses going up because of the biopharma business and supporting that, which is more labor intensive. For the most part, it’s been the drop off in the VA MVP volume that caused most of the reduction in margin points. In terms of the VA MVP, so as John had mentioned in the prepared remarks, one of the competitive batters did file a protest. And so until we hear back from the VA, in terms of the outcome, it’s hard for us to know exactly what the sample flow is going to look like. But from our estimation, at this point in time, the $10 million order we did receive, it’s our expectation that we would fulfill that in the first half of 2023. We are very pleased about the contract award, primarily because it is a 5-year exclusive contract. We have been the sole provider with the VA MVP for the last – close to 10 years now. And so, it’s exciting that they are collecting or they are collecting samples again. They are enrolling new veterans. And in terms of the number of samples that they have in their freezer in Boston, it’s still a significant number. It’s probably more than 700,000 samples. And so we believe that the program has many, many years to run.
John West
This is John. I would just comment that protests like this are not that unusual. We had one of these with a VA contract that we received back in 2013. And we of course, respect. The VA will go through I think a thorough process on this. But what happened with us at least back in 2013, was after a period of re-analysis of things we ended up being still awarded the contract. And so we hope to hear about this in the next month or two months here, and obviously we will communicate what happens if things go well. We certainly look forward to continuing what’s been over a 10-year track record with the VA.
Vivian Bais
Got it. Thanks so much for that. So, you also mentioned initiating outreach with oncologists for next year. Can you just refresh us on the timing for the MolDx submission? And could you also give us a sense for the file and demand that’s been building there? Thanks.
John West
And so, the timing – we expect the MolDx submission to be in the first quarter of next year and hope to have an approval in the second quarter. So, that’s I think basically the timing that we have been going out, or we have launched our sales force. We have brought out the newest version of our NeXT Dx Test at the end of September. We have been beginning to receive orders for the test. And we have been beginning to invoice them to payers. So, I think it will be pretty small revenue until we get the reimbursement decisions online. But we are actually processing tests and invoicing them today.
Vivian Bais
Alright. That’s it for me. Thanks for taking the question.
John West
Great. Thank you.
Aaron Tachibana
Thanks Vivian.
Operator
Thank you. [Operator Instructions] Our next question comes from Derik de Bruin from Bank of America. Please go ahead.
Unidentified Analyst
Hi. Good afternoon. This is John on for Derik. With the cash use being down this year in terms of your thoughts on operations, cash burn for 2023. Are you still looking in the range of $80 million, $85 million, or has there been any update there?
Aaron Tachibana
Yes. Hi, John. This is Aaron. So, in terms of the cash on balance sheet, so we do have more than 2 years of cash on balance sheet at the end of Q3. In terms of looking forward, yes, so the operating cash burn, we are expecting that to be below $85 million. This year, 2022, is a little bit unusual, because we are setting up our new headquarter facility, and it’s going to cost us roughly $38 million or so of net cash this year, but going forward, the operating burn is going to definitely be below $85 million.
Unidentified Analyst
Alright. Thanks for that. And yes, taking at that any cash use for the new building. What sort of CapEx demand are you looking at? Are you expecting any additional orders of new instruments?
Aaron Tachibana
Yes. So, in terms of new capacity CapEx, so as we look forward here, most of the spend right now that we see is for the new facility. In terms of a refresh on sequencing equipment, I think John answered that a little bit ago. There is a lot of potentially exciting new technologies in the marketplace. None of them are really production ready just yet. And so we don’t see ourselves adding any sequencing capacity with older technology. We are going to get through the next several quarters here with what we have, and then we will have to take a look at where some of these suppliers are at like Alumina and Ultima, and others.
John West
Yes. I would just add, I think in terms of the new facility, part of the expenditure that we have had this year already for the new facility actually has been new equipment, not in the sequencers, but in terms of a lot of the robotics. We use a lot of high-end laboratory robots. They can be $500,000 to $700,000 a piece. And there is quite a few of them. And we need to get the new lab up and running while the old lab is still running. So, we have actually added a fair amount in terms of laboratory robotic equipment this year, that’s brand new for the new facility. And that’s been part of the cash burn in building out the new facilities. So, I think when – by the time we are fully in there for next year, and I think we will be in great shape in terms of the robotics, which can be a substantial expenditure. So, I think the question may be on the sequencer side, but at this point, we have to see how well the new instruments work when Alumina has come out with a new instrument, but they have said they won’t have the high throughput flow cell for which was probably the biggest driver for that platform. That’s projected by Alumina to be in the second half of next year. We don’t know when in the second half. So, I think if it turns out, that’s early in the second half, and it works well out of the box, then we could be looking at things in the third quarter or fourth quarter. If it turns out that the new flow, so isn’t really ready until near the end of next year, then it could be 2024 before that would drive some uptake on the platform.
Unidentified Analyst
Got it. Appreciate it. And if I could squeeze in just one more your – Natera contributions has been pretty steady the last couple of quarters between $7 million and $8 million, any potential changes there? If you could speak to that, that would be great.
Aaron Tachibana
Yes. So, we haven’t given any formal guidance or estimates around the Natera volumes and Natera volume has continued to tick up or increase over the last several quarters here. We believe we have a pretty good partnership with Natera. In terms of where this volume goes longer term, we believe that the tumor-informed MRD products are the way to go. And Natera has done a good job in the marketplace on the commercial front getting reimbursement. And so it’s our expectation that our business with Natera could continue to grow as we go into the future.
John West
And I think people have asked us about, we have an MRD product. And obviously, we are helping Natera with their MRD product. And they have asked about whether that’s an issue at all, because their products are so different that they really addresses different parts of the market. So, we actually see them as a way of happy to work with Natera and help on the front end of what they are doing in their segment of the market. And we have our own product coming, but it’s going to be addressing different parts of the market. So, I think they will both have this plenty of room for both products, and I look forward to a lot of growth in the MRD segment.
Unidentified Analyst
Thank you.
Operator
Thank you. [Operator Instructions] Our next question is from Mike Matson with Needham. Please go ahead.
Joseph Conway
Hi, guys. This is Joseph on for Mike. Question on Natera first, I saw a press release today that they announced the agreement with VA MVP for basically a [indiscernible] processing for the Veterans Affairs. Can you maybe speak to your involvement, essential involvement in that? But I guess maybe more importantly, is there a potential for a similar contract or maybe competitive bidding with the VA MVP for using ex-Personalis in these efforts? And then kind of what this Personalis really have to do in the coming months or year to really be an option for the VA in MRD testing? Thanks.
John West
Great question. Let’s see just to clarify a couple of things. The contract that Natera won from the VA was not from the MVP. It was from the clinical side of the VA. So, the million veterans program is a research project that’s funded entirely on the research side of the VA. The MRD testing that Natera won was through the clinical side. So, they are really different segments. Personalis was not in a position to compete for any of that the MRD product at this point, because we don’t have the diagnostic version of our MRD product out yet. We expect that in 2023. And at that point, we would have things. And again, we would be you know, pursuing probably different parts of that market from what Natera is doing. But once we have the diagnostic version of NeXT Personal, then that would be something we would be happy to work with the VA or other major hospital systems to implement.
Joseph Conway
Okay. Yes. Thank you for the clarification. And then I guess we haven’t gotten too much commentary on any future population sequencing contracts. Obviously, we saw the announcement, the new task order for VA MVP, which is encouraging. But just given that we are kind of seeing reduced pharma spend going into this recessionary environment, are you seeing any increased or decreased interest from governmental bodies to take on some types of efforts like these, whether in the United States or internationally? Thank you.
John West
Sure. Happy to answer that. Yes, we actually spend some time looking at off-state opportunities outside the United States a couple of years ago, and we found two things. One was that many of those countries want that work to actually be done in their own country. It’s an issue of employment and building up local sequencing capabilities, in addition to the generating the data. And so rather than us setting up subsidiaries in all those countries to do those things, we have often found those efforts have gone often to academic labs inside of those countries. I would say also, a lot of population sequencing efforts really slowed down during the pandemic, when it’s difficult to recruit patients and hospitals were chock full of that patients. So, that’s probably beginning to speed up more, but we have just put all of our effort into the oncology side of the business. We see such an opportunity there, particularly being able to sensitively detect cancer when it’s either after surgical resection or when the patient has responded to an immunotherapy where today, there is really almost no solution to that problem that can really see what’s going on. And so that’s what we put our energies into. So, at this point, we will happily continue to work with VA MVP. And if there were opportunities, opportunistically, we would look at population sequencing. But it’s no longer an area that we are really actively pursuing from a commercial standpoint. I think the way that we will be augmenting our pharma business is a, with expanding our pharma business into many more time points because of the MRD product, but then also supplementing it with diagnostic revenue both from our NeXT Dx as it gets reimbursements and with our NeXT Personal test.
Joseph Conway
Okay. Thank you very much for taking our questions.
John West
Thank you.
Operator
[Operator Instructions] Please standby for the next question. Our next question comes from Arthur He with H.C. Wainwright. Please go ahead.
Arthur He
Hey. Good afternoon John and Aaron. This is Arthur He on for RK. I just had a quick one on the VA program. So, assuming the favorable outcome for the initial contract, when can we hear the decision from VA for the following 4-year option? And what’s the main factor to drive their decision in your opinion? Thank you.
John West
Yes. So, this is John. So, the – assuming that this goes forward, we will be working off of the task order that was already issued back at the end of September. It’s possible there could be additional task orders during this year. We don’t know whether that would happen or not. In prior experience where we had multiyear contracts, generally, the amount of money that applied each year towards the contract would be decided in September of that year, often near the end of September, because it’s the end of the government fiscal year. So, it wasn’t unusual for it to be last few weeks of September. But at this point, with this contract decision and assuming that there is no issue with the protest, the VA is now free to go ahead and continue to issue task orders to us over the next 5-year period of time without having to do any competitive rebid or anything like that. So, I think we don’t know what the size of that will be. And obviously the VA has the option to start something completely new if they wanted to. But the most straightforward thing is since we have been doing sequencing for them for over a decade, and they have just given us this contract that’s so easily extensible that way. Historically, what’s happened is they have just extended it every year, decided the amount of money that they could afford to spend on it. And that’s been the next year’s task order. It usually happens in September.
Arthur He
Thanks for taking my question.
End of Q&A
Operator
Thank you. I am 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. Have a great day.
John West
Thank you.
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