Personalis, Inc. (PSNL) Q1 2020 Earnings Call Transcript

Personalis, Inc. (PSNL -5.80%)
Q1 2020 Earnings Call
May 07, 2020, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Personalis earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to turn the conference over to your speaker today, Ms. Caroline Corner.

Thank you. Please go ahead, ma'am.

Caroline Corner -- Investor Relations

Thank you, operator. Welcome to Personalis' first-quarter 2020 earnings call. Joining me on today's call are John West, president and chief executive officer; and Aaron Tachibana, chief financial officer. This call will include forward-looking statements, including statements regarding the markets in which we operate, including potential market sizes; trends and expectations for products, services and technology; trends and demand for our products; Personalis' expected financial performance, expenses and position in the market; and the impact of COVID-19 on our operations and our customers' operations.

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-K filing for fiscal-year 2019 and in our 10-Q filing for our first quarter ended March 31, 2020. The forward-looking statements we provide during this call, including projections for future performance, are based on our reasonable beliefs and expectations as of today. Personalis undertakes no obligation to update these statements, except as required by applicable law.

Our press release with our first-quarter 2020 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 5:00 p.m. Pacific Time today.

Now I'd like to turn the call over to John for his comments on first-quarter 2020 business highlights.

John West -- President and Chief Executive Officer

Thank you, Caroline. Q1 was our first quarter dealing with the impact of COVID-19. When we saw the COVID-19 epidemic expanding, we took action to accelerate the processing of samples in the population sequencing part of our business, both to make sure we could achieve our overall goals for the quarter and to leave as much lab capacity as possible for pharma samples which might be delayed. We did experience some delays, but we were still able to achieve $4.4 million in revenue for biopharma and all other customers which was within the range we had planned for the quarter.

In part because we had accelerated processing of samples in the population sequencing part of our business, our revenues with the VA MVP program achieved a new high of $14.8 million. As a result, our total company revenue reached $19.2 million, our 15th quarter of sequential growth and a new record high. We have received strong orders in our biopharma business starting in Q3 last year for the launch of our NeXT platform. In Q1, we received new biopharma orders totaling more than 3x our biopharma revenue in the quarter.

Those orders included a large order from a single existing customer. We do not expect that order to repeat every quarter. But even if we exclude it from our Q1 orders, our order amount would still be well above our Q1 revenue. Our population sequencing and biopharma businesses share a unifying theme in the comprehensive and large-scale genomic characterization of human samples.

Both of our whole genome sequencing and our NeXT platform cover all 20,000 human genes. Because of their shared underlying technologies and the operational implementation, we achieved considerable synergy between the two businesses. Next, I would like to provide some additional updates on the impact of COVID-19 on our organization. First, we are focused on the health of our employees and our community.

We have been under shelter-in-place orders since March 17, which now extend at least through May 31. Most of our employees are working from home. Our laboratory is staffed to run samples at reduced capacity with appropriate safety and social distancing measures. Our commercial team is still engaged with our customers.

We received a record biopharma -- we received record biopharma customer orders in Q1 and remain encouraged by engagement and order flow in Q2. We continue to receive pharma customer samples though with some delays. We received record batches of samples from the VA during the month of April, and assuming we can maintain adequate staffing of our lab, we expect they will keep us busy for most of the rest of this year. Our cash level puts us in a position of strength.

We remain focused on adoption of our NeXT platform, development of new products and supporting our customers. Shifting focus to our progress this quarter, there are several factors which give us confidence in the long-term growth of our business. In Q1, we continued to scale, delivering over 14,000 whole human genomes, which is more than a 90% increase from Q1 of last year. We have now delivered more than 1,000 genomes from cancer samples and, in Q1, also completed sequencing our 100,000 sample overall.

The potential value of new orders received from biopharma and all other customers was more than 3x the amount of our biopharma revenue in Q1, and new orders have now increased sequentially since Q3 2019. In April, this trend continued with orders again exceeding revenue from our biopharma customers. As we've explained before, it takes time for orders to convert to revenue and the actual revenue recognized from an order may be less than expected due to the failure of individual customer samples to meet our sample quality requirements and other factors. But this growth in orders gives us confidence in our future revenue stream.

As of the end of Q1, 26 different customers have now placed orders for NeXT, up from 19 at the end of Q4. We continue to be happy with how NeXT is being adopted by our existing and new customers. While it will take time for new customers to complete pilots, we are pleased with the number of customers engaged and look forward to deepening our relationships. We are establishing a lab and commercial operation in the People's Republic of China.

Several global pharmaceutical companies have asked us about China, underscoring our belief that it's a good time to expand there. In January, before the COVID-19 disruption, members of our management team traveled to China to start this process. We continue to build our commercial team in both the U.S. and Europe, which has grown by 50% since our IPO.

In particular, we have added business development staff with extensive commercial experience in companion diagnostic development. And as a result, we are now engaging with an increasing number of pharma companies for potential companion diagnostic development programs. We've also expanded our quality and regulatory team to support these efforts. In April, we applied to the FDA for a presubmission meeting for a single-site PMA for NeXT.

This represents another investment we are making for our future growth. We are also leveraging the technology we developed for cancer to capture opportunities outside of cancer. For example, it is beginning to be appreciated that neoantigens can be created outside of cancer. In Q1, we were contracted by a major biotechnology company to apply our proprietary neoantigen bioinformatic expertise to their noncancer gene therapy drug development.

We have also announced our pharma research solutions, a suite of DNA sequencing and data analytics to support pharmaceutical development across a wide range of disease indications. Personalis had a total of 10 scientific posters accepted for presentation at this year's AACR and ASCO conferences, continuing our scientific leadership in the field. These are listed on our website under Conferences, and they will be presented online in May and June. In March, we welcome Steve Moore as our new General Counsel.

Steve has a long career at state-of-the-art companies in the genomics field. He was most recently at Pacific Biosciences as General Counsel, having joined them in 2010 when modern DNA sequencing was in its infancy. Prior to that, he was at the consumer genomics company, Navigenics, and before that, spent many years at Affymetrix. Welcome, Steve.

I'd now like to update you on the population sequencing part of our business, which is sometimes referred to in the field as population genomics. Our work with the VA MVP represents the largest population sequencing effort within the United States. The VA now targets enrollment of 2 million veterans, and over 825,000 veterans have enrolled so far. Since 2013, Personalis has completed sequencing whole human genomes from over 60,000 VA MVP samples.

Personalis has been contracted so far to sequence over 116,000 VA MVP samples. In Q3 2019, we received our largest VA MVP order ever. And later this year, we expect to begin work on it. With the large shipments of samples we have recently received, we now have all of the samples in-house that we will need to complete the 100,000 whole human genome for the VA.

If we kept sequencing at the rate we achieved in Q1, we would expect to complete that 100,000 genome for the VA MVP by the end of this year. However, given the challenge of COVID-19, our sequencing production rate is uncertain. We think it is possible, though that Personalis could become the first for-profit company ever to sequence 100,000 whole human genomes in the United States. Since the VA has recently doubled the number of veterans they plan to enroll, we believe this program is likely to continue for many years.

We expect our unparalleled commercial experience with the VA MVP program to position us for other opportunities in population sequencing. Given our clinical experience, we also see an opportunity to help transition population research to population health. We have already received population sequencing orders for over $145 million, and we plan to expand our commercial team to address what is projected to be a multibillion-dollar market. I'd now like to update you on three proprietary new products.

First, in January, we launched our diagnostic readout on NeXT, called NeXT Dx, to be used by biopharma customers in clinical trials and by research collaborators. The core of NeXT Dx achieves over 1,000 fold DNA sequencing coverage in cancer driver genes, enabling sensitive detection of companion diagnostic biomarkers that have already been approved by the FDA on other platforms. We believe that this may eventually qualify NeXT Dx for reimbursement under an existing CMS national coverage decision, which could be very helpful for Personalis' customers seeking to develop companion or complementary diagnostics with our platform. Because NeXT Dx is based on the same underlying NeXT platform, for samples where a NeXT Dx report is generated, we expect to also provide our pharma partners with additional data covering all 20,000 human genes and a broad range of biology outside the coding regions of the genes, inaccessible by a standard exome.

This rich biological content coverage would make NeXT particularly suitable for database development both by Personalis and Personalis' customers. Lastly, the broad footprint of NeXT allows it to capture more cancer mutations. This would make it an ideal front end for liquid biopsy products, which can subsequently use those variants for tracking tumor evolution. That brings me to the development of our liquid biopsy product line.

Our first product in this product line is expected to be for use together with our tissue-based assay. Both our tissue and liquid biopsy-based products provide data on all 20,000 human genes. But with the addition of the liquid biopsy product, we expect to enable monitoring of patients that comprehensively at multiple time points. Many new cancer drugs extend the lives of patients but do not eradicate the disease.

Thus, a growing segment of the cancer survivor population consists of patients who are still undergoing active disease management. Our exome-scale liquid biopsy product is being designed to track the evolution of what can be thousands of cancer mutations in a single tumor. And importantly, it is expected to be capable of detecting new mutations as they emerge under therapeutic pressure. This would represent a significant expansion of our addressable market, serving pharmaceutical companies, building our database and increasing clinical opportunities.

While COVID-19 has impacted our R&D lab staffing, we still plan to launch our liquid biopsy product this year. Lastly, we have been working over three years on a combined laboratory and informatics project to advance our neoantigen characterization capabilities. We believe that neoantigens are the crucial centerpiece of a new generation of companion diagnostic biomarkers. We expect our pharma customers will apply this capability to mainstream cancer drugs, such as checkpoint inhibitors, and also to experimental personalized cancer therapies which explicitly target neoantigens.

Our new advanced capability may also be used for development of drugs that are designed for use outside of cancer, such as gene therapies. This Personalis R&D project has required multiple proprietary technologies including genetic engineering of proprietary human cell lines, mass spectrometry to identify and modify peptides binding to HLA and the training of novel machine learning algorithms. Our data shows that this project has achieved a leapfrog advance in this field. We expect to launch this capability as part of our NeXT platform before the end of 2020.

In summary, Personalis continued to receive strong orders from our pharmaceutical and biotech customers, continued to build commercial capability and has a great suite of new products already launched and with more to come. We believe that together, these factors, among others, put us in a strong position for long-term growth. While COVID-19 is causing some delays, our population sequencing business, with its backlog of orders and samples that we have already received, helps support us near term. That, combined with our strong cash position, lets us continue investment in our future growth initiatives.

I will now hand it over to Aaron for our financial results.

Aaron Tachibana -- Chief Financial Officer

Thank you, John, and good afternoon, everyone. Revenues for the first quarter of 2020 were $19.2 million, up 6% sequentially from $18.2 million for the prior quarter and up 36% from $14.1 million for the same period of the prior year. The $19.2 million was a new record high for quarterly revenues. The sequential quarterly revenue growth was driven by an increase in volume for testing services provided to the VA MVP.

For the first quarter, the VA MVP revenue of $14.8 million was 7% higher sequentially, compared with $13.8 million for the prior quarter and was 77% higher, compared with $8.3 million for the same period of the prior year. The VA MVP unfulfilled orders at the end of the first quarter were $54 million. And based upon current estimates, we expect the unfulfilled orders to convert to revenue over approximately the next four quarters. Biopharma and all other customers accounted for revenues of $4.4 million for the first quarter, essentially the same as Q4 and was within the range we expected entering the first quarter.

Gross margin was 21.1% for the first quarter, compared with 36.2% for the prior quarter and 28.3% in the same period of the prior year. The VA MVP gross margins continue to be solid and were higher than the corporate gross margin reported for the first quarter. The VA MVP, being higher volume and in a single service offering, has been automated and does not require a significant amount of labor and has a very efficient sample test process. The first-quarter sequential gross margin decline of 15.1 percentage points was due to a few factors.

First, Q4 2019 included a one-time cost reduction for certain materials of approximately 5.5 percentage points that did not repeat in the first quarter. Second, we had some elevated expenses in the first quarter to help mitigate any near-term risk of supply due to COVID-19, which reduced gross margin by 3.3 percentage points. In addition, we have a few customer projects with lower margins in the first quarter compared with Q4. And for the most significant of these, we incurred additional costs related to a major new customer, which are not expected to recur now that we are up and running with them.

As mentioned in the past, we may see gross margin variability in the future as there are a few moving parts, such as sample receipt linearity from customers, the mix of customer projects and capacity utilization of labor and equipment. In addition, we recently renewed our lease in Menlo Park, California, for which rent expense will increase later this year and into the future. Also, we will be building out a lab operation in China this year, which will add start-up expenses in 2020, and most of these expenses will be classified as SG&A this year. We expect revenue from China to begin ramping throughout 2021.

And during this ramp-up period, we expect to have gross margin headwinds from the under-absorbed labor and overhead. We are very excited about the China growth opportunity in front of us. Operating expenses were $13.7 million in the first quarter, compared with $9.4 million for the same period of the prior year. R&D expense was $6.4 million in the first quarter, compared with $5.2 million for the same period last year, and SG&A expense was $7.3 million for the first quarter, compared with $4.2 million for the same period last year.

Most of the SG&A spending increase was related to head count growth and public company costs. Net loss for the first quarter was $9.1 million, compared with a net loss of $5.7 million for the same period of the prior year. The net loss per share for the first quarter was $0.29 and the weighted average basic and diluted share count was 31.3 million, compared with a net loss per share of $1.84 and a weighted average basic and diluted share count of 3.1 million for the same period of the prior year. The number of shares last year is significantly lower because it did not include the conversion of approximately 18.5 million shares of preferred stock nor did it include the 9.1 million shares from the initial public offering.

Now on to the balance sheet. We exited the first quarter with a strong balance sheet with cash and short-term investments of $120 million. First-quarter cash flow from operations was a usage of $8.6 million, primarily due to the net loss and working capital needs. During the quarter, we added approximately $1.5 million of extra inventory to help mitigate potential supply chain disruption, and these incremental purchases will be paid for in the second quarter.

With a strong cash position of $120 million, we have flexibility to operate over the next couple of years. In near term, we will continue to invest prudently in critical areas so we can be well-positioned to accelerate growth once the COVID-19 situation is behind us. Regarding our investment in China, we expect the cash requirements to be in the range of $4.5 million to $6 million from the second half of 2020 through the first half of 2021. Now for a discussion about our guidance.

On our last call, we withdrew our 2020 revenue guidance due to uncertainty from the COVID-19 pandemic. We still do not have enough clarity near term or through the end of this year, and therefore, we are not providing revenue guidance for fiscal 2020 at this time. Let me explain what we did see during the first month of Q2. In April, we received some customer orders and samples.

However, we were also aware of some delays that will result in sample shipments moving from the second quarter into the third quarter. Regarding our largest customer, the VA MVP, we did receive a large batch of samples during the month of April, and we now have enough samples in-house to process over the next two to three quarters. In addition, our lab has operated with a limited number of employees from mid-March through the end of April, which limited output capacity. We expect to bring back more employees into the lab during May and June, which will help increase output.

It's still too early for us to quantify the magnitude of this disruption or determine how long it will take to resume normal operations. Therefore, we are not providing 2020 guidance until we know more. We plan to provide an update to this information during our next earnings call. Now I will turn the call back over to the operator to begin the Q&A session.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from David Lewis with Morgan Stanley.

Edmund Tu -- Morgan Stanley -- Analyst

Hi, guys. This is Edmund on for Davis -- David. Thank you for taking the questions. I was just wondering on the MVP side, what is your current capacity looking like now versus the last update? What percent of your lab personnel are able to continue to process samples? And how much do you expect to increase that by in May and June? And do you have any sense of what that's looking like on the MVP side? And are you expecting additional samples to come in, in the near future?

Aaron Tachibana -- Chief Financial Officer

Hi, Edmund. This is Aaron. I'll take the first question. So in terms of the capacity, we don't have specific number or percent we can give you.

So again, we did $14.8 million in Q1. The month of April was a little bit lighter than what we had processed on average in the Q1 time frame, primarily because of fewer people in the lab. The VA MVP is highly automated, and it doesn't require as many people in the lab as the biopharma business. However, we still do need people to load and unload samples from robots and things of that nature.

In terms of going forward, so we're going to be bringing more people back into the lab in May and June to increase the output capability, OK? And so whether or not we'll get back to the level we did in Q1, it's hard to tell. There's still a wide range of variability in terms of what we can produce, primarily because of the number of people. We don't know exactly when we'll have certain levels of people in during the month of May. So there's still some question there.

In terms of the second part of your question with the VA sample. So we did receive a large batch of samples in the month of April, which we were very pleased about. The VA has all of their samples stored in a refrigeration system in Boston, Massachusetts. They're under a shelter-in-place as well.

And so it's not clear exactly when we'll receive the next batch of samples from the VA. But again, like what we've said here in the prepared remarks, we have samples in-house to process over the next two to three quarters.

Edmund Tu -- Morgan Stanley -- Analyst

Great. Thanks. That's very helpful. And on the biopharma side, it seems to have stalled a little bit.

Can you provide some more color here? That one large customer order that you reported in this quarter, this is a different customer?

John West -- President and Chief Executive Officer

Sorry, it seems we lost you.

Aaron Tachibana -- Chief Financial Officer

Yeah. So Edmund, in terms of the large customer, it's a new customer for us. This new customer had placed some orders in the Q4 time frame. We processed some samples for them in Q4, as well as in Q1.

So in terms of this customer, during Q1, we were going through some of the ramp-up phases. And in terms of cost, it did require more material and labor cost to go and get things right for them. This is a customer that previously was using a different service provider than Personalis, and so they move business over to us. And any time you're taking data from one lab like ours, comparing it with another lab that was somebody -- another supplier doing work for them, there's some correlation time frame in terms of making sure that the data is consistent.

And so we went through a lot of that during the Q1 time frame just to help ensure that they were seeing the same thing we were seeing in the data, and they could feel comfortable with it. In terms of the data that we're providing, it's of very high quality. And so we believe that we're beyond some of those initial start-up challenges.

Edmund Tu -- Morgan Stanley -- Analyst

Got it. And for the 26 total new customers on NeXT, does this include customers that are still piloting the product? Or have they already incorporated this into their studies?

John West -- President and Chief Executive Officer

Yeah. This is John West. I could speak to the NeXT uptake there. So I think we're actually thrilled with the uptake of NeXT.

When we receive pilot orders like that, they are generally customer-paid orders. They can range up to close to $1 million in orders. So that's not a bad start. It's been quite a change in our business.

A couple of years ago, a pilot order might have been $10,000 or $20,000, but we've now had several large pharma companies starting with us where the initial order from them was between $500,000 and $1 million. So that's been very positive. We did speak over the last couple of quarters about a group of pharmaceutical companies that we had never worked with before, at least not our customers in 2018. And with NeXT, their adoption, we had identified, in particular, four large pharmaceutical companies where that was the case.

And we had mentioned last quarter that two of them have now given us purchase orders. I'm happy to say now that both of those customers have actually given us follow-on purchase orders and that the total value of orders we've now received from those two big pharmaceutical companies which were new to us now totals over $2 million. The other two that we had identified are ones that are we're actually in active negotiations, and there's a third one as well. On top of that, there are two other large pharmaceutical companies that we started working with for the first time in Q1.

One of them is headquartered in Europe. The other one is headquartered in Japan. Those are more traditional pilot orders, but we're optimistic that those can become very large accounts for us. Lastly, I'd say we had one large pharmaceutical customer that we actually had worked with a little bit over the years, and they finally tried NeXT when we introduced that last summer.

We received a pilot order from them at that point. And I'd say, depending on the data, it wasn't clear how that would go, actually, it's gone terrifically. We've now had four orders from them. The most recent one was over $1 million.

The total of the orders we received from that customer is over $2 million, and this was from a single customer that was -- that tried NeXT for the first time sort of this time last year. So we're actually thrilled with the uptake of the platform. I think it's been a terrific quarter for us. And actually, it's been surprising given the COVID disruption, the customers have continued to actually be quite accessible.

Many of them are not off traveling in the ways they could have been before. And so actually, it's been a remarkably good time for us from a commercial standpoint.

Edmund Tu -- Morgan Stanley -- Analyst

That sounds great. And one final one for me, just in terms of cash burn. What levers do you guys have to pull to reduce cash burn and opex given the COVID environment? And how will you prioritize your investments?

Aaron Tachibana -- Chief Financial Officer

Yeah. It's a good question. So in terms of cash and burn, so in terms of the levers that we have, it's really about the type of head count we're bringing into the company. So even with the COVID situation, we have been hiring people, fortunately.

We're going to prioritize for critical areas in development or on the commercial side, first and foremost. We don't have a big need today from a capacity build-out standpoint. The operational capacity we have is sufficient with head count, as well as on the equipment side. And so we can deprioritize that area.

And also in the G&A area, we don't have to go full bore to build out the infrastructure. We can take some time with the COVID situation. In terms of -- yeah. Looking forward here, 2020, the cash burn will be elevated compared to '19, obviously.

And so the cash burn is probably going to be in the range of $50 million, and that could be plus or minus 10%.

Edmund Tu -- Morgan Stanley -- Analyst

Great. Thank you guys very much.

Operator

Your next question comes from Doug Schenkel with Cowen.

Subbu Nambi -- Cowen and Company -- Analyst

Hey, guys. This is Subbu on for Doug. You talked about orders being 2x revenue in Q4 and I believe 3x revenue in Q1. Recognizing the slowdown associated with lab closing, would you expect there to be a material catch-up in revenue with samples coming in much more quickly than normal as labs open up? Or do you expect that backlog will be worked through at a normal cadence?

John West -- President and Chief Executive Officer

This is John. I think it's a little early to know how quickly labs will open up. We have customers all over the world, and we have customers in pharmaceutical companies who are conducting clinical trials where their samples are all over the world. And so the sample flow coming to us is not just a matter of laboratories opening in the United States, but we receive samples from Europe, from Singapore, from many other places in Asia.

And so the opening in some of those places is actually ahead of the United States and, in other places, may lag behind where we are in California. So I think it's a little bit uncharted territory there. I think we're being cautious. Normally, the orders that we receive would still take anywhere in the range of six to 18 months to go from an order to being revenue, on an average.

I'd say with COVID, there could be more delay than that. I think we're discovering it as we go along the way. But we are actually pretty pleased with the samples we've received so far. So I guess we're being cautious, but I think the strong orders helps a lot.

Aaron Tachibana -- Chief Financial Officer

Yeah. And Subbu, yeah, this is Aaron. So the other thing to remember is most of our business today in biopharma is retrospective analysis, meaning samples are already taken from patients, and they're in some type of storage facility. So it's really up to the customers to get the samples and get them sent to us.

In terms of out into the future, the shutdowns of labs and clinics right now -- we're not quite sure what that impact would be in terms of future sample flow to us. But right now, as John had mentioned, the sample flow into us has been relatively healthy. And in terms of where it's coming from, all geographies around the world is where our samples will come in from, except for China, obviously, because of the export requirements.

Subbu Nambi -- Cowen and Company -- Analyst

Got it. That's helpful. And you alluded to this in the previous question, but it sounds you have made great progress with the biopharma customers. But I remember at the time of our Q4 call in late March, it sounded like orders had started to slow as business development opportunities became tougher just from a physical interaction perspective.

So are you evolving your BD practices at all? Are you able to increase to get in front of people, continue to hire in these areas? Or how are you thinking about it in the -- for the rest of the year?

John West -- President and Chief Executive Officer

Yeah. This is John. Maybe I could speak to that. I think the -- at the end of March, on our call, the COVID shutdown that we were facing had really just started.

And so we weren't quite sure how that was going to go. And I think at a lot of our customers, it was a little chaotic for them as well. They were perhaps in the process of shutting down and/or beginning to work from home. I think it was a little unclear for them also what they were going to be able to do.

I think what we've found is that we've been able to be remarkably resilient in terms of our operations even though we're operating on this very distributed basis. Actually, most of our commercial team normally works on a distributed basis. And so I think the fact that it turned out that the customers didn't just go home and stop working, they actually, in general, have gone home and continued to work, and that's actually made them somewhat more accessible. So it doesn't necessarily mean that samples will flow because that has to do with what happens in laboratories.

Some of which are shut down. But in terms of customers' engagement with the ideas behind what we're doing and being able to think about the advantage of having that broad biology accessible to them, I'd say the uptake has been perhaps more encouraging than we were thinking on the Q4 call. I would say that I think that Personalis is likely to come out of the COVID situation in a quite a bit stronger position than when we started. That's both because of customer orders and engagements.

But I think what we're seeing is that we're on the right track there, and there's increasing buy in to the NeXT platform.

Subbu Nambi -- Cowen and Company -- Analyst

Got it. Thank you so much, guys.

Operator

Your next question comes from Kevin DeGeeter with Oppenheimer.Kevin Michael DeGeeterHey, guys. Thanks for taking my questions. Can you just talk a little bit about the build-out of the China facility? Really, I guess two parts to start. First, do you anticipate at least the initial demand being primarily from existing customers, perhaps global customers? Or is this really potentially serving new customers for Personalis? And I guess secondarily, talk to us a little bit about the decision to build your own lab versus perhaps partnering with a local organization in China as an alternative.

Aaron Tachibana -- Chief Financial Officer

Hi, Kevin. This is Aaron. So I'll take a shot at this, and then John can expand, if need be. In terms of China, so in terms of the customers, so right now, we've been working with primarily global pharmaceutical companies around the world.

And a lot of them are headquartered here in North America. And so these are the ones that are typically asking about China. So the likelihood is those are going to be our initial customers to help us bring China up, in terms of other demand, so China is a very large market from a population standpoint. And so we're going to hire commercial people pretty close to right out of the chute as well and go pursue that business with local pharmaceutical companies as well.

It will be the same type of business model we have here in the U.S. It will be a fee-for-service. And so in terms of the lab operation, we won't be selling to clinics, hospitals or oncologists. It will be to pharmaceutical companies.

In terms of the second part of your question, building out our own lab and/or evaluating a partner, and so these are all the types of things we've been considering. Sitting here today, we're not prepared to talk too much about which direction we're going. All we'd like to say today is that we are in the process of the planning and going forward to go and commit to building something out here in China. But there are different ways to do it, for sure.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Great. And then maybe could you just talk to us a little bit about your update for neoantigens outside of oncology, I think more generally, the cell and gene therapy opportunity? One thing that's about clinical trials and patient populations for most cell therapy or gene therapy opportunities, they're relatively narrow patient populations. But it seems like the value proposition you're bringing is particularly differentiated from some other lab companies. I guess where I'm going with this is if one thinks about pricing and volumes of some of those initiatives, will the opportunities ultimately look sort of similar to oncology? Are we talking about potentially very different economic models to Personalis?

John West -- President and Chief Executive Officer

This is John. I could speak to that. I think it's the first time that we're seeing people really appreciate the idea that there can be neoantigens outside of cancer. So I think that's an idea that we think will spread.

There are actually mutations that happen in a variety of different settings, not only in cancer. And also, there could be genetically engineered products. So I'd say that we think that there's opportunity there. The point that we were trying to make there was more that some of the technologies that we've developed for cancer, and our neoantigen capability is one of them, are things that -- where there's a market that's broader than just cancer.

And so we've had people from large pharmaceutical companies who have come to visit us, where ostensibly the first part of the focus of the meeting was on our cancer products. But they would say, you know, actually, I'm also responsible for the biomarker efforts in our company, our pharmaceutical company, across all different medical indications, and the things you guys are doing are amazing. Could we also use this in a variety of other areas? And so the fact that we can look comprehensively at the immune system, we see interest from people in -- working on drugs for the autoimmune diseases. Certainly, whole genome sequencing is sensible for almost any medical indication and provides a really comprehensive view.

So I think there's a whole suite of things that Personalis has already developed, where there's a broader market than we've been tapping into before. And so this is sort of the main point that we were trying to make, is that in addition to what we're doing in cancer, which we're actually pretty happy with how that's going, we do see a broader opportunity. And it's an opportunity where the products already exist largely, it's really a commercial initiative to tap into that.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Great. Then maybe one last one, if I may, really housekeeping. I think if I heard you, Aaron, correctly, you called out potential 2020 cash burn of around $50 million. I think, if that's correct, it would suggest around $14 million a quarter for burn if you distribute that equally over the next three quarters.

Is that a reasonable way to think about things, as being reasonably distributed from a burn perspective, kind of given the puts and takes of the China lab and the other components in the second half of the year? Or is there some quarterly variability you would encourage us to think about?

Aaron Tachibana -- Chief Financial Officer

So that's a good question, Kevin. So yes, about $50 million burn for the year. So the piece that we also have that's tied to -- in terms of the net loss, in addition, we have the customer deposits. So you recall that the VA prepays 70% of the order value upfront.

And so our customer deposits in 2020, we're probably going to use $12 million to $13 million of cash coming off the balance sheet from the customer deposits, primarily because back in 2018, we were receiving cash from the VA. And you recall, we didn't process a lot of samples because we didn't have them received or in-housed to be able to get that done. Now that the VA has accelerated the sample flow to us, we're actually recognizing revenue and shipping sample -- or sample data back to the VA at a higher level than what was prepaid. And so we're going to be eating that prepayment off the balance sheet.

So that's about $13 million. And then the rest of it would come from the net loss.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Terrific. Thanks so much, guys.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back over to your host, Ms. Caroline Corner.

Caroline Corner -- Investor Relations

Thank you. That's all for today.

Operator

[Operator signoff]

Duration: 49 minutes

Call participants:

Caroline Corner -- Investor Relations

John West -- President and Chief Executive Officer

Aaron Tachibana -- Chief Financial Officer

Edmund Tu -- Morgan Stanley -- Analyst

Subbu Nambi -- Cowen and Company -- Analyst

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

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