Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Third Quarter Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Karina Calzadilla. Thank you. Please go ahead.

Thank you, Felicia, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies third quarter 2022 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial reports for the third quarter of '22. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will be referencing to a slide presentation that has been posted to the Investors section in our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements, depending on a number of factors, which are set forth in our public filings with the SEC and this presentation. In addition, non-GAAP financial measures will be discussed during the call, and a reconciliation of non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO of Co-founder; and Tycho Peterson,0020our Chief Financial Officer. In addition, Harlan Robins, Adaptive Chief Scientific Officer and Co-founder; Nitin Sood, Head of MRD business; and Head of Immune Medicine business will be available for Q&A. With that, I'll turn the call over to Chad Robins. Chad?

Thanks, Karina. Good afternoon, everybody, and thank you for joining us on our third quarter 2022 earnings call. As always, a big thank you to all our Adaptive employees for their dedication and for delivering another solid quarter. As we approach year-end, we are well positioned to finish strong in both MRD and Immune Medicine. This quarter, as outlined on slide three, we achieved important milestones and results. Starting with key corporate achievements. As planned, we strengthened our cash position to $528 million with an attractive non-dilutive royalty financing agreement with OrbiMed. This agreement extends our cash runway to over three years while providing the flexibility to make strategic investments. We also finalized our long-range plan update, which will enable us to achieve sustainable revenue growth while reaching adjusted EBITDA profitability in 2025 and cash flow breakeven in 2026. Tycho is going to go further in detail during his remarks. Revenue for the third quarter was $47.8 million, representing strong growth of 21% versus prior year. In our MRD business, both our clinical testing and MRD pharma partnerships delivered solid performance. Clinical volumes grew 52% versus prior year and our MRD pharma partnerships also had significant growth of 33%, excluding milestones. Our Immune Medicine business continues to execute on pharma services and drug discovery opportunities. Pharma services drove 23% growth versus prior year as we increased penetration into larger trials. And our Genentech partnership in drug discovery is on track with both our shared and private cell therapy programs. Moving to our MRD business on Slide 4. As shown in the graph, clonoSEQ clinical testing volumes continue to grow quarter-over-quarter. This quarter, tests delivered grew 7% sequentially to 9,650 tests. In the United States, our market of focus, tests delivered grew 11%, with volume growth observed across all 3 marketed…

Thanks, Chad. Turning to our financial results, starting with revenue on Slide 10. Total revenue in the third quarter was $47.8 million with 58% from Immune Medicine and 42% from MRD, representing a 21% increase from the same period last year. MRD revenue of $20 million grew 26% from a year ago with clonoSEQ clinical testing and MRD pharma partnerships driving approximately 51% and 33% of the growth, respectively. This growth was partially offset by a $1.5 million decrease in MRD regulatory milestones. While we continue to anticipate milestones from our MRD partnerships, these are not within our control and will vary quarter-over-quarter. ClonoSEQ test volume, including international, increased 52% to 9,649 tests from 6,341 in the same period last year. We expect strong growth to continue through year-end. Immune Medicine revenue was $27.9 million, up 18% from a year ago. This change was driven by a $5.4 million increase from Genentech and a $1.3 million increase from pharma and academic partially offset by a $2.5 million decrease from T-Detect COVID. Shifting to operating costs and guidance on Slide 11. Total operating expenses were $93.3 million, representing a 3% decrease from $95.8 million last year and a 3% decrease versus the prior quarter. Cost of revenue was $14.9 million compared to $14.2 million last year, representing a 5% increase, primarily driven by increased labor and overhead costs, partially offset by a decrease in material costs due to lower sample volumes. R&D expenses were $35.7 million compared to $36.1 million a year ago, representing a 1% decrease, mainly due to decreased investments in T-Detect. This was partially offset by higher drug discovery expenditures related to Genentech. Sales and marketing expenses were $21.5 million compared to $24.9 million a year ago, representing a 14% decrease largely due to our ongoing efforts to…

Okay. Thanks, Tycho. As outlined today, we are delivering on our promises. Both our Immune Medicine and MRD businesses have great momentum to achieve the respective catalysts listed on Slide 14, and we have a strong balance sheet to support future growth. I'd like to turn it back over to the operator and open up for questions.

Thank You. [Operator Instructions] The first question comes from the line of David Westenberg of Piper Sandler.

Hi. Thanks for taking the questions here. So I'm going to start here with the DBCL adoption ramp. So what are we thinking about for DLBCL adoption ramp, given the fact that I think clone and sorry, you disagree with this characterization, you did really, really well. Pandemic hit kind of slowed and you had really good momentum in 2022. I think you have had a little bit of critical mass, particularly in the first half of this year with the clonoSEQ business. Do you think that you can ride that momentum in DPCL and this is going to be faster than say, the ramp that you got in multiple myeloma and you believe the first one is all, right...

David, it's Chad. I'll make 1 comment, and then I'll pass it over to Nitin to specifically address we are very still low penetrated in our marketed indications in myeloma, ALL and CLL. So I think there's a significant ramp of our existing indications. And with the new launch of DLBCL, again, I'll hand it over to Nitin to specifically comment on timing and ramp.

Yes. And I just want to build on what Chad said, multiple myeloma, which is a key growth driver for us going forward, grew 17% quarter-over-quarter this quarter. So we're still at sort of 6.5%, 7% penetration in multiple myeloma. There's a lot of room for multiple myoma to drive growth going forward into 2023. Talking specifically about DLBCL. At ASH this year, in December, we will launch the DLBCL CLIA-validated assay. We expect this asset to contribute to growth in the second half of 2023 as it takes time for us to educate physicians on the use of blood-based MRD testing. The current standard of care in DLBCL imaging-based monitoring, we have data to show that DLBCL has higher specificity than imaging and it takes recurrence earlier than imaging. So the foundation and the fundamentals are strong as we continue to position education, I think the second half of 2023 is where we'll see the growth.

Got it. And maybe I might ask kind of a continuation with that. I mean I believe your physicians are pretty educated in the fact that this is count in T cells and B cells and really theoretically, this could be used on any kind of T cell or B cell-mediated cancer. So can I ask how much of this -- how many of this is actually already being ordered off label? And it would just be as you get Medicare coverage, maybe some turning on of some additional ASP and maybe I'm completely off base with that question.

Around sort of 10% of our ordering volume is outside our main indications. This includes DLBCL. This includes CTCL, NCL and other indications. So - we'll see, obviously, we'll get paid on the DLBCL component of that test. But I think as we expand into the community, which is where DLBCL is treated, we'll see greater uptick of DLBCL. In addition, we will continue to file for reimbursement for these other indications like MCLCTCL and they'll contribute overall to increasing our ASP as well.

And David it's also I was just going to make another comment. It's also worth noting, if you look at the number of trials right now going on in non-Hodgkin's lymphoma, particularly in DLBCL, the necessity to monitor residual disease as these new therapies hit the market really do drive clinical adoption and awareness. That's why the MRD clinical business on the MRD pharma business are incredibly synergistic as we've seen kind of in multiple myeloma, that's what you'll start to see, again, being conservative in the second half of 2023.

Got It. And if I'm not being too great here, I'm just going to squeeze 1 more in for Tycho here. You mentioned additional cost cuts into 2023. Is this going to be primarily in R&D or SG&A? And -- in terms of -- I know you've done a lot of restructuring in the Immune Medicine business, particularly around -- specifically around key detect. Is there some remaining stuff there? Or has that already been -- are those costs been mostly removed?

Yes, the cost for T-Detect specifically are kind of out of the equation when we made that decision last I think to give you some high-level commentary on '23 without getting an had a guidance, which we'll give in the fourth quarter, I'd say we're looking at a lot of things. I mean publicly, we've talked about real estate consolidation. We've talked about workflow enhancements, leveraging sequencing costs. Obviously, Illumina is driving down costs there, there's some stuff in the cloud compute costs. But the other angle here is, yes, as we went through our long-range planning process, we came up with a list of R&D projects and triage them. And map them to revenue and margin. And yes, there are some opportunities to drive a little bit of R&D leverage. G&A we'll have some leverage as well. and we'll communicate more as we give official guidance. But it's all part of a process of getting more efficient as a company and be more thoughtful about how we invest our dollars.

Appreciate it. Thank you, guys.

The next question comes from Tejas Savant of Morgan Stanley. Please go ahead.

Good morning, guys. This is Eon [ph] for Tejas. Just wanted to touch base on your partnership with Epic. I was wondering how you envision the integration of their integration into the EMR system will impact on us like volumes once it goes live in '23?

Sure. Nitin, I'll let you cover that as well.

Yes. We initiated work with Epic and expect to have accounts up and running in 2023. We've started with 4 pilot accounts and expect that integration to be completed within 6 months. And overall, we're anticipating the impact on order volumes in the second half of 2023 and a more considerable much bigger impact in 2024. And the way we think about this is, first, Epic will sort of standardize the use of quality in accounts that we already have to sort of drive deeper penetration in the accounts that we have. And then reduce the barrier for adoption in the newer accounts. So overall, we're pretty excited about this. We're underway, and we expect to announce more updates on this in 2023.

Got it. And then on peers in the space, I talked about hospital staffing issues, and you've also noted seeing order spikes in the past. I was wondering if this change has -- this trend has changed over the past few months and separately on the biopharma side, I'm curious, I've also noticed clinical trial sample collection and deliveries being slowed down due to staffing shortages. Are you seeing similar trends here?

Go ahead, Nitin.

Yes. Yes. I mean I think I would say we're not seeing sort of any significant impact. We see some of variability here and there related to various events, but I would say both our pharma business as well as our clinical business looks off to a good start in Q4. And we were pretty feeling pretty good that it will continue to grow robustly above 50% in 2023.

Great. Thank you.

Our next call comes from Julia Chen of JPMorgan Chase. Please go ahead.

Thank you for taking my question. This is Martha in for Julia. So I wanted to 2023 - now it's a bit too early, but can you share some color regarding upcoming headwinds and tailwinds, any type of indicators or factors that you could share with us at out giving you the specific numbers.

Yes. We're really going to -- I don't think we want to say a lot about 2023 until we're ready to officially guide. I did mention in my prepared comments, we're going to continue to drive operating leverage. So that's an ongoing focus. And we laid out a past profitability, obviously, on the call today. I don't know. I mean you just touched on the hospital end market. I mean is there anything else you would add in terms of end market dynamics for MRD that you want to flag.

Yes. I mean I think I'd just like to again, sort of highlight the fact that all the leading indicators are looking strong. The number of HCPs and accounts grew 50%. And year-over-year this quarter. It has been in the last few quarters. The number of unique patients tested grew 60%. And -- so -- and that combined with the fact that our penetration both in the pharma space as well as in the clinical diagnostic space is low. I think we feel we'll do very nicely in 2023. And all the leading indicators look positive, and we will provide specific guidance as Nico said, in Q4.

And Sharon, can you make a couple of comments on our Immune Medicine business, particularly Genentech?

Absolutely. With Genentech, again, we're making great progress on both fronts, both the shared and private products. And as Chad mentioned, significant growth in terms of what we achieved in Q3 and look to do the same closing out this year into next year. As it relates to the Immune Medicine pharma services, similarly, we expect good growth trajectory as well in 2023 and beyond with significant opportunities to penetrate in later-stage clinical trials and across multiple indications relevance to our assay.

One thing I'll add just from the financial perspective, again, we're going to wait to officially guide with the fourth quarter call, but we will take a more conservative view around the MRD pharma milestones. You saw that in the narrowing of the range for the fourth quarter. Those can move around quarter-to-quarter, of course. And I think as we go forward, we're going to try to kind of derisk the reliance on those. So that's one area lagged ahead of official guidance where we'll be a little bit more conservative.

That's very helpful. And the other question is...

Go ahead. Sorry, was there an additional question?

Operator, do you want to go to the next one?

Sure. The next question comes from the line of DerIk Brian from Bank of America. Please go ahead.

Operator, if you want to go to the next question, it would be great.

The next question comes from the line of Salveen Richter of Goldman Sachs. Please go ahead.

Hey, guys. This is Elizabeth on for Salveen. Thanks for taking our question. Had a question on the drug discovery efforts and specifically the antibody therapeutics area. What are adaptive key differentiators? And can you speak to the status of those discovery efforts currently?

Sure. Sharon, do you want to take that?

Absolutely. So similar to our TCR discovery efforts with Genentech and with the traffic Genentech amongst many of our capabilities is the sheer scale at which we discover and are able to characterize naturally occurring potent T cell receptors. The same applies for antibody discovery, where the technologies and the platform that we've built and validated for the past several years allow us to identify those ultra unique antibodies, which you alluded to, we have a portfolio of quote neutralizing antibodies. They happen to be against and we're pursuing additional capabilities to be able to focus on areas that really differentiate us against target that we may discover in areas that are unmet need like autoimmune disorders.

Got it. And when can we expect the next catalyst or milestone from that program?

So we are -- our strategy is to monetize on our existing assets. As I mentioned, neutralizing antibodies because of the portfolio of antibodies we've identified -- we have some -- several of them that are still relevant given some of the variants that exist today. So our core strategy is partnering for both. But in the interim, is really heads down on elaborating, as Jen mentioned, our own potential pipeline where antibody discovery can really make a unique differentiator for advancing those assets either in partnership or perhaps in the future on our own.

Got it. Thanks for the color.

Our next question comes from Derik De Bruin with Bank of America. Please go ahead.

Hi, good afternoon. This is John on for Derik. Can you hear me?

Yes. We can hear you.

All right. Yes. Apologies. I was double muted. I forgot to mute the other one. In terms of any commercial benefit down the road from your work on PTLD, is there sort of a time frame on when you might decide that data might become positive? And along with that, thank you for the 5-year long-term plan. Just wondering like looking at the profit -- your profitability target by 25% and the cash flow positivity by 26%, you're obviously looking to spend less and burn less cash, but if you could just provide any puts and takes there? And if I could just squeeze in 1 more there. If you're in that same long-term range. I was wondering what sort of contribution you're assuming from like the perhaps like future target discovery and therapeutics? Or for instance, how much contribution you might be assuming from COVID and T-Detect COVID line, given that you've talked about how the financial contributions should be minimal in the coming quarters. Apologies for ring them on.

Yes. Thanks, John, a lot there. Sharon, I'll have you cover the post-treatment line disease syndrome and then Tycho, I'll have you cover some of the puts and takes on future cash flow and then how we're moving kind of bringing in profitability years and then I'll make some overall comments on strategic direction. So do you want to start?

Absolutely. So in line with LDS, because of the investment we previously have made, we are wrapping up the last time point of the cohort that we enrolled and that completes sort of assessment in different settings of individuals with line. The goal there in the strategy as over archingly is opportunities that we may have with our pharma partners. As you may know, there are a number of therapeutics out there now, both the vaccine, but other modalities. And so we're going to be opportunistic to leverage that data, including in the PCLD setting.

On the long-term guidance, as we've kind of laid out on the slide there, it's a 20% to 30% revenue CAGR. The goal is to try to drive OpEx leverage. Over the long-term plan, we do expect low single-digit OpEx growth over that same period. One nuance the difference on EBITDA positivity in 2025 is because that we're excluding stock comp and then cash flow breakeven -- the cash flow components include the royalty payments to OrbiMed and obviously, working capital. I don't know that we're going to give a lot more color on kind of what's behind the revenue projections. We certainly don't want to get into kind of talking about partners or deals in the long-range plan. So I think that's all we'll kind of say at this point.

Yes. And I'll just make a comment with respect to our immune medicine business and our strategy, which is we built a unique set of capabilities over the last several years to identify targets and then find immune receptors, both T cells and antibodies against those targets. And what we're doing kind of from an investment standpoint is prioritizing opportunities to either ourselves or in partnerships to kind of leverage those capabilities, moving kind of into -- more into the therapeutic area. So that's what I'll say about that for now. Obviously, Genentech is the first set of catalysts, but behind that, we're working on quite a few things that kind of leverage those capabilities.

And just to round it out, the long-term guidance does not assume revenues from T-Detect. We kind of made that decision last quarter to pause and online in particular. So there's really nothing on the long-term outlook for T-Detect on the diagnostic side.

Got you. And if I could ask on the DLBCL as well. You're obviously trying to increase you're trying to educate the physicians here, and you're having conversations with the pharma sponsors, the clinical trial sponsors. Any on the physician access for better or for worse or has it held steady? And if there are any additional channels you're finding helpful in getting in front of them, what sort of work are you doing?

Nitin, do you want to take that?

Yes. I mean if I understand the question correctly, physician access in general is improving and has improved quite a bit. It's also region-dependent, certain regions, it's full on in-person meetings. In other regions, physicians have just sort of permanently shifted over to meeting virtually. And -- but I think overall, we're just driving growth in multiple ways. I think Epic integration is going to help a lot expanding into DLBCL and then the community is going to help a lot. So I think there's a lot of catalysts for growth going forward.

Appreciate the color. Thank you.

[Operator Instructions] Okay. If that is all, thank you for your participation in today's call. This does conclude the program. You may now disconnect. Thank you.