Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies First Quarter 2023 Conference Call. [Operator Instructions] I would now like to hand the conference over to one of your speakers for today, Karina Calzadilla, Head of Investor Relations. Please go ahead.

Thank you, Britney, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies first quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the first quarter of 2023. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and we'll be referencing to a slide presentation that has been posted to the Investor 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 listed in this presentation. In addition, non-GAAP financial measures will be discussed during this call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-founder; and Tycho Peterson, our Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-founder; Nitin Sood, Head of the MRD business; and Sharon Benzeno, Head of the Immune Medicine business will be also 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 first quarter 2023 earnings call. First, I want to thank all our Adaptive employees for their continued dedication and execution. This quarter's results represent a solid start to the year, laying the foundation for us to deliver on our 2023 annual goals. As shown on Slide 3, revenue for the quarter was $37.6 million, which reflects a 26% reduction in Genentech amortization, offset by strong recurring revenue growth from both our immune medicine and MRD businesses. We continue to streamline our organization and improve operating efficiencies. We recently announced the consolidation of the President and Chief Operating Officer roles under Julie Rubinstein to better align operations with our path to profitability. Our research and development efforts in drug discovery continues to progress. Both programs in cancer cell therapy with Genentech are advancing and are on track to achieve the respective goals set for this year. And our drug discovery team is making great progress towards novel targets in autoimmunity. Let's take a closer look at our MRD business on Slide 4. Our MRD business is firing on all cylinders. MRD revenue growth for the quarter had strong growth of 20% versus prior year. ClonoSEQ test volume grew 57% with double-digit volume growth in all marketed indications. Multiple myeloma continues to be the biggest growth driver and largest contributor. DLBCL launch is progressing well and now represents 3% of clonoSEQ orders. Ordering health care providers and ordering accounts experienced significant growth of 58% and 56% versus prior year, respectively. Blood-based testing, a key component of our growth strategy, increased in all indications and grew 30% versus prior quarter. Now, approximately 35% of all MRD tests are in blood compared to 31% last quarter. This growth in blood testing…

Thanks, Chad. Turning to our financial results, starting with Slide 9. Total revenue in the first quarter was $37.6 million, with 57% from MRD and 43% from Immune Medicine, representing a 3% decrease from the same period last year, which was primarily attributable to the expected step down in Genentech amortization and a $3 million MRD regulatory milestone comp. MRD revenue grew to $21.4 million, up 20% from a year ago, with strong growth from both clinical, testing and pharma partnerships. ClonoSEQ test volume, including international, increased 57% to 12,079 tests delivered from 7,698 tests in the same period last year. Immune Medicine revenue was $16.2 million, down 22% from a year ago, driven predominantly by Genentech amortization. Moving down the P&L. Total operating expenses, including cost of revenue, were $94.8 million, representing a 7% decrease from $101.7 million in the same period last year. Notably, R&D, sales and marketing and G&A all declined year-over-year. Cost of revenue was $18.7 million, driven by higher usage of our production lab to process revenue samples as well as a transitory increase in overhead due to the ongoing lab consolidation into our headquarters in Seattle. Finally, interest expense from our royalty financing agreement with OrbiMed was $3.5 million, which was almost entirely offset by interest income. Net loss for the quarter was $57.7 million compared to $62.8 million last year. We ended the quarter with approximately $441 million in cash, equivalents and marketable securities. Now turning to our outlook on Slide 10. We are reiterating full year revenue guidance of $205 million to $215 million. At the midpoint, we expect the contribution from our businesses to be approximately 55% from MRD and 45% from Immune Medicine and we expect revenue to be back half weighted. Within our MRD business, we expect over 50% growth in clonoSEQ test volume and MRD regulatory milestones in the mid to high single-digit millions. As we drive operating efficiencies, we are also reiterating our full year OpEx targets, including cost of revenue to be below 2022 OpEx of $385.5 million. Cash preservation remains a priority. And we expect our burn for the remainder of 2023 to average around $40 million per quarter, which is unchanged from guidance at the beginning of the year. Of note, the Q1 cash burn was higher due to usual bonus payouts in March. Q1 financial results were solid and in line with our expectations and we are on track to deliver full year guidance. Importantly, we have a strong cash position to fuel growth and execute on our long-term goals. We remain committed to driving additional operating leverage and achieving positive EBITDA in 2025 and cash breakeven in 2026. I'll now turn the call back over to Chad.

Thanks, Tycho. As discussed during the call, we had a solid start to the year and we are focused on 3 main areas: first, execute on our MRD business to further solidify our leadership position; second, in Immune Medicine, advance our partner programs with Genentech and our internal R&D efforts in autoimmunity; and third, manage capital allocation and drive operational efficiencies. With that, I'd like to turn it back over to the operator and open it up for questions.

[Operator Instructions] Our first question comes from the line of Mark Massaro with BTIG.

Mark from BTIG. Congrats guys on the quarter. I guess I didn't hear too much about the integration with EPIC other than you expect to complete it by the end of this year. I would love to just kind of get a sense for operationally what needs to happen. Are you getting close? What are some of the challenges and opportunities of achieving that by year-end?

Sure. Nitin, do you want to take that one?

Yes. Yes. So I think the EPIC integration is really progressing nicely. We defined the user interface in EPIC to order clonoSEQ, how the results will look clonoSEQ. We've done a lot of testing, end-to-end testing. And it all is progressing very well. And we'll go live with a couple of pilot sites to do a proper thorough end-to-end integration testing, and this will be sometime in Q3. And then, we're simultaneously lining up accounts that we'll bring online with EPIC in the second half of the year. And that's also progressing very nicely and we're seeing a lot of interest from our installed base in this integration. And I think the real gating factor I see is the IT resources and IT bandwidth available at each of our sites. But I'm fairly confident that we'll get this completed and we'll roll it out in the second half of the year. And based on the precedents from our industry peers, I'm expecting a small impact in the second half of 2023, but really a big impact in 2024.

Okay, great. So it's nice to see DLBCL pick up to 3% of orders. I think in the past, you've talked about how DLBCL is an indication that includes MRD assessment based on ctDNA. Related to this, I think we recently saw Quest Diagnostics acquire Haystack Oncology, which I thought was interesting. I would love to hear maybe your latest thoughts on what your view is on solid tumor MRD, if that's an area of interest and where you might be in terms of thinking about tackling this internally or externally?

Sure. Maybe I'll make a few comments, Mark, and then I'll hand it over to Nitin to discuss some of the technology. I mean, we're always looking for ways to expand our brand and either leverage our brand or leverage our channel. But we want to do that in a way that makes the most sense for us as a business. I should point out that there's a pretty significant total addressable market opportunity in front of us just in the hematology space that we need to operate, execute on and commercialize. And that's our main area of focus right now. That being said, we do look at opportunities where -- like, for example, we've got 70 reps in the field that have, I would say, kind of best-in-class exceptional relationships with the hem/onc. And so that's one area that we look to leverage. And then secondly, to your question, we also have a brand in MRD, particularly not only with our clinicians, but with pharmaceutical companies and clinical trials. So that's another area that is under consideration as well. With respect to the Haystack acquisition, in general, I think it's great to see M&A in the space around MRD. I think it's incredibly validating. And you've got some extremely large players out there that I think are increasingly interested in the MRD space. So I think that's great. And they're earlier stage, right? And one of the main advantages of really the clonoSEQ franchise, that it has several competitive moats around the business, including the fact that we've got -- we're regulated by the FDA in many indications, we've got wide payer coverage, and we're deeply penetrated into clinical trials. So that being said, with respect to circulating tumor DNA, maybe I'll pass it over to Nitin to give some comments on kind of what we're doing there. Nitin?

Yes. I mean I think the circulating tumor DNA technology that we have is uniquely focused towards B cells and sort of lymphoid malignancies. And therefore, we're uniquely positioned to really excel in that area. And then, we have a very strong infrastructure in terms of generating clinical data. We have relationships with all the KOLs. We've got over 100 publications in this area. Even most recently, we saw Grail published data in this area. But again, their sensitivity was 1 in 1,000. We are 1 in 1 million. They demonstrated data in setting pretreatment, whereas our data is post treatment when the tumor burden is much lower. So again, our technology is very suited for lymphoid malignancies. And we are continuing to innovate in that area and we'll continue to release new products in that area. But as Chad said, we're constantly evaluating market areas and product expansion opportunities. And when we have something, we'll share that with you guys.

Our next question comes from the line of David Westenberg with Piper Sander.

So we're back to a really big number on the sequential order. So I kind of want to just maybe talk about the customer -- or the patient stickiness here. Maybe let's go back if we can. Can you talk about some of your older cohorts maybe? Because you've been around in the market for even longer than Terra, '18-'19. You have some '18-'19 cohorts. Can you talk about some of the ordering behaviors from some of those cohorts from back then? And also, can you remind us if you are reimbursed past that fourth test with either CMS or some of the private payers? Just trying to think about how we can think about that waterfall effect in your business.

Sure. Nitin, go ahead.

Yes. I mean, I think we -- so the only comment I'll make here is that our Medicare reimbursement is limited to the 4 tests. But we are working on expanding that to add Medicare coverage for a single test beyond those 4 tests. So that's in the works. As it relates to private payers, it's based on individual test. So when a patient gets tested beyond 4 tests, we will be covered with our private payers. And then in terms of repeat testing, which is I think the intent of your question, we're currently averaging 1.6 tests per patient. And this varies by indication and it's much higher in ALL. It's lower in other indications. And our expectation is that on average this will go up to 2 tests per patient as we expand our clinical utility and our clinical evidence set. And we continue to educate our physician population about the use of clonoSEQ across the patients' journey. Yes.

Got it. All right. And then I'll just ask one more short one. Can you talk about maybe some of the consolidation of the President's role? Maybe why wasn't that separated from the beginning? And then if we should expect any other kind of positions in the future that might be consolidated? I mean I think you had no changes to kind of your OpEx and burn since last quarter, so I'm guessing not. But just wanted to ask that. And I'll hop back in queue after that.

Yes. First, I want to just get out on the table there are absolutely no performance issues or disagreements with Mark Adams. He actually did a really nice job in building a top leadership team. And really that team is in place and I think we'll thrive under this new structure and under Julie's leadership. David, I think, as you know, having covered us for a long time, Julie has been -- has done almost every role, executive role within -- in the company and has intimate knowledge and working knowledge of almost every function at Adaptive. And so the real reason that we did this is we wanted to align our operations and our R&D and commercial efforts across the company so that we could drive towards profitability and really executing on all our goals. So again, this is just kind of the next generation of the company and evolution where we thought there was an opportunity to consolidate these roles under one person.

[Operator Instructions] Our next question comes from the line of Derik De Bruin with Bank of America.

You had some really solid growth in your Pharma Services business. I'm just curious. We've heard some other companies talk about maybe a little bit of slowing, reprioritization of pipelines in the pharma space. Can you sort of talk about what you're seeing there? Any sort of slowdown or changes in terms of how some of your customers are growing or thinking about it? And it's basically just sort of like a temperature check on what you're sort of seeing in the biopharma services space.

Yes. Yes. Derik, I'll make some comments, and maybe Tycho or Sharon wants to pile on here. But I think there's -- first of all, we don't -- there's nothing material to report in terms of kind of a slowdown from our top pharma customers. That being said, I think there are 2 areas that we're closely watching. One is the IRA, the Inflation Reduction Act. And the second is just in terms of kind of macroeconomic headwinds with kind of lesser degrees of funding for kind of small and midsized kind of biotech companies that would potentially use our services. So it's something we're keeping an eye on, but we don't see -- and it's also reflected, frankly, in our guidance range. And so there's nothing to report kind of above and beyond that, at least in terms of impact on our business.

Yes. I mean you have relatively small emerging biopharma exposure will be my guess?

We do. Yes, we have some. Our biopharma exposure really is kind of across the board from small and midsize to -- almost all large pharma and biotech going to use us in some capacity, whether for -- in MRD trials or for pharma services from our Immune Medicine business.

So as we're sort of like -- we're sort of out and finished the pandemic, and obviously comps were a little bit weird because of the Omicron last year. How should we think about order pacing now that we're sort of back to more seasonal traditional sort of things? Can you just sort of help us sort of look at how we should think about order and test volume in the clonoSEQ business as we go for the next couple of quarters?

Sure. Nitin, you want to comment on ClonoSEQ as over the next few quarters?

Yes. I mean I think -- look, all the leading indicators look very favorable. New HCPs and accounts grew greater than 50%. Unique patients tested grew greater than 70%. All the indications -- all 4 indications that we play in grew double-digit quarter-over-quarter. Sales force productivity has increased by 77% from prior year. Our community business grew by 45% quarter-over-quarter. Blood testing grew by 30% quarter-over-quarter. And then with expansion into DLBCL and we're expanding into another -- non-Hodgkin lymphoma indication called mantle cell lymphoma, where we're filing for Medicare coverage next month; the upcoming EPIC integration, which is going really well. The increased reach and effectiveness of our sales team, the low penetration we already have. I think I expect to -- the growth to continue in 2023 above 50% and onwards beyond that as well. So from my standpoint, I'm very optimistic about the clonoSEQ diagnostic business. And likewise, I feel fairly strongly about our pharma business. We have a very strong pipeline of new deals that we're working through. So I expect that to be above 20% for the remainder of the year as well.

Derik, its Tycho. I just want to remind you we had guided for the year to be kind of back-half weighted. If you think about clonoSEQ, just think about the EPIC integration we talked about earlier and the DLBCL ramp, right, just kind of getting off -- and obviously, we doubled the sales force a year ago. We're kind of anniversaring that now. But just think about momentum building in the back half of the year.

Thanks for the reminder, Tycho. Can you just -- can you give us some sense on the -- I don't know, either the test volume or the revenue volume split between the different indications, ALL, multiple myeloma, CLL and NHL, now that you've got -- I'm just sort of curious in terms of where we are and where you think you are penetrated in those markets. And just would like to get a sense of the flavor on just what the revenue mix is from the different indications.

Sure. Nitin, do you want to take that?

Yes. So I think we are primarily driven by multiple myeloma and ALL. That sort of is our 2 major indications. And I would say we are sort of close to 20% penetrated in the ALL market. We're probably 7% to 8% penetrated in the multiple myeloma market and then sub-5% in CLL and DLBCL. And so longer range sort of in the -- by 2027 or so, I expect our overall market penetration to be above 20% across all the indications. And really, a lot of growth will come from continued penetration in multiple myeloma and DLBCL, where maybe we have the highest patient numbers. And then that combined with a steady increase in ASP will drive our revenue for the foreseeable future.

Our next question comes from the line of Tejas Savant with Morgan Stanley.

This is Yuko on for Tejas. Regarding -- following up on the previous question here regarding EPIC integration. With pilot sites underway, how much of a driver is EPIC integration for community uptake of clonoSEQ?

Nitin?

Yes. So I think EPIC is primarily in our academic setting. That's where we see most of our EPIC installation going forward. We are looking at other EMRs that are dominant in the community setting. Once we learn and get operational excellence going with EPIC, we look at other EMRs as well. But in the interim, our penetration in the community is so small that just our expansion of our sales team with a focus on the community, that's what's driving the growth in community. And as I've stated before, we had a very solid performance from our community business. A year ago, 8% of our tests came from the community. In Q1, this was 18% of our tests. And I expect for the full year, 20% of our business to come from community. And again, in the next 3 to 4 years, I expect 50% of our order volume to come from the community.

Okay. And then also, you mentioned additional data presentation during your prepared remarks to be presented this year. Should we anticipate any of these or other data points to be presented at ASCO?

We're looking at ASH, which is kind of the -- in terms of our conferences, sorry? At the American Stride Hematology meeting, at the end of the year is where kind of more of the data presentations will be presented.

Our next question comes from the line of Tom Stevens with Cowen & Company.

Just a couple on the gross margin and the consolidation. So I guess how long do you expect that consolidation to take? How much does it cost in dollar terms? And how much do you expect it to save in 2024? And then I've got a follow-up to that.

Yes. We haven't -- so I mean a couple of things to think about. The big impact on gross margins this quarter was Genentech amortization and MRD milestones, right? Those are very high margin, 100% in the case of the MRD milestones. So as those revenues were down, that weighed on gross margins. I did mention here. We're moving our lab into our headquarters in Seattle, that will -- that's an ongoing process. Yes, I mean, a couple of more months. I don't want to put it from time line on it. It's happening. And we haven't quantified any savings from that. We'll kind of come out and reevaluate our OpEx targets every quarter and update you as we have more information.

And then you mentioned --

I could add one more thing, Tom. We're doing a lot of work on comps right now. I mean this is a big initiative internally, really kind of looking at our overall margins. So it is something that we will be communicating more on and hopefully providing some guidance around this as we go forward. We historically haven't really talked a lot about gross margins, but it is a big focus internally.

That's really helpful. And then just a follow-up on multiple-myeloma blood. So it sounds like if you're presenting at ASH end of this year, we shouldn't expect any impact on your kind of clonoSEQ volumes from blood multiple myeloma until maybe mid '24?

Actually, Tom, every quarter, we're getting more test multi myeloma kind of done in blood. And we continue to kind of sell the Meritor blood-based testing. So obviously, the continued data readouts will help with clinical utility and comparability studies. But the reality is and part of our growth trajectory is based on kind of the increase in blood-based testing across kind of multiple indications, including multi myeloma.

And then just one last one, more on the weed. So your milestone pipeline for MRD looks about $50 million bigger. I guess, like does that change any of your pacing expectations? And kind of where do you expect the pacing of that $400 million to kind of be in the out years, especially with the Takeda deal?

Yes. So you did hear that we reiterated our guidance for this year, mid-single digit millions in milestones. We're obviously not commenting on 2024 at this point. But what we've talked about is that we've got line of sight to around half those $400 million in 74 active trials. Next year will be a bigger year for milestones for sure, just kind of give what we know about trial readouts. And when we officially guide, you'll hear more about it then. Keep in mind, all the milestones at this point are also on secondary endpoints. So should the FDA move forward endorse MRD as a primary endpoint that would be upside relative to what we've previously talked about.

Our next question comes from the line of Andrew Brackmann with William Blair.

This is Dustin on the line for Andrew. This is just a more broader strategic question. It's been some time since you've reorganized the business into the immune medicine and MRD segments. Just wondering how that reorganization has helped you guys in terms of commercialization and capital allocation?

Yes. It's a really good question, and it helped quite a bit, particularly in the area of focus, right? We now have 2 focused dedicated teams with very clear objectives as to what they need to deliver kind of not only this year, but in terms of the long-range strategic plan of the company. So, we've -- if you look at kind of our MRD objectives, which are clearly laid out, we know exactly what we need to do. And then similarly, in the immune medicine business, both in our partner program and then in our R&D programs for drug discovery. We have very clearly defined kind of milestones and kind of go no-go decisions. So from a perspective of capital allocations, we can be very clear as to what we're investing in and what the growth trajectory looks like in each one of those businesses.

And then, one more maybe on your long-term guidance. You guys laid out earlier this year. And in terms of the range, the 20% to 30%, just wondering what could bring you to the high end of that range? What could be sources of upside there? And then looking at the lower end of the range of 20%, what could bring you guys down there? And then additionally, once the first quarter, we can expect some sort of adjusted EBITDA profitability, if you have any visibility there?

Sure. I mean, some of the swing factors in the outlook are around MRD, obviously, clinical volume growth to the extent there's upside there that could be a factor. We talked about MRD milestones earlier and how we've been fairly thoughtful about kind of risk adjusting those. We put a 30% to 50% probability of success on those milestones to the extent there's better out there that would be upside. Immune medicine, obviously, additional pharma deals would be a potential driver beyond what we've modeled and anything with Genentech that is upside relative to either timing or incremental programs that we haven't announced or signed; so those would be the main things. Anything Chad or Sharon, do you want to add on it?

I think that captures well, Tycho.

And it's all organic. Obviously, if we did something in -- you talked about solid tumor earlier. I mean if we move down another path that would be incremental too. EBITDA, we're not going to get granular on the quarter, right? We kind of laid out the -- as we get closer, and obviously, when we guide for '25, we'll talk about it. But I don't want to get that granular at this point still to yourself.

Our next question will be coming from the line of Salveen Richter with Goldman Sachs.

This is Elizabeth on for Salveen. I wanted to ask on the drug discovery efforts. So it sounds like this year is really a year for building the infrastructure and building up the engine to drive the drug discovery vertical. So I wanted to know what you hope to learn this year as you optimized for the personalized product and any kind of concrete time lines you can share there on potential INDs? And then what you're also hoping to learn on the autoimmune drug discovery front.

Yes. So as Chad mentioned, in terms of the IND, there's the one IND acceptance for the first cell therapy program that is included in our 2023 guidance. No additional timing on additional INDs -- are ones that we can -- we are in a position to certainly highlight or discuss but certainly, we'll provide updates as appropriate. Related to the fully personalized approach, absolutely, we are scaling our regulated infrastructure in South San Francisco with our dedicated lab for the full -- to enable a fully personalized approach, especially as we have line of sight with our partner Genentech for clinical readiness and we'll provide updates as that advances. In addition to Genentech, our internal pipeline, as we've indicated, is focused to leverage our existing capabilities in autoimmunity. Specifically, we've highlighted multiple sclerosis as an area of focus as well as IDD. And there, we are very focused in terms of a proof point to get to at least 1 novel target in autoimmunity that -- where we generate sufficient data to warrant additional investments with the goal of expanding the pipeline and entering into the clinic.

And when do you think we'll have some more clarity on that internal pipeline and kind of concrete guidance around milestones for that program?

Yes. Right now, as we said, we're heads down in terms of R&D to get to that novel target. We're certainly excited by the progress we're making. So we're not in a position right now to elaborate. But certainly as we get more information, the goal, really is to validate that target and then assess based on compelling data, whether it warrants further investments. And we'll certainly update as these progress throughout the year.

Our next question comes from the line of Dan Leonard with Credit Suisse.

So I have a question on gross margin. The 50% gross margin, figure in the quarter, is that the right baseline now to think about the business absent milestone payments?

I mean, look, as I said before, the 2 big drags were Genentech and the lack of MRD milestones, right? So in any given quarter, we have more MRD milestones, which are 100% margin that will live. So it will continue to be lumpy. The other kinds of factors were higher costs of running in our production lab. We had a little bit of scrap that we had to deal with, too. But yes, look, I mean, the milestones would be the big swing factor quarter-to-quarter. So just keep that in mind as you're thinking about it.

And we have talked about kind of margins at scale being in the 70-plus percent range. But we have -- as Tycho mentioned, a very kind of rigorous internal program to look at how we are kind of focused on our margins. And that is, again, is also one of the reasons is something that Julie is driving in coordination with Tycho.

I appreciate that. And then as my follow-up, can you speak to how the Pharma Services business is performing within immune medicine and what is the outlook?

I think Nitin commented on 20% plus growth for Pharma Services, but I think that was just specific for MRD.

Yes, happy to elaborate. So as we've mentioned last year in 2022, our Pharma Services business in immuno medicine substantially grew by 67% versus 2021. And so we aim to continue this trajectory with double-digit percent growth. The 20% to 30% CAGR over the next 3 to 5 years does apply to our pharma immune medicine business in terms of our forecast. And the growth this year, as you saw the contribution in Q1 2023 was $7 million or so, almost half of the $16 million for immune medicine. So we're excited by the various growth levers and sources of revenue that we're generating from our immune medicine business and aim to grow that through this year and the years beyond.

At this time, there are no more questions and this call will now be concluded. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.