Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [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, Vice President of Investor Relations and FP&A. Please go ahead.

Thank you, Didi, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnology's fourth quarter and full year ‘24 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of 2024. 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 listed in this presentation. In addition, non-GAAP financial measures will be discussed during the 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 Kyle Piskel, our Chief Financial Officer. Additional members of the management team will be available for Q&A. With that, I'll turn the call over to Chad Robbins. Chad?

Thanks, Karina. Good afternoon, and thank you for joining us on our fourth quarter and full year earnings call. As highlighted on Slide 3, 2024 was a year of key wins and strong execution on all fronts. In MRD, revenue increased 42% versus 2023, driven by both clinical testing and pharma. Two major catalysts occurred in the year, which we believe will drive long-term growth profile of the MRD business. First, we obtained a new gap fill rate for our clonoSEQ test of $2,007 which is about $300 higher per test than our previous implied rate. And second, the ODAC vote in favor of using MRD as a primary endpoint to support accelerated approval of multi myeloma therapies, represents a paradigm shift in the development of heme cancer drugs. In immune medicine, we make significant progress in our autoimmune programs and recently nominated our lead clinical indication. We are now focusing on the preclinical development of an antibody therapeutic candidate in this lead indication. In conjunction with driving MRD top-line growth and advancing our IM programs, we completed restructuring initiatives and yielded a 40% reduction in cash burn from 2023, concluding the year with a robust cash position of $256 million. Let's take a closer look at the MRD business performance and outlook, starting with clinical testing on Slide 5. Full year clonoSEQ clinical revenue grew 40% versus prior year. As shown in the chart, volumes continued to increase quarter-over-quarter with a record high 20,945 tests delivered in the fourth quarter, representing a 34% increase versus prior year and a 7% increase sequentially. Meaningful growth was observed in all reimbursed indications. Multi myeloma contributed 43% of U.S. clonoSEQ volume in Q4, followed by ALL at 34%, CLL at 10%, DLBCL at 6% and MCL at 4%. Looking at some of…

Thanks, Chad. Starting on Slide 13 with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was $47.5 million, with 85% from MRD and 15% from immune medicine, representing 4% growth from the same period last year. MRD revenue grew to $40.1 million, up 31% from a year ago, with clinical and pharma contribution of 65% and 35%, respectively. ClonoSEQ test volume increased 34% to 20,945 tests delivered from 15,680 tests in the same period last year. Immune medicine revenue was $7.3 million, down 51% from a year ago, driven as expected by lower Genentech amortization which decreased 56% and lower pharma and academic services as IM focus has centered-around drug discovery efforts. Full year 2024 revenue was $179 million, representing a 5% increase year-over-year. MRD revenue was $145.5 million, up 42% from a year ago, with $12.5 million of milestone revenue recognized in the year. Excluding milestones, MRD revenue grew 29% versus 2023. Immune medicine revenue was $33.4 million. Moving down the P&L. Sequencing gross margin, which excludes milestones and Genentech amortization, was 59% for the fourth quarter. This represents an increase of 11 percentage points versus prior year and 3 percentage points sequentially. Full year sequencing gross margin was 53% compared to 41% in 2023. Lower overhead costs from efficiencies in the production lab and direct labor leverage, which combined lower cost per sample contributed to these improvements. Total operating spend for the quarter, inclusive of cost of revenue was $81.3 million, which excluding the impairment charge from last year, represents an 11% decrease from Q4 2023. This decrease continues to be mainly driven by our focus on driving leverage across functions with R&D once again being the biggest contributor of the decline, given more targeted investments in immune medicine. Full year operating…

Thanks, Kyle. 2024 was a pivotal year of execution, and we are looking forward to building on the success in 2025. In MRD, we are executing on our strategy, and we are confident in reaching our profitability goal later this year with an enhanced growth and margin profile. In immune medicine, we are advancing our drug discovery efforts, which we believe could have an enormous future potential. And importantly, we have a strong cash position that enables us to achieve our goals in both businesses, we've got the people, the market position and the momentum to drive success in 2025 and beyond. I'd like to now turn the call back over to the operator and open it up for questions. Thank you.

[Operator Instructions] And our first question comes from Andrew Brackmann of William Blair.

Maybe if I could start just on the underlying assumptions of the guide here for the MRD business. Obviously, a lot goes into this one. But maybe if I could just ask on pricing, that seems to be a pretty big lever this year. Can you just unpack for us that $1,300 assumed ASP for the year a bit more, what's included there? What's not included? And as you sort of think about some potential upside levers there, what could maybe drive something a little bit higher than that

Sure, Andrew. Kyle, I'll have you answered that.

Yes. Andrew, probably 4 important things to align on the ASP drivers. The first is the full year impact from the gap fill rate for our Medicare line of business in 2024 that was only partially reflected in the last quarter of the year. So we're going to see the full year impact of that being in place. Second and probably most important is the pacing at which we're able to recontract with existing contracted payers as well as contract with the remaining kind of larger open payers that we have. The third component is revenue cycle management. To some extent, we think this has some meaningful opportunity with the gapfill pricing being available, not only in helping us to win appeals but to win appeals at a higher price point. So that, we think, can drive some meaningful improvements. And last is Medicaid. Not only with having the gap fill reference rate available, even though they are traditionally a lower payer, we can start to gain some meaningful traction in the reimbursement environment and a bit organically as our volume mixes to the community, we'll see a mix away from that Medicare line of business, which has been historically a lower payer. So those are kind of the four main things I'd focus on for ASP.

That's perfect. And then if I could for my follow-up here. Obviously, a pretty big year in terms of catalyst and sort of milestones to get to adjusted EBITDA positivity for the MRD business here. Can you just sort of talk to us about sort of the pacing of that margin progression throughout the year? And then specifically, as it relates to the NovaSeq X transition, what sort of needs to get done in order for that to sort of be fully de-risked at this point?

Yes. On the pacing, we exited Q4 at about 59% on the sequencing margin profile. I think that's probably a fair number for the first half of the year, depending on the contribution mix from pharma but that's probably the right ballpark to be in. I think the NovaSeq X in the second half of the year, we've said historically between 5 and 8 percentage points lift there over 12 months. So you'll start to see an improving margin profile in addition to an improving revenue profile from the ASP drive that margin profile. So on the longer-term front, we see the NovaSeq driving about 10 percentage points on the margin profile. But as it relates to the adjusted profitability time frame, it's that's really driving that, and we're fairly confident in our ability to achieve this with the initiatives we've outlined.

Yes. I'll take it all together, we're Yes, Andrew, just taken all together, we're certainly confident in our ability to achieve EBITDA positivity in the second half of 2025.

Our next question comes from Rachel Vatnsdal of JPMorgan.

Perfect. So first up here, just on the NeoGenomics partnership, great to see that signed. Can you walk us through what's contemplated in guidance currently in terms of contributions from that partnership? And how should we see that trend throughout the year?

Susan, you want to take that?

Sure. Thanks for the question, Rachel. So the NeoGenomics partnership, we've already begun working in earnest with the team, and we expect that it's going to take around 4 months for us to work closely to design and implement the customer experience and the supporting backroom operations that will facilitate delivering clinic tests through NeoGenomics channels. Our goal is to start the cross promotion with an initial group of pilot accounts in the second half of this year. And we're really planning to take a slow ramp on that to allow time to collect and implement customer feedback, make sure all mechanics are in order. And so well, we could go faster. Both companies have experience with lab-to-lab partnerships. And so we're intentional here, we're not rushing -- we have the opportunity to jointly ensure that we implement all the best practices that we know will lead to longer-term success. And so as a result, the guide this year really doesn't incorporate any material volume from NeoGenomics and it's really in 2026 and 2027 that we expect to see that all come through.

And that's to help us be prudent in kind of our outlook. If there's additional uptake earlier, that's great news for us.

Perfect. And then just on my follow-up, just in terms of the MRD guidance. I think I heard you say it's a 40-60 weighting between the first half, second half on a revenue basis. But walk us through your assumptions in terms of the feeding of volume growth? Should we assume a similar progression or more linear and more hockey stick in terms of the volume ramp throughout the year?

Yes. I think thinking about it linearly is probably right. I would say the back half of the year, with the Flatiron launch and the catalyst from continued Epic integrations might have a more profound impact but as it relates to our guidance, we're kind of thinking about it linear while we watch the uptake from both EPIC and Flatiron, which could drive us to the upside of the range.

Our next question comes from Mark Massaro of BTIG.

Yes, it's great to see the progress in 2024. And so my first question is, I recognize that you are not contemplating any material uptake with the Neo partnership in '25. However, many of us do cover NeoGenomics, and we're not super familiar with the size of the COMPASS and CHART offerings. So can you just give us a sense maybe qualitative, quantitative about how significant of an opportunity is COMPASS and CHART as we think about '26 and '27. What type of attachment rate do you think a clonoSEQ could have as part of that product offering?

Yes. Thanks for the question, Mark. I want to start first by saying that I think the company is supposed to view this as a win-win collaboration that's going to potentially offer upside to both products, both to the COMPASS and CHART products on the Neo side into ClonoSEQ for Adaptive. The estimated volumes, I'll leave it to NeoGenomics to comment on their current business, but we'll say that we think that it could have a material impact to our volumes. And we're looking at sort of mid to high single-digits over time. The deal is a 3-year deal with the opportunity to extend. And so again, you'll start to see more of that come through in the later years.

Okay. Got it. And then as a follow-up, can you speak to any success that you're having with commercial payers who might recognize the higher $2,007 price on the Medicare side. Do you think that, that is an opportunity for you in 25 to kind of go back to some commercial health plans and negotiate a higher rate?

Yes. Absolutely. We've already seen some nice conversion of re-contracting with the existing commercial payers, and we're under late-stage discussions with several un-contracted payers that are contracting at a higher rate. We absolutely believe that this will drive our ASPs or one of the components -- one of the poor components that Kyle mentioned that will drive ASPs for the year. But certainly having that new PLA code in place has been extremely helpful.

Our next question comes from Sung Ji Nam of Scotiabank.

Could you remind us in terms of your pipeline for MRD, the recent Medicare reimbursement from mantle cell lymphoma? Just remind us again kind of what's in the pipeline, kind of what are some of the next indications that we could look forward to over the next kind of 12 to 24 months?

Sure. So yes, as you noted, mantle cell lymphoma is our most recently Medicare-covered indication, which we launched commercial promotion for in mid-Q4. And I just want to note that, that's an indication that we're already seeing a significant enthusiasm around -- there's a high unmet need and we had some really nice data coincide with our launch at ASH 2024, which demonstrated the ability of clonoSEQ into the negative sensitivity to inform the decision on whether or not to transplant the patients with natural cell lymphoma. So clinical actionability data kind of right out of the gate, which is great. Going forward, we are anticipating submission of additional indications to MolDX for potential reimbursement. We're next going to see coverage for T-cell ALL and we're also exploring advanced stages of cutaneous T-cell lymphoma, CTCL, which is also known as sensory syndrome. We're actually in active efforts to get that T cell application in and utilizing data from the validation of our recently updated T cell assay, which we launched in the clinic in Q4 in which for which we recently received additional approval from New York clip as well. I do also want to mention that on the mantle sales front, we're not entirely done with our work in the sense that we'd like to continue to seek an additional reimbursement framework from MolDX which is recurrence monitoring. So in addition to getting coverage under our current episode reimbursement structure, we'll look for incremental time points, and we're in active discussions with MolDX on that topic as well, and that will allow us to get coverage for testing for patients off therapy with over time.

Great. And then just curious on the recent updated guidelines, NCCN guidelines for B-cell lymphoma, specifically the PET positive DLBCL following first-line therapy. Just curious whether there might be opportunities for you guys for Adaptive I'm realizing this is a very specific indication, but whether that is pretty, I think, significant in that the first ctDNA inclusion in the guidelines in the NCCN guidelines. And so just kind of curious what kind of your positioning is here for that.

Absolutely. The inclusion of MRD and then seeing guidelines for [indiscernible] large B cell is a positive step forward for the space in general and for providing access to patients for MRD testing is right in line with our strategy, like most companies, we periodically submit proposals to NCCN and as do other companies in the space. And so it was great to see MRD get into the guidelines as a first step, although there's still more work to do as this is a Level 2 recommendation and a relatively narrow in scope. So on an ongoing basis, we anticipate continuing to generate data and submit that data to NCCN to support expansion of those guidelines. And in the meantime, NCCN has generally been consistent about not setting particular assays in the guidelines, and they'll mention classes or specified performance that they expect. And so the current update is relevant to ClonoSEQ and to other DNA assays in the space with recommended.

And just to tack on to that, Sung Ji, if you remember, we've already obtained Medicare coverage for diffuse leg B-cell lymphoma. And so any additional guideline inclusion also helps us in our efforts for contracting with commercial payers around that indication. So again, thrilled to see it, more work to be done, but we are in the clinic already with DLBCL.

Our next question comes from Tom Stevens of TD Cowen.

Sorry about that. It's Dan Brennan. Apologies. So first question, just congrats on the quarter. Maybe just back to the ASP bridge for 2025 to the $1,300 so for the commercial rate, we come up with around $1,280 in the fourth quarter this year. Is that right, kind of what's assumed in ‘25? And then on Medicaid, since now you have 2 state approvals, and I think that's 10% of volumes. How are you thinking about Medicaid contribution to that $1,300 in ‘25?

Yes. I mean on your commercial rate, maybe a little high. Obviously, you got to pump something else up to get there. It might be on the Medicare front or our direct build direct-to-hospital ASPs, which we call roster. What was the second part of your question, Dan? On the Medicaid. Yes. I think now that we have state approval we at least, at the very least, have a rate to peg against. And you may have heard in other companies, some people think of this as 50% to 60% of the kind of gap fill rate as being somewhat traditionally recognized. Obviously, we want to do better than that, but we acknowledge it will take time but not only with those payers, but some of the managed care organizations for Medicaid, we think we can start to use this rate as a reference to establish reimbursement. I think California is probably most notable where we can start to see some improvement in New York and then hopefully over time to, once we get coverage there.

Got it. Okay. And then maybe just on the EPIC side. So I think you said 20% of volumes are EPIC on '24, kind of what do you see in those accounts that adopt -- is there a meaningful difference in payment or volumes? And kind of what are you assuming in '25?

Yes. So at this point, we have 19 accounts that are integrated with EPIC that includes 2 of our largest accounts. We are -- we've been actually monitoring these, although many of them, 9 of them went live just in the last quarter of 2024. So we still have early days in terms of data. But we do see consistently is that our growth in those accounts in terms of order volumes outpaces the growth in the rest of the business. And additionally, that the growth seems to outpace on an ongoing basis for the accounts that we've had integrated for more than a couple of quarters. Additionally, to order volumes, we see significant numbers of new ordering providers, so it expands access to the test across the account versus what we saw prior to integration. And we get consistent positive feedback about the workflow improvement and streamlining of the ability to get samples collected and out the door and into adapt its hands. So overall, quite bullish on the opportunity to continue to accelerate growth with EPIC integration, and we expect to have 8 out of our 10 top accounts integrated by the end of and a total of 50% of our business flowing through an EMR integration, whether EPIC Flatiron or other community by the end of this year.

Got it. And maybe just a last one just on obviously, targeting adjusted EBITDA positivity in '25. I think you said flat OpEx, I think that's been consistent. But is there any view on maybe being too restrictive on the sales force? I mean penetration rates are still extremely low. Volume growth is pretty healthy. Why not maybe look to expand the sales force further to pushing the community or other? Just kind of wondering on that sales force kind of level, what's the right number to think about?

Yes. I think we feel at this point pretty good about where we are with the sales team. They are clearly a very promotionally sensitive test. But at the same time, we want to make sure that we are managing spend and we've been approval with our ability to achieve our profitability goals. I will say that the NeoGenomics deal is one of the ways that we're looking to expand access and touch points without investing directly in our sales team, but certainly not off the table that we could grow our sales team over time if that fills in the --

Our next question comes from Matt Sykes of Goldman Sachs.

This is [indiscernible] on for Matt. Congrats on the quarter. A lot has been covered already, but you've shown a consistent sequential improvement of around 1,200 clinical units for MRD for the past several quarters, do you see that as a sustainable cadence going forward? Or do you anticipate any inflections at all in that growth?

Yes. I think we'll continue to see growth aggregate volume and percentage volume. We've around expecting north of 25% volume growth for the full year both in 2024. So that's kind of what's baked into our guidance assumptions for the midpoint of 180. So I think at the end of the day, we've still got a lot of opportunity. We're still low penetrated in our core indications. So I think we've got long-term durable growth for the coming 3 to 5 years in this business.

And our next question comes from Tejas Savant of Morgan Stanley.

So maybe 1 quick housekeeping 1 for you, Kyle, and I have a couple of follow-ups. So on that $6 million to $7 million in pharma MRD milestones, how are you thinking about it in terms of the first versus second half? Should we just assume that it all comes through in 4Q as a placeholder assumption?

I would just spread it evenly. I mean, we could try and get very precise with it. But I think just for practical purposes spread it evenly, we have line of sight to some earlier, some later, but it's really difficult to put it into a precise quarter. So I think just spreading it easily is the best way to do it.

Got it. Perfect. And then on that 5% to 8% margin improvement in the first 12 months of the NovaSeq transition, Chad, just curious as to how should we think about the impact that will have on your clones turnaround time? Do you need to batch your samples now to fully realize the COGS benefit?

Yes. So basically, one, NovaSeq X is replacing of 40 to 42 NextSeqs. But ultimately, you do need to do some batching on it, but it should not impact our turnaround time given the volume profile that we have. Harlan, do you want to add to that?

Yes. So the volume that we have right now takes up Medi next per day. So we're going to be able to load daily our entire clinical volume and we'll still have plenty of room for growth. So that's why we're getting such a nice return on the NovaSeq. So in fact, 1/2 of the NovaSeq ticks up the equivalent of effectively like 30 NextSeqs in terms of our runs. So if you think of it that way, we're only filling up portion right now. And so we'll continue to add more on that 1/2 of the NovaSeq. So in other words, it scales beautifully without having to increase cost to us. We can just load more and more samples from the same machine. Obviously, eventually, we'll hopefully in the not too distant future, we'll strip the threshold to needing to run 2 halves of the one machine, but we're excited about this.

Got it. That's helpful.

I'd just say the timing is about the same.

Yes, turnaround time in doesn't really change at all.

Because the machine runs about the same -- it's effectively similar.

And then on the IM side of things, guys, just a quick clarification on the Genentech partnership. Chad, you talked about the switch to a digital or in silico model to reduce time and cost to deliver that cell therapy product. So when you switch over to that new method, what additional data, if any, do you have to provide the FDA to deploy that approach in a clinical trial setting?

Davis, to be, I'm not sure we're there yet. And Genentech controls kind of the regulatory component of this. We're providing all the -- we provide all the work and supporting documentation for that. But that -- we're not there yet.

Okay. Fair enough. And on that point around if this effort were to succeed, how should -- can you just help us flesh out the broader potential upside here if this transition to the digital approach goes well?

Sure. Harlan, do you want to take.

Yes. So I mean, I'm a scientist, so I'll give -- start with a scientific answer, which is one of the huge problems in immunology is trying to figure out what T-cells actually do, what do they bind to. And so as part of this solution, what we're really doing is solving that bigger problem, which was the first step of that just got the Nobel Prize this year on protein folding, but figuring out what -- health proteins interact with each other was that no 1 had the training data to be able to do that. So there's many, many applications, one of which is personalized cell therapy. And the real advantage is there's 2 big advantages. One is a massive time advantage, something that presently we have to do in our assay that takes multiple weeks we should be able to do in a matter of a day or 2, something like that. That's number one. And then number 2 is the cost advantage where having any kind of personalized assay, you have to literally buy or make reagents for each patient and then run your assay and lab. So the huge advantage there is that you don't have to do any of that. You're just using some compute. And then separate from that, like the other set of -- like the most direct other applications, the personalized cancer vaccines, for example, immune monitoring, there's tons. So we're excited about that potential.

Thank you. That concludes our question-and-answer session and today's conference. Thank you for participating, and you may now disconnect.