Good afternoon, ladies and gentlemen, and welcome to Adaptive Biotechnologies Third Quarter 2019 Financial Results. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. [Operator Instructions] I'd now like to turn the conference over to your host, Ms. Carrie Mendivil.

Thank you. Earlier today, Adaptive Biotechnologies released financial results for the quarter ended September 30, 2019. If you have not received this news release or if you'd like to be added to the company's distribution list, please send an email to investors@Adaptivebiotech.com.Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section titled forward-looking statements in the press release Adaptive issued today. For a more complete list and description, please see the Risk Factors section on the company's prospectus declared effective on June 26, 2019 and the other filings, the company makes from time to time with the Securities and Exchange Commission. Adaptive disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise, except as required by law.In addition, non-GAAP financial measures will be discussed during this call. Please visit the aforementioned press release for a reconciliation to the most directly comparable GAAP measure. This conference call contains time sensitive information and is accurate only as of the live broadcast, November 12, 2019.With that, I'd like to turn the call over to Chad Robins, Adaptive's Co-Founder and Chief Executive Officer. Chad?

Thanks, Carrie, and thank you everyone for joining us this afternoon. I'm very pleased to welcome you to Adaptive's earnings call to review our results for the third quarter of 2019. Joining me today is Julie Rubinstein, our President; and Chad Cohen, our Chief Financial Officer. In addition, Harlan Robins, Adaptive Chief Scientific Officer and Co-Founder, will be available for question-and-answer.At Adaptive, our mission is to translate the genetics of the Adaptive immune system into clinical products to transform how diseases are diagnosed and treated. Our approach represents one of the largest clinical applications of genomics and one of the largest global addressable markets in healthcare. Because the Adaptive immune system, both detects and treats most diseases in exactly the same way, Adaptive's new medicine platform reads and translates the genetics of the Adaptive immune system, enabling product applications across life science research, clinical diagnostics and drug discovery.Over the past 10 years, we've been primarily focused on building our immune medicine platform database and infrastructure to accelerate our product development engine. With this foundation in place, we are now accelerating our efforts to scale our business to aggressively pursue the large pipeline opportunity in front of us. We finished the third quarter of 2019 with revenue of $26.1 million, up 52% over the prior year period. On our prior earnings call, we laid out key milestones in each business area, and I will walk you through our significant progress.First, related to life science research. We are on track for the completion of an upgraded RUO kit for immunoSEQ at the end of this year with a launch plan for the first quarter of 2020. This kit will enable more researchers across disease states to access our immune sequencing solutions in their labs.Turning next to clinical diagnostics, clonoSEQ is our first…

Thanks, Chad. Starting first with life sciences research. We are continuing to make important progress across our research business as our partners expand their usage of our immuno sequencing products and services. In particular, the biopharma community is increasingly using immunoSEQ for immune repertoire profiling, and clonoSEQ for MRD monitoring in clinical trials. Since the beginning of 2019, our assays have been selected by an additional 40 biopharma companies for a total of 165 partners to date. As Chad mentioned, by the end of this year, we are launching an upgraded RUO kit for immunoSEQ that will work quantitatively with any sample type, including stored tissue samples. As the use of immuno sequencing expands across disease states, we are growing our sales and marketing team and seeking partners for global distribution. As the industry continues to assess the inclusion of MRD as a potential surrogate or primary endpoint in clinical trials for blood cancers, it is increasingly important to have a standardized and highly accurate option for MRD testing in registrational trials.Of note, in Q3 we announced a global agreement with Amgen for the use of our clonoSEQ assay to assess MRD across multiple drug development programs in their portfolio. This partnership exemplifies the growing role MRD testing plays in demonstrating drug efficacy in clinical trials. Under the terms of this type of agreement, we will receive annual development fees in addition to potential sequencing payments and regulatory milestones.Turning next to clinical diagnostics. Starting with clonoSEQ, clinical test volumes during the third quarter increased 36% to 2,551 tests compared to the third quarter of 2018. clonoSEQ is currently used by more than 400 HEMOCs in over 130 institutions. Clinical test volumes are growing in line with our expectations just 9 months following CMS coverage. Progress to date has been achieved…

Thanks, Julie. Turning to our third quarter 2019 financial results. Total revenue in the third quarter was $26.1 million, representing an increase of 52% from $17.2 million in the same period last year. Our revenue mix for the third quarter consisted of 45% of our revenues coming from our sequencing category and 55% coming from our development category. During the period, we recognized $2 million in revenue related to a milestone payment from a biopharma partner, which I will discuss in a moment. By comparison, we recognized $6 million in milestone revenue for the same period last year.Sequencing revenue in the third quarter was $11.7 million and grew 38% from the same period in 2018. This increase was primarily driven by growth in revenue generated from our biopharma and academic customers, and really the sequencing volume, as well as growth in revenue generated from our clinical customers. It's important to note that we recognized revenue in our sequencing revenue category when sequencing results or clinical test results are delivered to our research and clinical customers. Research sequencing volume, which includes sequences reported to both our biopharma and academic customers, increased by 25% to 10,618 sequences from 8,466 sequences in the third quarter 2018. Separately, clinical volume increased by 36% to 2,551 clinical tests from 1,879 clinical tests in the third quarter 2018. Development revenue grew to $14.4 million in the third quarter, up 65% from the same period last year. The increase was primarily due to amortization of the $300 million upfront received in February from our Genentech partnership, partially offset by a decrease in regulatory milestones recognized in the third quarter of 2019, as compared to the third quarter of 2018. Cumulatively, we have recognized approximately $26 million from the upfront payment in 2019, while approximately $274 million of…

Thank you. [Operator Instructions] Your first question comes from the line of Tycho Peterson of JPMorgan. Your line is open.

Thanks. Another good quarter, especially on the development services side. Is this the new baseline going forward? And is that really just the work progressing faster than expected.

Thanks, Tycho, for the question. Just reiterating the comments that we just made, there was a big push to deliver a number of data packages in the third quarter. So that resulted in a uptick of the resources consumed as part of that partnership. We don't expect that level of investment to be at the same area in the fourth quarter, and therefore, it likely will pick up again in 2020. But in the fourth quarter, it'll be -- development revenues associated with partnership will likely level off.

And then thinking a little bit about pipeline, I guess starting with the label expansion for CLL for clonoSEQ and blood by year-end, can you just talk to how you think about that process? How much risk there is? And then as we think about expanding multiple myeloma and ALL from bone marrow blood, how do we think about the timeline for those as well? I know you've talked about in the future, but wondering if you can...

Sure. Thanks, Tycho. For CLL, we are confident in our data and we're confident that we'll be submitting by the end of this year. So obviously, there is always risk when you submit to the FDA in terms of the timeframe as to which we receive approval. Technically they have a six-month timeframe in which to grant us marketing approval for the CLL label expansion, but we are confident in our data. As for ALL, you talked about ALL in the blood. We are also progressing nicely. We haven't yet talked about our timeframe for submission on that yet, but we are progressing very nicely on the data and we expect to have a filing in 2020.

And then on the Microsoft antigen map, you mentioned early discussions with regulators. Can you just talk to the nature and tenure of those discussions and how far behind are the other signals like celiac and ovarian? You mentioned you're still working on them, so...

Hi, Tycho. Yes so we're actually progressing fairly nicely on celiac and we're feeling quite good about the results. It's a little bit behind where we are with the line where we got the confirmation in two independent studies, which allowed us to feel confident in announcing it. As far as other signals go, we're moving on a lot of different fronts, which we'll be bringing up in the future. And then in terms of FDA, we've had multiple meetings now with the FDA. And we're -- this is going to be a bit of a process because this is new to them and new to us, and they are showing significant interest in working with us and have been -- and I think are going to be a great partner for us going forward.

Okay. And the last one, any impact from the New York approval back to clonoSEQ here that you've got in August in terms of volumes this quarter, or will take a little while for that to ramp up?

That will take a while to a little while to ramp up, but we should see that start to ramp in 2020. Matter of fact, I was just in New York last week visiting the New York institutions, and a lot of them are in that kind of first stages of account setup and workflow and then the next phase will be HCB training, but we should see the volume start to ramp up from the New York institutions in 2020, but it hasn't yet been reflected in this quarter.

Okay. Thanks.

Thank you. Your next question comes from the line of Derik De Bruin of Bank of America. Your line is open.

Hi, good afternoon.

Hey, Derik.

Hey. Can you confirm specific what the MRD clonoSEQ revenues were for the quarter?

So, Derik, we haven't provided any discrete numbers in terms of our ClonoSEQ revenues, but we're consistent with what we said in the prior quarter. Those revenues represent just under 10% of our total revenues.

Got it. And I guess can you talk a little bit about how you're sort of thinking about the ramp in that product? And I mean I realize you're doing the onboarding and bringing on people now, but could you sort of talk about some of the work you're doing in terms of sales and marketing? How long you think before you'll start to see the acceleration in that product?

Sure, Derik. Really, we're expected to be nine months into our commercialization efforts with having a 14-person field team in place. As we mentioned, we've been to date largely focused on account-contracting, workflow integration and HCP training, and we're just starting to turn our attention to demand generation for the first two indications in ALL and multi myeloma. And we do expect to see some acceleration in growth, even as early as the Q4 of this year. Additionally, so we're doubling our sales force. We're expanding our medical team in response to the accelerated coverage we got with 165 million lives, and I think together with the expansion of CLL into the blood, we're poised for 2020. But as we talked about coming out in the IPO, we expected this to be an 18-month timeframe and the real inflection to be hitting in 2021, where we see clonoSEQ taking a meaningful portion of our of our total revenue trajectory. But we are significantly, in addition to the sales force, ramping up our efforts not only in medical, but also in marketing to the patient population as well in terms of knowing their MRD status. And the final point is, I mean it's really a two-part component. One is to get an IG sample for every patient, and then two this land and expand strategy where we find a time point for each patient that a use case for each patient and then --each clinician to then monitor more and more for each patient once they once they find kind of their initial time point.

Great, that's really helpful. And then just one final question. So, appreciate the update on the Lyme disease just some size of the market there. And also just curious how many signals or what do you deem is enough signal to move forward. I mean I think there is sort of a question of at what point do you sort of think you're saturating the number of antigens that are out there. So it's really a question of like when do you think you've got enough signal and sort of a question is like, are there going to be antigens, are there going to be false negatives out there that you're going to miss because you're not screening enough T-cells?

Great, thanks. I'll answer first the question about commercialization and then I'll pass to Harlan who can answer some questions about --sort of size of the signal that we feel we need to have. So, as you know, we just received our first signal. And I think right now we're most excited that that this significantly derisks the science, that's triggered our motion now to put our commercial team in place for this immunoSEQ Dx product. I would say we're currently assessing the commercial landscape for Lyme as well as other diseases, including those that we've discussed in the past. And so as more signals get confirmed over the coming months we will solidify our commercial path forward.

Hi, so the signal that's needed for us to move forward is really driven by the present diagnostic and whether or not we can, we can improve clinical care by having a superiority in some dimension and that we're, and of course that we're confident that our signal is truly what we think it --that we've confirmed in multiple datasets and feel confident that it is what it is. However, and the total number of T-cell receptors in the whole population that are specific for any given disease specific set of antigens is in the well into the millions, 10s of millions, some very, very large number. And the number that we've found to date in any given disease that have generated our diagnostic is or is in the hundreds, thousand.So the point is, we're only seeing a small fraction of immune response and that's already sufficient to be considerably better than standard of care and certainly in Lyme disease. And so the point is, is that with our partners, Microsoft, we have a machine learning algorithms that we're also discussing with the FDA, so that we are able to have a self-learning diagnostics. So we can discover more and more of those T-cell receptors that we go and continually improve our diagnostics.

Great, thanks for the clarity.

Thank you. Next question comes from the line of Doug Schenkel with Cowen and Company. Your line is open.

Hi, this is Sean [ph] on for Doug. Thanks for taking my questions. You mentioned ClonoSEQ because is at 165 million covered lives, which I believe is consistent with last quarter. Could you provide an update on what percent of payer contracts have been implemented at this point? And I think on the last quarter's call, you said it would take one or two quarters probably to have all those payer contracts implemented. Is that still the thinking or put differently. Has this been going as planned. Thanks.

So, yes, it's been going as planned and we are in negotiations to convert those medical policies into contracts now. We expect to, first, some of the first to hit towards the first half of 2020 but discussions are progressing as planned.

Okay, great. And maybe a question for Julie on the Lyme disease. I may have missed it, but did you reveal the details of the planned clinical validation study in terms of its size or how long it will take in order hit the planned launch in 2021?

Sure. We are discussing that in our conversations with the FDA to determine the actual protocol. But we do believe it can be enrolled and fully completed in 2020.

Okay, great. And then maybe one last one for me is how does your sensitivity and picking up MRD and blood for the CLL indication compared to competitors, which I believe are only indicated bone marrow.

Yes. So we have --it's highly disease dependent, the tentative date of our assay is really related to the denominator, which is how many total sales we're looking at. So, realistically, the sensitivity our assay is identical in bone marrow and blood but the actual disease burden is slightly different in bone marrow and blood. For CLL, they are actually fairly similar, so our sensitivity in blood is better than a less sensitive technology is in bone marrow, which is really which is why we think we'll be able to ship the whole field to blood. So that's, by the way, 100 million cells is what -- FDA approved.

Thank you. Your next question comes from the line of Brian Weinstein of William Blair. Your line is open.

Hey guys, thanks for taking the question. Recognizing that you guys are making a lot of investments in sales force and expansion of menu on ClonoSEQ. Can you talk a little bit about how you expect to the typical timeline to play out from sort of introduction to an account to convincing the account to be thinking about MRD testing with ClonoSEQ to then having them be kind of fully up to speed, so is as we hear about more accounts coming up, what is that kind of general timeframe for them to just sort of ramp. How are you thinking about that?

Sure. Hi, Brian, thanks for the question. So this year it on average takes about 9 months to sign on an account and that includes all of the contracting, account activation and HCP training, we anticipate tightening that up now as we progress and as we brought in the field force as well. And then within an account, the average time it takes for an ordering clinician to get to their fifth patient is somewhere between two to three months. So that gives you some sense of timing. We're learning a lot more as we penetrate further into the market and we expect those timelines to tighten as we, as we expand.

Great. And then can you talk a little bit about the institutions where you're getting the most traction academic large IDNs community. Just where is this being received most favorably today and where do you need to do the most work ?

Sure. So we've targeted a couple of hundred of the Tier 1 institutions. We did a quite a large and detailed landscape of all the institutions in the United States and that's really where our main focus has been and we're penetrating quite well in those Tier 1 mainly academic or larger institutions. In 2020 we anticipate continuing to focus in those Tier 1 institutions, but also beginning to penetrate the Tier 2 as we move closer towards the community.

Great. And last one for me, I recognize you'll give formal guidance in the beginning part of next year. But just as we're thinking about 2020, are there certain considerations that we should be thinking about that, I hate to use the word puts and takes. But are there certain things that we should be considering as we build out our models, a little bit more finally, for next year?

Yes. So, we will give will give the formal guidance on the next quarter's call. I would just say that 2020 will be still a pretty heavy investment year for us, as we think about the broader opportunity the applicability of [indiscernible] across many disease types as we continue to further our development relationship with Genentech and continue to press into the market with our ClonoSEQ clinical product which is likely going to involve significantly heavier lift from us, from a sales and marketing perspective.

Okay, thank you.

Thank you. Your next question comes from the line of David Westenberg of Guggenheim Securities. Your line is open.

Hi. thanks for taking the question. So [indiscernible] being able to send out much of an issue, kind of asked another way, do you anticipate the adoption of the IVD kit or the launch of the IVD kit to really increased traction in ClonoSEQ.

Hi David, I would say there are certain institutions that don't do send out tests. But I would also say that the many institutions that originally said, hey, we don't do send out tests, as MRD monitoring and in particular NGS MRD monitoring with ClonoSEQ becomes more and more known that is we're already seeing that start to change. So as we, as we get more and more covered lives under medical policy and under contract, the kind of the barriers are being removed for clinicians to be able to send our tests . The other thing that we're working on is getting on test menu and working on kind of workflow and integration. And as we have better and better examples and have an easier path to workflow and integration having done this now for the past nine months, we can go in with essentially kind of a menu of here. There are several ways that we can kind of work with you to send out a test and here's us working in different institutions.

So all right, thank you. And then just kind of continuation of Tycho's question about the conversations with the FDA in terms of, I mean of CTX are there. Have they brought up maybe any sort of like comparative Technologies or pathways. For example, maybe diagnostic imaging with like maybe facial recognition software and it's not necessarily facial recognition, but that would kind of work at it iterative process that could go on, just any kind of help to maybe think about the way FDA has looked at other kinds of projects that have a similar kind of concept of, of learning as you go, kind of methodology?

So the, the FDA wrote a really nice white paper that describes their policy position on this. It's not --I shouldn't say that really their policy position, but it's a, it's a white paper that was both looking for input and trying to establish their policy on this. They have one, I think they have one approval to date that they're moving that they've already moved forward on. So but there the white papers should be quite informative. It's really well written and really lays out how they're thinking about how to use machine learning to have self-improving diagnostics.

Thanks. And if I could squeeze in just one last question for Chad on gross margins went up quite significantly. I mean basically sequencing revenue itself went up by about $3 million year-over-year yet. Cost of goods sold went up by about 300,000. Is there something that's contributing to the increase in COGS is that maybe essentially currency, as we go forward more payer adoption, should we expect maybe an increase in COGS?

Some of that relates to just overall scaling that we're doing in the lab. So over time, we'll continue to engineer our test to bring down those costs, but others are specific really to the quarter in which we saw a mix towards our less costly immunoSEQ tests as part of that sequencing component of our revenues in the current quarter, but hopefully the goal is to drive down those costs over time. And I think that's what you're seeing, when you look at comparatively our sequencing the cost of our sequencing revenues year-over-year for the 3rd quarter.

Thank you very much.

Thank you. Your next question comes from the line of Amanda Murphy of BTIG. Your line is open.

Hi, thanks. Some follow-up questions, I guess first on the conversation just around shift to blood. There has been some data, I think recently some of the some to abstract and now that have looked at use of ClonoSEQ in trials and I realize this is not sort of a real world setting per se but there is just kind of a give and take between sensitivity and sampling meaning getting enough cells in the sample to get [indiscernible] sensitivity. So I just was curious how to think about that. Moving forward, especially as you get into more of a clinical setting and getting the consistency of kind of the blood sampling draw stringency if you will.

Yes. So good question. So we have been consistently improving our extraction capabilities so that we can optimize removing the DNA that we need -- the concentration that we need to be able to consistently get at the that deeper level, we're actually acquiring enough sample to get to in a million is pretty standard. There is a standard bone marrow or a standard blood, should have enough cells to get there on a highly consistent basis. So we see this as a temporary. But I think if not completely solved we're almost completely solved at this point.

Got it. And then just two quick modeling ones. So you talked about some academic weakness, I think in Q4, and then also obviously, I think from a seasonality perspective, everything is clinically, you may have a stronger Q4 just with the kind of typical running through sort of deductibles. So when I guess everything about modeling ClonoSEQ and mmunoSEQ and then ASP dynamics, so trying to figure out how to think about those trends into Q4 volume and ASP, I guess more ClonoSEQ and its really very academic split between multiple different products.

Yes. So it will be just sort of at a high level, we'll continue to see growth in clonoSEQ revenue going into the fourth quarter and corresponding volume growth. So those are our expectations. Second is we'll continue to see growth in our biopharma sequencing revenue as well as specifically, we've seen historically over the past many years, a lot of seasonality -- peak seasonality in the fourth quarter as a biopharma partners and sort of spend through their allocated budgets as well. So that will come into play. Again this year at least was our expectations, and so I think the academic softness related to just the wait and see approach in terms of adopting our new assays and new kits that should come online more in the first quarter and through the rest of 2020 and we're seeing just a slight pullback in the fourth quarter relative to that academic business. And I think, I hope that answers your question.

Yes, okay. And just another quick one on the milestone side, you talked a little bit about some level of pull forward with Genentech, but I guess just in front of the IND. I'm not sure if you're willing or able to disclose, how this milestones might play out through the IND, so I'm assuming, they'll be IND-related milestones. But is there anything else in front of that, that we should think about or any way to quantify what that might look like into the IND filing itself in 2020 before, thought there would be?

As we said, we plan to file an IND by the end of 2020. We can't disclose yet what targets the IND is for nor do we have, really this is under Genetics control in terms of the timeline going forward, but there is a series of commercial and regulatory and commercial milestones associated both with the shared product and the private cloud product, that are with the Genentech deal and those milestones will fall in accordance with those products, both on commercial and regulatory milestones and again we don't yet have timing on those.

But there might be spend I guess between now and the IND --

Say, that again. I didn't hear you.

I'm sorry --so it's not like it's going to be sort of derivative payments between now and IND filing, you're still kind of --

No.

Yes. Okay, thank you very much.

Thank you. I am showing no further questions at this time, I would like to turn it back to you, CEO, Chad Robins for any further comments.

Thank you everyone and have a great evening. Appreciate it.

Ladies and gentlemen, this concludes today's conference. Thank you for participating and have a wonderful day. You may all disconnect.