Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year 2021 Earnings Results Conference Call. . I would now like to hand the conference over to your speaker today, Ms. Karina Calzadilla, Investor Relations at Adaptive, Ms. Calzadilla, the floor is yours.

Thank you, Chris, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies Fourth Quarter and Full Year 2021 Earnings Conference Call. Earlier today, we issued a press release reporting Adaptive's financial results for the fourth quarter and full year of 2021. The press release is available at 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 Interim Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-Founder; and Nitin Sood, our Chief Commercial Officer, will be available for Q&A. With that, I will turn the call over to Chad Robins. Chad?

Thanks, Karina. Good afternoon, everybody, and thank you for joining us on our fourth quarter and full year 2021 earnings call. As always, I want to thank all of our Adaptive employees for their dedication, flexibility and strong execution during another challenging year as we continue to adjust to the changing dynamics of the workplace. 2021 was a year of key achievements for Adaptive, which set a solid base for many upcoming catalysts in 2022. Indeed, we are off to a great start with Genentech's selection of our TCR candidate targeting a shared cancer neoantigen to progress as a potential therapeutic product candidate, which I'll discuss later in the call. Before I go into our annual performance details and upcoming milestones, I'd like to address an important initiative we communicated at the JPMorgan conference. As shown on Slide 3, to effectively allocate capital and drive growth, going forward, we will discuss Adaptive around 2 key and distinct business areas. MRD and immune medicine. The MRD business is comprised of our clonoSEQ diagnostic test offered to clinicians and the clonoSEQ assay offered to our pharma partners to support drug development and approvals. The immune medicine business is comprised of drug discovery, research and diagnostics, driven by our T cell mapping efforts with Microsoft. This includes Genentech, Nykode, the T-Detect franchise and ImmunoSEQ TMAP. We aim to begin reporting revenues based on these 2 business areas by next quarter. Turning to Slide 4. You can see the significant progress we made throughout the year. Despite the impact from COVID variance, we delivered strong growth and ended the year with $154.3 million in revenue, up 57% versus 2020. The Revenue in the fourth quarter grew 26%. In our MRD business, we expanded our clonoSEQ sales team, which will be fully trained and in…

Thanks, Chad. I'll first review our fourth quarter financial results, briefly describe our full year financial performance, and then we'll provide an outlook for 2022. Turning to Slide 9. Total revenue in the fourth quarter was $37.9 million, representing a 26% increase from $30.2 million in the same period last year. Our revenue mix for the fourth quarter consisted of 61% of our revenues coming from sequencing and 39% coming from development. Sequencing revenue in the fourth quarter was $23.1 million, an increase of 81% for the same period in 2020. Growth in sequencing revenue was driven primarily by a $6.5 million increase in revenue generated from our pharma customers and a $3.3 million increase in revenue generated from our clinical customers. Research sequencing volume increased to 9,510 sequences delivered up 61% from 5,907 sequences delivered in the fourth quarter of 2020. Clinical sequencing volume excluding T-Detect COVID, increased 41% to 6,356 clinical tests delivered in the fourth quarter of 2021 versus prior year. Development revenue was $14.9 million in the fourth quarter, down 15% for the same period last year due to lower amortization of the Genentech upfront payment. Shifting now to our operating costs. Total operating expenses for the fourth quarter of 2021 were $99.5 million, representing a 34% increase from $74.4 million in the same quarter last year. Cost of revenue was $14.4 million during the fourth quarter of 2021 compared to $6.2 million for the fourth quarter last year, representing 131% increase. Higher cost of revenue was primarily driven by an increase in material costs due to volume growth and an increase in labor and overhead expenses. Research and development expenses for the fourth quarter of 2021 were $34.7 million compared to $35.8 million in the fourth quarter of 2020, representing a 3% decrease. This decrease…

Thanks, Kyle. As you heard during the call and shown on Slide 11, 2022 is expected to be a catalyst-filled year with multiple shots on goal across both our MRD and immune medicine businesses. We're off to a running start, and I'm confident in the success of our business as we continue to execute and demonstrate the capabilities of our platform. With that, I'd like to turn the call back over to the operator and open it up for questions.

. Our first question comes from Mark Massaro of BTIG.

I guess maybe the first one on the 2022 revenue guide. At the midpoint, it came in about $3 million below consensus. I guess, we understand that sequencing revenue is going to be about 60% of the total revenue for the year. Can you just give us -- Chad, your comments suggest that like access to the clinic seems to have improved in January. So can you just give us maybe some framework for what led you to this guidance, recognizing that hopefully, maybe we're out of the woods with COVID perhaps. But can you just give us some of the puts and takes to how you came up with that range?

Yes. Sure. So first of all, it's early in the year, and we want to be prudent. But there's variability in revenues associated with the milestones, and there's some variability in some of the T-Detect with the changing dynamics of the pandemic. There also is potential upside in some of the T cell mapping efforts and potential target discovery efforts that we're looking from our T cell franchise. And there could be potential upside in clonoSEQ, both in the clinical business and the MRD pharma business as well. But we're very confident in our ability to execute. And like I said, it's early, and we want to make sure that we're being prudent as we look forward to the year.

Maybe just my second question. You did get attractive reimbursement for T-Detect COVID. What are you seeing with respect to demand there? I think you talked about ebbs and flows related to variants. But do you see that being a material product here in 2022? And how should we think about that test sort of being any type of read through to any other products in your franchise?

Yes, that's a really good question. I mean first and foremost, I think it was great that we were acknowledged by CMS for this important use case in COVID. We are currently enabling the software infrastructure for the reimbursed product. It is important to note though that the new rate hasn't started yet, and we're assessing our path forward in light of really the changing nature of the pandemic. As I mentioned on the comments related to guidance, this isn't a very significant portion of the revenue profile of the year, and we're being extremely prudent in monitoring kind of what's going on in the pandemic. As far as a read-through, remember the COVID test is an EUA, and it gave us a lot of experience in launching a test to consumers. We're going to leverage some of that consumer-related experience. But for the future tests -- the test case for kind of Lyme and going forward and setting us up for the franchise and the launch of the IBD panel in 2023. What we're looking to do is really get that whole machinery and infrastructure in place, and we're building that out over the course of the year, so that we can rapidly deploy tests up on the system in a CLIA environment to generate data and to be able to launch test with an extremely high specificity and increasing sensitivity that have a high positive predictive value to patients.

And sorry, just a quick follow-up to the guidance question. I know you talked about how Q1 will be the low watermark for the year. But in Q1 of 2021, you did grow sequentially. So can you just help us determine whether or not you expect to grow sequentially in Q1 '22?

Yes. I mean -- this is Kyle. Q1 2021 was a little bit of a difficult comp for us. We had $7 million in milestones recognized during that year and also a little bit of pull through, which we typically see at the end of the year from our pharma business and Q1 '21. So while Q1 of 2022 is kind of sequentially stable to Q4 of 2021, we're still expecting to see modest growth in the sequencing line and roughly flat again on the development line with no milestones anticipated.

Our next question comes from Brian Weinstein of William Blair.

So obviously, you talked about the MRD and the immune medicine kind of characterization. But is that mostly an external reporting mechanism? Or can you just talk about how the business is being structured internally, if there's been any changes in terms of how you're structuring it along these lines and if it's changing kind of the way that you're thinking about investments here? Or is this strictly just an external kind of reporting mechanism?

Thanks, Brian, for the question. Actually, it's both external and internal. What we're trying to do in terms of providing clarity externally. At the same time, we're trying to create very focused teams around the different business areas for businesses that really fit together. And so if you think about it, MRD pharma and clonoSEQ really fit together. And at the same time, all of the underlying mapping data that supports all of the opportunities in immune medicine under really kind of that T cell franchise, all fit together. And so we're not only looking to align our revenues to these business areas. We're also looking to align organizationally so that we can better prosecute and be focused and nimble against these opportunities.

Great. And then as a follow-up, on the MRD, the $330 million, obviously, you guys aren't going to talk about who the partners are. You said that I think you had 60 or so of them. But can you just give us an idea about kind of the sizes that some of these potentially could be in the timing that some of the more important ones might read out? I recognize that your risk adjusting things in your guidance. But is there any kind of additional light that you can shed on kind of the makeup of that $330 million at this point?

Yes. This is Kyle again. I'd say think of the basket of milestones of $330 million is being 1/3 relating to secondary endpoints and 2/3 of them relating to primary endpoints. We've got access to the secondary endpoints right now. And that's what you're seeing run through in our top line numbers and expect us to continue to see that this year and on to the next year. And then once our pharma partners get access to enabling these primary end points, we expect to see the rest of that 2/3 kind of unlock and start to fall into our top line.

And next, we have Derik De Bruin of Bank of America.

So a few questions. So what's embedded in your guide for clinical testing volumes? Last year, at this time, you talked about doubling clinical volumes. In '21, obviously, the pandemic sort of stymied those plans. But I'd love to know sort of what you're embedding in the guide for volume.

Yes. So this is Nitin. I'll take that question. So despite COVID, we had strong growth in 2021. We grew 48%, our HCPs that ordering the test grew 57%. And as a result, we decided to expand our sales team because all the leading indicators for the business are very positive. Good news is we've completed the hiring and we're deploying the expanded sales team, where we've doubled the size of the sales team. And 2022 is off to a good start with actually we have very strong performance in January. So I'm confident of our strong position, the momentum we're seeing, and I expect that our growth trajectory will actually increase in 2022. And we also have a lot of other things outside in the industry that are acting as catalysts. For example, in CLL, we're seeing the adoption -- a greater adoption of fixed-duration therapy. These therapies require measurement of depth of response. And obviously, MRD is the choice to do so. In multiple myeloma, we're seeing clinical data reading out right now that allows MRD-directed de-escalation of therapy. That's another catalyst. And then finally, in non-Hodgkin's lymphoma, Medicare is providing a path for reimbursement, which I think will be a longer-term catalyst. So Overall, I expect 2022 to grow stronger than 2021, and we actually expect, given our penetration to have growth in -- even beyond 2022 into 2023 and 2024.

Right. Yes. But ultimately, I mean, when you report next quarter, are you going to give us a volume number? Because ultimately, that's one of the metrics that street's going to look at.

Yes. Yes, we will give volume numbers.

Yes. And Derik, as part of that breakup of the businesses, that is one of the things that comes -- we'll be -- kind of output of that is that we'll be able to provide volume numbers around the business.

Got it. And are you going to -- does anything change historically just from sort of how we should think about -- thinking about the volumes between the clinical and the pharma business?

No, I wouldn't think anything historically change. You're just going to get an additional dimension to look at MRD and aggregate across our clonoSEQ business and our pharma business.

Got it. So why the gross margin has been down quite a bit the last couple of quarters. I mean does that expect to sort of like creep back up? Or does it stay sort of like pressured at these levels in the 60s.

Some of that's a reflection of the milestone timing. And I'd say, expect to see modest improvement, especially as we're accessing more of our MRD pharma revenues, which have higher ASP price points over the year. So I wouldn't expect big swings over the periods outside of when we see milestone revenues land in the P&L.

Got it. I noticed on your catalyst chart, there wasn't anything called out for Lyme. What's the pathway on that in '22?

Yes. For T-Detect Lyme, remember, just to frame this, this has been a great technical proof point of the platform. And it's going to have a -- while it does have a minimal revenue contribution in 2022, it's really key to building the foundation of our CLIA-related infrastructure to be able to enable one blood test for multiple answers. So not only are we building a lab, we're building all the software and data infrastructure to be able to essentially launch test after test through the exact same system. And so what we're doing is learning how to update and improve the classifier as we continue to generate more data disease-by-disease. So we are going to launch in Lyme, and this is going to be a physician ordered consumer test to begin with, and then we're going to aggregate that data and increase sensitivity over time. We'll launch first in the acute setting, but the goal here is to get into the larger segment of the post-treatment Lyme disease setting, which that enables us to access a larger testing population. So we're still kind of finalizing the pricing and kind of moving forward under that premise.

Great. And just one more, if I can. So how do we monitor from the Genentech standpoint on -- obviously, the candidate was selected. Maybe that was a little bit more. The news around that was a little bit more muted than we had anticipated. I thought there might have been a little bit more information on that. How should we sort of think about the candidate selection and some of the other packages? And just how do we sort of monitor the progress of this? Like what's the -- what are the obligations, if any, from Genentech to sort of disclose?

Yes. So just to frame it, so Genentech selected the TCR candidate to move forward. It's against a neoantigen which is expressed in tumors and not on healthy tissue. So there's inherently a better safety profile associated with that type of antigen. And -- so Genentech will determine kind of the timing to advance its first cell candidate forward into the clinic with certain goals in mind. So they're going to have to demonstrate the kind of manufacturability of the product. And they also have kind of further work to do in terms of ensuring safety and administration to the kind of the patient population. So we're working kind of closely together to do more of that kind of end-to-end testing. And then further this year, we have a whole library of candidates, and we're going to aim to submit an additional kind of 2 data packages to Genentech this year. We can't disclose the targets, but we could -- there is a potential that we could have several stacked milestones over the next few years that are associated with the product -- sorry, with the program, I should say.

And next, we have Tejas Savant of Morgan Stanley.

This is Yuko on for Tejas. With investments behind the clonoSEQ sales force, would you elaborate on the magnitude in which the increased sales force would expand on your existing call points? Or is it more that there will be increase in the frequency of calling on those physicians?

Yes. So we -- as I said, we are doubling the size of our sales team. We'll have around 70 or so individuals doing 2 things. One is deepening our penetration in the existing accounts we have, primarily in the academic setting. So that's -- there, they will be increasing the frequency with which they call out to physicians and expand the number of physicians that we chart into those accounts. And then the second part of the sales team is going to be focused on adding new accounts, primarily in the community setting. So we'll be doing both activities deepening the penetration of the accounts we already have and then adding existing -- or adding new accounts in the community setting.

That was super helpful. And then one more. Regarding the NHL opportunity for clonoSEQ, would you comment on the current practice regarding minimal residual disease monitoring in DLBCL? Is this a market that you expect would likely need to invest in to build awareness?

Yes. So in terms of the use of MRD in non-Hodgkin's lymphoma or in DLBCL, this is certainly behind myeloma and CLL, but the adoption or the clinical need is increasing as evidenced by the fact that Medicare provided a path for reimbursement. However, a lot more clinical evidence needs to be generated to drive adoption. And we will be investing in clinical studies to demonstrate the use of MRD in DLBCL.

Next, we have Tycho Peterson of JPMorgan.

This is Rachel on for Tycho. So first up, on T-Detect, can you just share your latest development progress with Crohn's and celiacs. So what are the latest milestones that we should watch for? And then what is the time line for launching T-Detect GI syndromic panel?

Yes. Rachel, thanks for the question. Yes. So again, what we're focused is really on launching a test with a very high positive predictive value, which means that we have to set the sense of specificity very, very high and then increase the sensitivity over time. So for IBD, which is the farthest, advanced, we are planning on launching a test next year to a set of patients with shared symptoms. We completed so far 5,000 IBD samples and confirmed in ileal Crohn's and have signals in colonic Crohn's and ulcerative colitis. So we're looking at a specificity in the 99.5% range and then improving the sensitivity all through this year is really the goal to increase those metrics. And we are launching a clinical validation study that we're preparing for, and we're going to be launching that this year and preparing for a launch in 2023. So we're looking at a kind of 2- to 4-year diagnostic path for patients. We have 4 to 5 kind of specialist business and thousands of dollars for these patients to get diagnosed. And we're really looking to essentially eliminate or significantly reduce that diagnostic odyssey kind of by launching this path forward in IBD.

Great. And then it's good to hear about the decision to go forward with the TCR candidate with Genentech. But to clarify, can you just say, are you guys progressing to IND ready for that candidate or not?

Can you repeat that last part?

Yes. If you guys are progressing to the investigational new drug application for the TCR candidate with Genentech?

There's a lot of steps as we prepare for -- to have a successful clinical trial. But certainly, that's the direction we're all moving in, yes.

Sounds good. And then last one for me. Just on clonoSEQ, can you give us an update on how your conversations have been going with private payers? And then does guidance assume any additional traction with private payers this year?

Yes. So I think, as you know, we have about 240 million covered lives for multiple myeloma and for ALL. In terms of increasing coverage, we're very heavily focused on CLL, where we have about 150 million covered lives. Further, we are engaged in conversations with private payers to really improve the collection rate we have, and our focus is going to be to drive increase in ASP. So expectation is mid-single digit increase in overall ASP in 2022.

. Our next question comes from Salveen Richter of Goldman Sachs.

This is Elizabeth on for Salveen. Just regarding the guidance to deliver the 2 additional TCR data packages by year-end for the shared program. I guess could you just comment on the key learnings ahead of this, given the first candidate was selected to move forward? And then just your general thoughts on how the program may be a little bit derisked at this point? And just how you're thinking of this as a derisking event?

Sure. This is Harlan. I'll take that. So for the -- both with this -- so we're -- for now, we're staying away from naturally occurring targets in the human genome so that we're derisking the safety profile, and that will continue for our other shared -- our other targets as well, the 2 other data packages that we're going to deliver. We've -- I know we don't get to communicate that much, but we've -- the team has been working really hard behind the scenes and we've generated a very large number of T cell receptors against a wide variety of targets and are -- have been working hand in hand with Genentech. So we've learned quite a bit about what's acceptable to them and also what we find acceptable to move forward and I think that's the best chance of really being able to help patients with cancer. So I'd say the program is certainly -- is derisking as we go as we improve our technology and learn more.

And speakers, I see no further questions in the queue. I will the conference back to you for closing remarks.

Thank you very much. We look forward to a great year.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.