Good day and thank you for standing by and welcome to the Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Karina Calzadilla. You may go ahead.

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

Thanks, Karina. Good afternoon, everybody. And thank you for joining us on our 2022 fourth quarter and full year earnings call. As always, I want to thank all of our Adaptive employees for their dedication and strong execution throughout the year. As you can see on Slide 3, 2022 was a year of key decisions and achievements for Adaptive. We started with the reorganization of the company around two business areas, MRD and Immune Medicine. We established clear strategic goals for each of these two business areas and executed against these goals by hitting key deliverables throughout the year. Following the restructuring, we shared our long-range financial plan to achieve sustainable revenue growth while reaching adjusted EBITDA profitability in 2025. We also strengthened our cash position with a non-diluted royalty financing agreement. Importantly, given our 2022 ending cash position of 498 million, we do not anticipate the need to raise additional capital to achieve our profitability targets. Both of our business areas achieved significant progress and finished the year strong. In MRD, clonoSEQ clinical volumes grew 51% versus fiscal year 2021 supported by our fully trained sales team, which we nearly doubled during the year. In addition, we launched clonoSEQ and DLBCL and signed an agreement with Epic for EMR integration. Both are key milestones that are fundamental to the growth of our MRD business. In Immune Medicine, we made the strategic decision to focus our commercial and development efforts around pharma services and drug discovery. Pharma services had substantial growth of 67% versus 2021. In drug discovery, our partnership with Genentech had significant progress in both of our cell therapy programs. We are optimistic about the potential of Genentech advancing the first candidate into the clinic. In addition to Genentech, we are focused on leveraging our capabilities to develop…

Thanks, Chad. Starting on Slide 11, with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was 55.2 million, with 51% from MRD and 49% from immune medicine, representing a 46% increase from the same period last year. MRD revenue of 28.1 million grew 70% from a year ago with clinical testing and MRD pharma partnerships, each driving approximately 41% of the growth, along with a $2 million increase in MRD regulatory milestones. clonoSEQ test volume, including international increased by 54% to 10,526 tests delivered from 6850 tests in the same period last year. Immune medicine revenue was 27.1 million up 27% from a year ago. This change was driven by a $5.2 million increase from pharma and academic customers, as well as a $2.1 million increase in Genentech amortization, partially offset by a $1.6 million decrease from T-Detect COVID. Total 2022 full year revenue was 185.3 million representing a 20% year-over-year increase. Looking closer at the full year, MRD revenue was 87.1 million up 32% from a year ago, driven by a $15.8 million increase in clonoSEQ clinical testing and $10 million increase in MRD pharma partially offset by a $4 million decrease in MRD regulatory milestones. Immune medicine revenue grew to 98.2 million up 11% versus the prior year, driven by a $13.6 million increase from pharma services partially offset by a $4.4 million decrease from T-Detect COVID. Now moving on to operating expenses on Slide 12, we continue to place a strong emphasis on leveraging our OpEx. Total operating expenses for the fourth quarter were 94.4 million, representing 5% decrease from 99.5 million in the same period last year. Cost of revenue was 16.6 million compared to 14.4 million last year, representing a 16% increase. R&D expenses were 31.2 million compared to…

Hey. Thanks Tycho. As highlighted during the call, and shown on Slide 14, we had several key milestone for 2023. We're off to a running start. And I'm confident in our ability to accelerate clonoSEQ penetration in our MRD business and to demonstrate our drug discovery capabilities in immune medicine. With that, I'd like to turn the call back over to the operator and open up for questions.

And thank you. [Operator Instructions]. And our first question comes from Derik De Bruin from Bank of America. Your line is now open.

So can you talk a little bit about revenue pacing. Obviously, you've got the DLBCL coming in the back half. How should we sort of think about sort of ramp, I realized Q1 is going to be your lowest there's a reduced seasonality and other things, but just some quarter-to-quarter progression, if you've got on revenues and volumes, that would be helpful.

Yes. I mean, as you noticed, first quarter will be the low, the DLBCL launch and the Epic integration are back half drivers, for sure. And then, if we've kind of look at the range, we laid out, there are some variables in there, which maybe I'll spend a minute on. On the MRD side, we got it conservatively on milestones. So that could be a swing factor, as we go through the year, could drive things to the high or low end of the range, depending on the magnitude of milestones, we've got roughly 370 million future milestones, as we talked about in the past line of sight to about half those. And we risk adjust those in our guidance with about a 30% to 50% probability of success. So that's one swing factors. The IND acceptance for immune medicine, obviously, a big swing factor toward the end of the year. And that's the biggest swing factor in the fourth quarter. And as a reminder, on Genentech, we recognized 7 million of the 10 million upfront on the acceptance of that milestone. So that gives you, we're not going to give quarterly guidance, but that gives you some flavor as to the drivers in the back half of the year, that are going to lead to accelerated growth as we progress through the year.

Great. That's helpful. And on the greater than 50% volume growth in clonoSEQ a little bit below what we were looking for just sort of like some commentary on trends, and basically, any residuals or like headwinds of the market patient access, hours on patient access, doc access, just any sort of, like commentary on volume trends.

No. Actually, Derik, as I mentioned, we're seeing kind of record volumes to start the year. And so, we want to be both be conservative and putting that out, greater than 50% leaves a lot of room on the upside too. So, we're putting that out, there was a watermark to hit. We feel very confident that we're going to be able to achieve that number and believe that another swing factor could be some upside there.

Okay, great. Thank you very much.

And our next question comes from David Westenberg from Piper Sandler. Your line is now open.

I'm actually at the other side of Derik here. Because one of the battlegrounds we get is in that 50% volume here. Can you maybe talk about same kind of concept? Can you talk about, you're now on a mid-50s comp here in terms of growth rate, so you do have a tough comp on the volume growth coming in 2023. I think Epic and DLBCL are kind of happening in the back half. Can you give us maybe a little bit more conceptualization of beating that tough comp? And really, I mean, what does Epic and DLBCL kind of contribute from an incremental standpoint because I do think it means that they do help you overcome that comp?

Sure. Hey, David. I'm going to turn this over to Nitin Sood, who runs our MRD business and calling in from San Francisco.

Yes. I mean, I think first of all, I just want to remind everyone that our current penetration is about 5%. So there's a lot of room for us to grow. As Chad mentioned, 2023 is off to a very strong start. And I am very confident that we grow volumes that greater than 50% off a larger base business this year. And that combined with ASP increase, which we're seeing steadily, we'll see revenue increase by 60%. Few things I want to point out. And as you know, our focus and growth strategy has been in the U.S. to twofold, to drive deeper penetration and to increase business in the community. Over the last few quarters we've seen, our orders per account and institutional accounts increase by 30%. Our community business has grown from 8% of our total business to 15%. And I expect that to be 20% of our 2023 business, and all leading indicators are looking favorable new HCPs accounts grew by 50%, unique patients tested grew by 60%, multiple myeloma which is a key growth driver for us continues to deliver. And we've had some very significant data readouts this year master determination. And then, finally, the increased reach and effectiveness of our sales team is coming into play and will sort of fully deliver in 2023. So over and above DLBCL and Epic, there's a lot of growth catalysts and I expect, our growth very confidently that we will grow about 50% in this year and even beyond.

Got it. Thank you for the color. I noticed you have 10 analysts here. So I'm just going to ask one more, since you probably have a lot more questions here. You did keep a burn rate or expenses, I think you said were flat, I respect that you probably going to revenue, which basically means, you are going to have to have, sales compensation for sales people that are hitting their numbers, bonuses, just a natural cost of goods sold that associated with higher revenue here. So, can you give us a little sense on where you have cuts remaining in 2023, given the fact that I think that you will, grow on the year and you're holding OpEx steady?

Sure. So a couple of things. Yes, cash burn guidance is 40 million on average for the year, Q1 will be higher due to bonus payouts. We had a pretty low quarter in the fourth quarter. There was favorable working capital, low CapEx spending and high investment income. So we're coming off a low burn on the fourth quarter, but 1Q will be a pretty significant step up. If we look at kind of total OpEx, overall, we spent just over 385 million, including cost of revenue last year. Some of the areas, we've talked about in prior calls where clono enhancement, leveraging lower sequencing costs, DNA extraction costs, cloud compute, real estate, these are all ongoing initiatives. We've done a lot of work around R&D, as well. We've mapped projects to revenue, our margin enhancement opportunities. And there's some leverage there that we've seen. Similarly with G&A. And then, we're doing a lot of work on gross margins. Now, we'll have more to say on that, at some point in the future, but this is an area where we do see significant potential, as we scale. So, the important thing about OpEx is, it's not coming from a single area, it's all parts of the company, there's been a real cultural shift underway here at Adaptive and really, there are no sacred cows. So we continue to look for opportunities to get more efficient and better as a company going forward, but it's across all parts of the business.

Thank you for the color.

And our next question comes from Daniel Brennan from Cowen. Your line is now open.

Maybe just the first one would just be as we think about the 23 guide, immunoSEQ, academic and pharma. And then as well on what's implied for MRD pharma. Just give us a sense of obviously, these are fast growing businesses, but hard pressed to see underneath the hood, obviously, a lot happening. What's kind of implied in '23? And what's the visibility on that outlook?

Yes. Tycho, you want to take?

Yes. I mean, we're not going to give specific guidance around immunoSEQ or academic or some of the sub-segments. I mean, Sharon is there anything specifically you want to say on immune for your part of it, then maybe we'll put it over Nitin as well, but we're not going to guide specifically on sub-segments.

Yes. Happy to expand that. Again, it's about execution. As we said, our strategy is to increase penetration with our portfolio pharma companies, and biotechs, in later and larger stage clinical trials, in really four major indications. And so we're head down, focused on doing that to generate revenue guidance.

And Dan, at midpoint of the range here, immune medicine is about 45%. So that implies kind of 95 million. Genentech amortization is a big headwind for that business, right, it's 30 million, 35 million this year versus north of 60 last year. So that's something that has to be factored in. And at pharma services, we've publicly talked about that business growing at a 20% plus CAGR in the long run. So that gives you kind of some sense of how we're thinking about it. And then, there's the milestone we talked about earlier with Genentech, toward the end of the year. MRD 55% is, the range at the midpoint that implies about 115 million. We talked earlier about volume growth of 50% for clonoSEQ and mid-single digit ASP growth. Milestones there, I mentioned earlier are going to be in the kind of the mid to high millions. And then, you've got the MRD pharma sequences business around 45 million, growth of about 10% at the midpoint. Nitin, anything you add to that.

No. I will point out that this is for the first time, our clinical diagnostic business is the key growth driver and it's going to be larger than our pharma business in MRD. So it's a pretty exciting year for us in 2023.

Okay. Maybe one quick follow-up, just in terms of the clinical trials and the adoption in blood. Are there any important not milestones in terms of dollar milestone. But in terms of events in these trials, such that it would lead to maybe a more meaningful, proven impact such that you could see greater ability to market as doctors? I know that, we spoke to a few doctors, and they're looking for continued data to mature over time. So will any of that be happening in '23, or it's just kind of an ongoing basis?

Go ahead, Nitin.

Yes. So I think first, I just want to remind everyone that, we are selling in what today 30% of all MRD tests are in blood. DLBCL and CLL are blood tests, primarily 26% of all ALL tests are in blood. Multiple Myeloma used to be primarily a bone marrow test. However, now 12% of all tests in multiple myeloma in blood, and this is increasing. And the used case for blood is simple in the case of multiple myeloma, when the test is positive in blood, your cancer is there, treat the patient, make it negative in blood and then verify annually in bone marrow. On top of this, we're conducting additional studies in blood to strengthen our evidence, and to demonstrate that we're better than other biomarkers in blood. We expect to have data for multiple myeloma readout at the International Myeloma Society in September, and ASH in December. And then, we have data also for CLL and DLBCL reading out. DLBCL, we have a major conference coming up in June. So we're executing commercially and we'll have additional data, and I expect blood, our volumes to go up.

Excellent. Thank you very much.

And our next question comes from Julia Cheng from [Cowen] sic [JPMorgan]. Your line is now open.

This is Julia from JPMorgan. So looks like in this 4Q, your clonoSEQ ASP of 1100 ramped up faster than what we were modeling. So could you maybe give us an update on your private payer conversation so far? And is it not possible for us to see, ASP accretion, above that mid-single digit growth that you're guiding to?

Go ahead, Nitin.

Yes. I mean, I think we've seen sort of a steady ASP growth for clonoSEQ over the past couple of years. And we anticipate that growth to continue in the mid-single digit range over the next two to three years and trend towards $1700 per test, which we have, as a contractor [rate] [ph] with private payers. We continue to invest in getting additional pricing agreements with non-contracted payers. We're including large Medicaid plans, where we've seen a lot of usage of clonoSEQ recently. We're improving our collection performance, so we're going to invest in that area this year. And then, we are also going after some of the expanded coverage for new indications like DLBCL. DLBCL, we have Medicare coverage only, but this year, we expect to expand that into private payer coverage. And then, we have minor indications like MCL and CTCL, that we need coverage on. So, a lot of things are happening. And we expect ASP to grow steadily towards 1700 in the next few years.

Great. And then, on the immune medicine side, for Genentech, you mentioned that your focus for this year on the first candidate is -- to clinic. Can you elaborate on, what can Adaptive do to kind of speed up the process and what kind of timeline we should be thinking about? And then, for those two additional TCR data packages, what's the timeline for Genentech making a decision on those?

So for Genentech, they control the timing of the filing, and obviously interactions directly with FDA, when they do file. And so that's ongoing. We're very optimistic and we're working closely to support it along the way. As it relates to the two additional TCR data packages that we completed and delivered at the end of last year. Those are being reviewed together jointly by the working teams, and obviously we will update in terms of any progress to advance those potential therapeutic product candidates.

Okay. Thank you.

And our next question comes from Mark Massaro from BTIG. Your line is now open.

So I wanted to know, maybe ask a follow-up question. I know, it's sort of been asked, but as we think about anniversarying a relatively challenging competence, 50%. 50% growth is really pretty elite and diagnostics. So it seems to me that the key variable in the back half of the year is the DLBCL launch, just to give people confidence that you can exceed 50%, again this year. But the one thing that I don't think I've heard is like, how should we think about the incremental contribution from DLBCL. And in any way for us to think about it in terms of market penetration or early access interest or anything of that variety?

Yes. Mark, I'm going to take this because while DLBCL is one component, it's really not only the multi-pronged strategy that we laid out. But they're just major levers across the board, including increasing penetration in the community setting. Our team has done a lot of work in defining pathways. And we've done -- really had success as of late and penetrating some of larger community practice accounts that have taken a long time to crack. We also mentioned kind of Epic integration in the back half of the year, I think that really being able to go right into your EHR and order directly from there should especially on accounts that are already ordering clonoSEQ, we think that should accelerate usage. In terms of increasing clinical utility, the previous question on blood-based usage in multiple myeloma and the readouts that we have coming, I think that will continue the additional use cases for discontinuation of maintenance therapy, as you get kind of more and more data from the master trial and the MRD to stop trial, and other that are kind of reading out. And then I'll make an overall comment that, I think I'm seeing, and I don't know, we can agree on this, but MRD in general is becoming a much more accepted by healthcare providers. It took a long time to get here. And I actually think even a lot of the noise around MRD and solid tumors, and just kind of a nomenclature and understanding kind of what the assay is, and no one wants to be first, but no one else wants to be last. And we're kind of hitting that starting to, I would say, starting to hit that point where it's become kind of more common practice. And that's obviously what we're trying to get to where it's -- something you do on every patient that has a one of these hematological malignancies that are just applies to. So I think it's a variety of factors that gives us confidence that we're going to be able to hit that 50% number in 2023.

Okay. Go ahead.

Add to that a little bit, in multiple myeloma, which is our biggest growth driver. We're less than 10% penetrated. So there's a lot of room for us to grow. In CLL, we're less than 5% penetrated. So even in the existing diseases, we have a lot of room to grow. And then, lastly, I think we expect the sales team to be twice as more productive this year than last year. Last year, we increased the size of the sales team. We deployed them in various territories. And in community, our penetration is extremely low. So there's a lot of growth drivers other than DLBCL. And yes, you've the 50% comp is above what other diagnostic companies do, but I think we have the best product in [Hem-MRD] [ph] and we have a great team in place.

Okay, excellent. So I also wanted to ask about you just to kind of confirm the T-Detect initiative, should we assume that's effectively paused? Because I guess, I'm also trying to arrive at how the OpEx can be lower while the top-line is growing. So maybe Tycho, if you could walk us through any of the buckets, presumably G&A maybe up a little bit, self-marketing maybe up a little bit, should we assume R&D is likely down.

Yes. I mean, look, as I said earlier, we're working on getting leverage across the company. And yes, I mean, G&A for sure, we've got some leverage. Sales and marketing a little bit but to Dan's point a minute ago, we did double the sales force last year. So you've got to keep that in mind. And then, yes, there was R&D leverage. I mentioned earlier, we went through a very thorough process over the summer of kind of mapping out every R&D project. And with that in mind, there was some stuff that dropped out that wasn't necessarily mapping to revenue our margin opportunities. So we do have R&D leverage as well.

And then, just in terms of your question directly on T-Detect Mark. As you know, we made the decision in 2022, to delay commercialization efforts of T-Detect as a diagnostic test, until we have strong enough signal data that can change physician behavior with a clear path to reimbursement. But that said, we kind of have this really nice opportunity to leverage the data and continuing to develop that antigen mapping data for both pharma services and in our internal efforts in drug discovery. If you look at kind of probability of success of therapies that are tied to an effective biomarker that can stratify patient populations, this is exactly the strategy that we're hoping to deploy with our antigen mapping efforts in developing those signals.

Excellent. That's it for me. Thanks, guys.

And our next question comes from Salveen Richter from Goldman Sachs. Your line is now open.

This is Elizabeth on for Salveen. When should we consider a proof-of-concept being achieved for the drug discovery efforts? Do you think that would be this year upon IND acceptance for the first share product? Just curious how you're thinking of proof-of-concept generation there? And then, could you remind us of the timelines around the personalized T cell therapy? And when that could, I guess what the next milestones are for that? Thank you.

Yes. Sure. Hi, Elizabeth. I'll start and then I'll pass it over to Sharon. I think really, there's two different sets of kind of proof points in the drug discovery business. The first is, with our partnership with Genentech in oncology and cell therapy. What you'll see first is an IND filing on a shared product. And then, we're making really strong efforts. We haven't yet disclosed the timeline. But I can tell you that we're moving rapidly towards proof-of-concept on the private product. And then, we have another set of proof points, a validation point that we're working hard towards, with our internal programs, which I'll pass over to Sharon to better describe.

Yes. So for our internal programs, the goal and the focus, first and foremost in autoimmunity is to get to at least one target, that's disease specific. We've highlighted our efforts and our focus and investments in multiple sclerosis and IBD. And once we have a target, that's validated that we're confident we're in a therapeutic program, that's where we'll deploy our TCR or antibody capabilities to develop an actual therapeutic assets and advance those with a goal to advance those or all ourselves into the clinic.

Got it. That's helpful. Thank you.

And our next question comes from Andrew Brackmann from William Blair. Your line is now open.

Maybe I just want to follow-up on some of the clonoSEQ commentary for the community setting. Chad, I think you just referenced a win on large accounts sort of basis. Maybe just qualitatively, can you talk about the tipping point that was there for that win and maybe some of the other accounts that you're talking to how's the funnel progressing? Thanks.

Sure. Nitin, I'll have you -- do you want to highlight without necessarily being specific on the accounts. You want to highlight kind of what the tipping point was. You can pick one of them one of our largest community practice accounts that has recently signed on?

Yes. I mean, I think first I'll just sort of broadly speak, what we did this year was hire additional individuals with focus on community accounts. And we took a multi-pronged approach here. We not only have individuals who sort of do physician education, but we have a sort of a strategic account management team that works with large community practices at the C level. So multiple things came into place. And in one particular account, after engaging with them over several months, they have sort of standardized their clinical workflows on clonoSEQ upon arrival of every patient that's diagnosed. For example, with CLL. And we expect more of these to happen in 2023 and be a key contributor to growth. And as I said, our community business is trending upwards. We went from sort of 8% at the beginning of 2022 to 15%. And I expect that to become 20% of our business in 2023, while our penetration in academic and institutional accounts also increases.

Okay. Thanks for that. And then, just a quick one on the macro frontier. I think about a month ago, you referenced the inflation reduction act as a potential headwind there. Can you just give us current thought and how you thinking about that? And maybe some of the conversations you're having with pharma related to that? Thanks.

Sure. Nitin, you can go first and maybe Sharon can comment from services business as well.

Yes. I mean, I think we've had many conversations with pharma companies. And we're hearing from many of them that due to IRA, there's increased scrutiny over their budgets. And I think the second thing we're seeing play out is, particularly in multiple myeloma, there's a lot of competition. Lots of drug programs are going on out there. The efficacy of the drugs that have recently come out are very high. And pharma companies are looking at so which programs to continue with and which programs to sunset. That's the MRD pharma aside. I'll pass it to Sharon for immune medicine.

Yes. I think mostly a watch and wait, but obviously, that's top of mind. And we too will monitor but no immediate impact as of yet for us.

Thank you.

And our next question comes from Sung Ji Nam from Scotia Bank. Your line is now open.

Just a couple of housekeeping questions for Tycho. Sorry, if I missed it, but did you -- are you guys including the potential milestone payments from Genentech IND filing in your guidance?

We are. So that's at the end of the year. As I mentioned earlier, we recognize so the milestone is on acceptance that can lag filing by a minimum of 30 days, but it can take longer. And we recognized 7 million of that upfront and then amortized the remaining 3 million. And there's no other Genentech milestones. So we're only recognizing the one in guidance.

Okay. Got you. And then, would you be able to break out what your assumption is for the interest expense for the year?

Yes. So the good thing is, interest income actually offsets into expense. So we have about, I think it's over 30 million now and interest income in the model. So that actually pays for the OrbiMed deal itself.

Great. Thank you.

And our next question comes from Dan Leonard from Credit Suisse. Your line is now open.

Just a couple of questions on the '23 guide. Tycho, I'm trying to map to that $95 million revenue figure for immune medicine in '23. I think you said Genentech amortization is 35 million. So that would mean the balance 60 million is pharma services. Is that -- it looks like that's nearly a double year-on-year from the '22 number. And is that math even, correct? And what's driving that? Is there any kind of bookings or book-to-bill or anything you could offer?

Yes. So Dan, I talked earlier about kind of the long-term CAGR for pharma services being in the 20% range. There's other drug discovery, right? So we have various ongoing discussions with potential drug discovery partners that would be the remainder of that. So it's not all at pharma services.

And the milestone.

And the milestone, yes.

And then a question on revenue phasing. I think this was asked a couple different ways, but you highlight a very strong start to the year in MRD. You're flagging, though Q1 is a low point. Is there anything to reconcile this timing related besides just the milestones in the second half of the year when thinking about phasing?

Yes. So I talked about the Genentech headwind that's the biggest headwind on the year. On the first quarter alone, it's about a $4.2 million headwind. We did recognize a $3 million MRD pharma milestone last year. And so there's a comp from that as well. There's no T-Detect revenue. So those are some of the factors that would impact the first quarter, relative to the remainder of the year.

Helpful. Thank you.

And I am showing no further questions. This concludes today's conference call. Thank you for participating and you may now disconnect.