Thank you for standing by. At this time, I would like to welcome everyone to today’s Adaptive Biotechnologies 2023 Third Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. Just now after the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Karina Calzadilla, Head of Investor Relations. Karina, please go ahead.

Thank you, Greg, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies third quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the third quarter of 2023. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and we’ll be referencing to a slide presentation that has been posted to the 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 Tycho Peterson, our Chief Financial Officer. Additional members from management 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 third quarter 2023 earnings call. This quarter marks a pivotal moment in Adaptive’s evolution. As we have previously shared, we have two compelling businesses in MRD and immune medicine. They are at desperate stages of maturity with different investment requirements, operating models and distinct value drivers. To maximize the full potential of each business, we have hired Goldman Sachs to assist with a review of strategic alternatives. We will provide clarity on the path forward by early next year. Why are we making this decision now? MRD is a pure play diagnostic business with strong modes supporting clonoSEQ’s established position as the gold standard in heme MRD. Its continued momentum and success will require a focused commercial execution to drive increased penetration in current and new indications, as well as further investments in operational scale to solidify its path to profitability. In contrast, immune medicine is now fully focused on drug discovery, supported by a major achievement this quarter with the discovery of a novel target multiple sclerosis. These data validate our target discovery approach in autoimmunity with the ability to unlock additional novel targets in multiple autoimmune indications. The combination of our drug discovery platform with Genentech in oncology and the discovery of this first novel autoimmune target gives us a clear path to successfully build a broad and differentiated therapeutics business. We are confident in the value these businesses can deliver to patients and shareholders and expect that this ongoing strategic review will yield the best path forward to maximize the respective potential in light of this process. And the evolution of our immune medicine business into a dedicated drug discovery model with line of sight to long-term value creation, we are updating total company…

Thanks. Tycho. I am confident in the potential value of MRD and Immune Medicine, and we look forward to arriving in an optimal outcome that maximizes each business to best serve our patients, and our shareholders. With that, I'd like to turn the call back over the operator and open up for questions. Question-And-Answer Session Operator Thank you. [Operator Instructions] And our first question today comes from the line of Mark Massaro with BTIG. Mark, please go ahead.

Hey guys. Thank you for the time and the questions. The first one is just, I guess, why now? I think there's been some discussion about synergies or lack thereof of the two businesses, just curious, why you're conducting this formal strategic review at this time? And maybe just any comments you have about the two businesses and should we read into this that there are just not parallel synergies between the two?

Yeah, thanks, Mark. And we have been talking for the last 18 months about having two distinct business opportunities. And we are evaluating all options with our partners at Goldman Sachs to maximize the value of both businesses. Really it's a fact that we have two distinct businesses and they're at different stages of maturity. They have different value drivers and they also have different investment requirements. I mean, if you look at the MRD business, I mean, it’s a commercial stage diagnostic business. It's the gold standard in MRD. But that business is, it's all about execution. And on the top line, we got to drive volumes, increase ASPs and on the cost side, it's about bringing down the cost of goods sold and achieving scale to get to profitability by 2025. But IM is a very different business. It's a very different business model. It's much more tend to traditional biotech business or therapeutics business. The business takes you more time. It's really valued on on its high, very high potential, but revenue at present isn't the driver. It's about generating data and it's about developing assets and going through clinical trials and really about showing additional proof points that are milestone and catalyst-driven. And it's become increasingly clear where each business is, it's really the natural point to look at a separation as MRD has now kind of achieved that scale. And at the same time, we've had really what we consider a really nice breakthrough discovery in our platform in MS that we think is going to apply to multiple other kind of autoimmune disorders. So, now's it’s the time and we're ready to go.

Okay, great. So obviously, I understand they've required different capital needs and investment, but as for why you're choosing to withdraw the Immune Medicine business from your guidance? I guess, can you maybe peel the onion back a little bit as for that reason?

Yeah, a lot of it is because, if you look at, if you look at kind of MRD, which has a kind of very known trajectory, and what we don't want to do is it's a really different story in Immune Medicine where we don't want to trade off, or mortgage kind of the short-term for long-term value creation. There are number of deals which we could do that we want to make sure that we're doing in the right context to really maximize the potential kind of for the long-term value of that business. And in some sense, like being forced to do deals under kind of certain time pressures and constraints, what I think, giveaway value, that would nurture our shareholders.

Okay, great. And last one for me, I might have missed it. but can you just walk through the split between MRD revenue from clinical versus Pharma? Obviously, you talked about the pharma having some headwinds, but and you certainly maintained your volume guide for 50% for the year. But maybe just any additional clarity on how you're thinking about the clinical versus pharma breakup?

Nitin?

Yeah, yeah. So, I mean, just for, I mean, you're asking on the breakout in the third quarter? Or what we are expecting for the fourth quarter?

Just both would be great, but I'll take either.

Yeah, I mean, look, the clinical business, if you kind of looked at, so we didn't have any milestones there, right? If you kind of look at, US obviously, it's about, a 60/40 split overall. It's kind of the right math for this quarter between clinical and pharma. We mentioned pharma was down a little bit - down a little bit sequentially versus the same quarter. Clinical volumes kind of nice sequential step-up. And then, for the fourth quarter, it should be similar kind of 60/40 split.

That's really helpful. Thanks guys.

Okay. Thanks Mark.

And your next question comes from the line of Dan Brennan with TD Cowen. Dan, please go ahead.

Great. Thanks. Thanks for the questions. Maybe the first one, just on this strategic review. It looks like there's a lot of options on the table. Is the idea that the Immune Medicine business, you'll look to sell that, could that business come out as a standalone business and trade publicly? Or is there a potential that both businesses get sold? I'm just trying to think through obviously, the press release discusses strategic options. Things are on the table. Just what are the permeations, where that are being considered?

Yeah. Thanks, Dan. We are evaluating all options that are all on the table that we think can maximize value. Obviously, we can't comment on any M&A at this time. All we can say, I mean, if you look at MRD, it's a differentiated business with a clear category leading position with real strategic value. And so that provides us a range of viable options to pursue. Same thing on the Immune Medicine business. It's we think we've got some very differentiated targets and are moving forward and those could be standalone businesses and do very, very well as standalone publicly traded companies. But again, all options are on the table right now.

Are there things without Immune Medicine on the MRD side that you guys would do differently in terms of, you want to get the profitability to balance sheet in good shape. I don't know what but in terms, maybe you'd want to be more aggressive, maybe you want to get more scale, maybe you want to add another businesses. I don't – when you think about MRD on its own operating like, are there strategically, how does that business look on its own?

Yeah. That's a really great question. And actually, if you kind of peel back the onion a little bit to use your term, one of the main reasons we're doing this is really that we have dedicated focus to kind of on each one of the businesses. So, there's there, what we found, kind of over the last kind of 18 months or so is there been kind of a competition for kind of resources. Software is a good a good example of that. Competition of resources, competition kind of for mind share, et cetera. So, there are ways that we could potentially accelerate on the top line in MRD and at the same time, I think there are additional ways that we can have going to operating leverage in the model. And that is certainly something we would look to achieve by looking at these as a standalone business.

Maybe I'll sneak one more in. It - have you discussed pricing and the benefits there, could you just give us a sense of where pricing could head to with all the initiatives that you're making on the clonoSEQ side?

I can just touch on the third quarter, and then maybe I'll hand it over, but, you know, we ended up just north of a $1,000, September was the highest month. I can stay based on trends in October we’re confident fourth quarter is going to see this mid-single-digit increase that we mentioned in the prepared comments. So, the initiatives that we've implemented are working. But, Susan, do you want to maybe touch on that a little more?

Yeah, we certainly see the opportunity for continued ASA increases and frankly, acceleration in the growth of ASP in 2024, and beyond. The ASP plan, that Chad alluded to is focused again on coverage expansion, growth in contracted lives, shifts in our payer, mix and operational enhancements to improve collections. We've undertaken already a number of initiatives with - aligned to those categories and we have quite a few more plans for launch in January and beyond. And through that, we expect to see an acceleration of the growth rate on ASP in 2024, and beyond that. We're not providing specific guidance. But we do certainly see potential for continued improvements.

Maybe I’ll squeeze another one. I'm sorry. MRD for ‘24 any early look? I mean, pharma is so uncertain. You've called it out, others have called it out, but maybe we're hopefully near a bottom here. Just any early way to think about ‘24 on the MRD side of the business? Thank you.

Yeah. We're not providing specific guidance yet for ’24. I can tell you though from from the clinical business standpoint, we continue to see, not only the ASP growth that Tycho and Susan, just alluded to, but our volumes continue to grow. And we do expect another great year in terms of volume growth in 2024.

It might be worth mentioning, we also had a significant backlog in MRD pharma, $190 million to that build bodes well for the future health of the business.

Great. Thank you.

Thanks, Dan. And our next question comes from the line of Rachel Vatnsdal with JP Morgan. Rachel, please go ahead.

Hey, this is Noah on for Rachel. Thanks for taking my question. Just reframing some of the topics we've touched on here a little bit more specifically. Understand your refocusing here on the MRD business. Can you give us a sense of the levers you can possibly pull to continue protecting and strengthening the balance sheet? It seems like the quarter had some decent bright spots. For example, excluding some one-time costs in the lab, move completion, gross margins in 3Q were 55% versus that 49%. And then, also you've no direct conferences that to switch from the NextSeq to NovaSeq X project is ongoing and to be a meaningful cost saver. So, could you give us any sort of quantitative sense as to, how much some of these cost saving mechanisms could protect your margins and manage your cash burn heading into next year, assuming we're just looking at the MRD business? And then, if you want to loop in any updated thoughts and remind us of how that OrbiMed deal could play into that math? I have additional bullets. Thank you. Sure. And hey, Noah. Good to hear from you. So couple thoughts on margins this quarter, milestones are a big factor, it's coming 100%. We didn't have any milestones this quarter. So that did way a little bit on margins. We had lower Genentech amortization also impacted us. But importantly, we finalized the lab move and that that did have some one-time cost in the quarter. If you exclude the lab move costs, gross margins work closer to 55%. So, just looking at it a little bit sequentially, the Genentech milestone, we saw in the second quarter was $7.5 million, again, no milestone in the third quarter. There was some product mix impact Pharma Services has higher margin. And as we discussed on the call that’s lower than expected. Going forward, we're fairly comfortable that that's, business at scale is a 70 plus percent margin business. And, we've got a number of initiatives. We've got a LIMS overhaul we talked about. There will be labor and workforce efficiencies on the back of that. You mentioned the switch to NextSeq. That really will benefit us on 2025. We'll kind of implement it in the latter part of 2024. But I would really think about that contributing in 2025. But like other lab businesses 70 plus percent at scale is easily doable for our business, overall.

The other thing is, we could - as we move labs from one building to another, we continue to look at the real estate portfolio. And we're looking at ways to kind of offload one of our buildings, as well, which will provide kind of additional leverage.

Within the MRD business, I know just one follow up. You might ask it on MRD specifically, we think that business can be profitable and in 2025 so.

That was my next question. So I was just thinking like, if we are looking at just the core MRD business, like you think, yes - would you like to sort of talk about the hitting potential growth rates like the 2022 to the 2027 revenue, CAGR at 20 to 30, or EBITDA margin breakeven in 2025, or cash flow breakeven in 2026 on just the core MRD business? And then, I have one last one.

Yeah, I mean, again, I think we think MRD can be profitable in 2025. We've kind of given you a number of the components around, how we are thinking about ASPs increasing and then volume growth over 50% this year and, it should be sustainable law of larger numbers obviously start to factor in as you get further out. But we're very comfortable that this will continue to be, well, high in the double-digits, in terms of volume growth overall.

Awesome. Okay. And then related to that, like law of large numbers saying, can you talk about - if you thought about any of the closest core MRD adjacencies that you know, maybe you could move into or pull forward some of the investment in those to be in the near term as part of your, like overall TAM story? Maybe not officially areas that you're definitively going into, but maybe some areas you consider it as potential portfolio adjacencies that could be easy growth drivers as we sort of think about refreshing the long-term growth story here?

Susan, do you want to take that?

Sure. We have looked at a number of adjacencies. I mean, first and foremost and those most obvious ones are other lymphoma malignancies in which we have not commercialized the assay. So, additional non-Hodgkin's lymphoma indications in particular. And we do have plans in place to move forward with commercialization, including securing reimbursements from Medicare, and private cares over the next couple of years. Additionally, there are adjacencies in the myeloid malignancies and for absent other tumors. And at this time, we are exploring opportunities in the myeloid space, very early stages to understand the feasibility of particular technologies and the opportunity. And then, in the solid tumor space, we have done some review, but have no plans at this time.

Awesome. Thank you so much. Really appreciate you for taking the questions.

Thanks Noah.

And our next question comes from the line of Tejas Savant. Tejas, please go ahead.

Good evening guys. This is Edmond on for Tejas. Thank you for taking my questions. I just wanted to touch upon the EMR integration with some of your pilot sites now live. I know you guys haven't talked about volume contentions really inflecting in 2024. But what have you seen so far in terms of volume inflection at these sites?

Sure. Thanks for the question, Edmond. We only have one site live as of today and not quite two months of experience with that site. But what I can say is that we have seen growth in that account in that short time and at both in HTP users, as well as in volumes. And additionally, that site’s positive feedback has led them to expand the scope of the integration previously, limited to the outpatient setting now expanding to inpatient and including the potential to place standing orders which are new features they've added to the initial go live. We have four more sites scheduled to go live by the end of this year. So we'll be able to start getting more robust, albeit it’s still anecdotal evidence to support understanding of how Epic may contribute to growth in 2024 and beyond. And again, we expect to have as many as 25 sites live by the end of ‘24, at which point, I think we will be more well-positioned to comment on likely growth opportunities. But we do expect lift on Epic other companies who have implemented Epic have seen lift and we will be eager to comment further when we have a little more evidence.

Got it. That was super helpful. And then, just wanted to clarify, I think you guys have just commented that you anticipate about $190 million in backlog, by year end for the trial side of the business. What are your expectations between on mix between pharma and smids in the backlog and between retrospective and prospective trail mix?

Should it between pharma – what? I am sorry. Well I can't comment the majority of new studies that we book. When you ask about prospective and retrospective, the more agility have prospective studies and we expect that to continue to be a case.

Yeah, we don't have a mix, but I will also say, kind of the majority of our client profile is kind of large cap pharma and not smids and small cap although we certainly do have kind of a – I would say kind of call it 15% to 20% that you would kind of traditionally classify as smids. But the majority are large pharma.

Got it. And then, with the ASH Conference just around the corner in December. Are there some key publications, presentations or data points that we should be watching out for?

Yes, indeed. In particular, we are excited about some data that's going to be presented by investigators from University of Chicago on the use of our assay in blood. So in this particular study, clonoSEQ sees that early time points during first line therapy in multiple myeloma to assess response in both blood and bone marrow. And to compare that assessment to the commonly used serum biochemical markers that are part of traditional myeloma response assessment criteria. This study will show that clonoSEQ in blood is strongly prognostic of outcomes and provides greater insights than traditional blood-based markers. And the authors have suggested in the abstract, which is now available publicly that the insights that has been gained from this work could be useful in the future if validated to inform treatment intensification in MRD positive myeloma patients. So, we expect to leverage that data to advance the adoption of our blood-based testing in myeloma by reducing it to help guide use of interim blood-based testing as a complement to marrow and by showcasing the favorable prognostic comparison when you measure early response with clonoSEQ in blood versus serum biomarkers in blood.

Got it. Thank you for the time today.

Thanks, Edmond.

[Operator Instructions] And our next question comes from the line of Salveen Richter with Goldman Sachs. Salveen, please go ahead.

Hi, this is Lydia on for Salveen. Thanks so much for taking our question. So we just have one on the Immune Medicine business. You noted that a novel target has been identified in MS. So what are the next steps for this program? And what is the path to monetization here? And then, can you just discuss the forward growth outlook for this business more broadly? Thank you.

Yeah. Sharon, I will turn it over to you to answer that.

Yeah, hi, thanks for the question. So yeah, we're excited. As we mentioned, we've been focusing on identifying novel targets in autoimmunity and multiple sclerosis is the first lead program where we've identified that novel target. We're actively confirming and continuing to validate both in in vitro and in vivo MS disease models. And ultimately building out of pre-clinical cold package to drop to the target. So that's in MS. And now that we've unlocked and proven out this approach in a massive course. In parallel, our pipeline includes other autoimmune disorders. And our goal overalls is of course to eventually be able to bring therapies against these targets into the clinic either on our own or with a partner.

Thanks so much.

Thanks, Lydia.

And our next question comes from the line of David Westenberg with Piper Sandler. David, please go ahead.

Hi, thank you for taking the question. So just had a question on immune medicine business, in terms of inbound interests or conversations that you had with what could be considered strategic partners but maybe could be customers right now? Like have they desired any kind of like exclusivity on certain kinds of work you've done in pharma or any other kind of inbound or strategic conversations you've had? I know that some of that sensitive, but any kind of color there would be great.

Hey, David, the only thing I could say at this time is, from the discussions, we've had under confidentiality kind of showing the work we've done on the MS target, there's a tremendous amount of excitement to look at ways that we may partner. And as we said going under a strategic review and part of the kind of rationale for not doing kind of a short-term deal is we're assessing kind of what the kind of optimal partnership is if we go down that route versus going to developing the asset further ourselves. And so, I think just more broadly on the immune business whether exclusivity and non-exclusivity really can't - not at liberty to comment on specific deal structures at this time.

Gotcha. And sort of I missed it. I've been in and out of Wi-Fi connection and phone connection on. Is it – was there any kind of data with this that we had with the MS? And is there any kind of parameters we should look like in terms of - I don't even know what they would be quantitatively like sensitivity, specificity, I'm a diagnostic guy. So, I do tend to think of things that way. But anything we should look for in the data that that says, this is going to be really, really exciting. Just help us frame that. Thank you.

Sharon, if you can kind of take that that’d be great.

Yeah, absolutely. So as you can imagine, we have a lot of data, which gives us confidence about the targets we've identified and are continuing to generate that data to further validate, including in the pre-clinical setting. Our plan is to publish on these new findings, importantly because of this novel discovery, we've focused and have submitted this quarter of full core patent applications that protects our findings in MS. But also more broadly on differentiated target discovery approach in autoimmunity. And in addition, this includes also data on potential new T-cell biology we've uncovered that informs how - if you will wrap up immune system attacks normal healthy cells and in the case of MS, possibly triggers the disease. So a lot of data forthcoming that we are excited and we'll share when appropriate.

Thank you for taking my questions.

Thanks David.

And our final question today comes from the line of Derik de Bruin with Bank of America. Derik, please go ahead.

Afternoon. This is John on for Derik. Lots been covered, but I wanted to ask on the macro. Great to hear on the bookings. But in terms of the pharma - the continuing pharma pressure, I was wondering if you think there would be some sort of a budget flush in 4Q. And what's your expectation there? And do you see that turning around in the next couple quarters? Or do you perhaps see that turning around maybe like in the second half of ’24.

Yes. Thanks for the nothing's for the question, John. So typically in Q4, you are right, that we do experience higher volumes in revenue as pharma companies flush out their budgets. But that said, given the industry softening we've been observing of late, we don't anticipate a big of a lift this year in Q4. That said, importantly we still do have a very significant backlog and healthy bookings. And we haven't seen a lot of studies being canceled. So, our backlog has grown and we believe that most of the prioritization is being completed. So we do expect the higher backlog that we feel 20% higher than last year will field revenue growth in 2024 and beyond.

Got you. Appreciate it. And then, just wanted to ask you what you've talked about the moving pieces of the ASP, but the long-term target of $1,600 in 2027. Is that, does that still stand?

Yeah, we are reconfirming kind of the long-term targets and are making great strides to get there.

Awesome. Thank you.

Great. Thank you. Operator, any other questions?

My apologies. It would help as I would talk unmuted. No, there are no further questions. Did you have any closing remarks folks?

No. Thank you for joining the call.

Thank you. And ladies and gentlemen, that concludes today's call. Thank you all for joining and you may now disconnect. Have a great day, everyone.