Thank you for standing by and welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] As a reminder today’s program is being recorded. And now I’d like to introduce your host for today’s program, Karina Calzadilla, Head of Investor Relations. Please go ahead.

Thank you, Jonathan, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies fourth quarter and full year ‘23 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of ‘23. 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 on our corporate website. During the call, management will be making 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, everyone, and thank you for joining us on our fourth quarter and full year earnings call. As you can see on Slide 3, 2023 was a year of transformation for Adaptive. Key milestones were cheeky for both MRD and immune medicine. We executed OpEx reduction initiatives to drive efficiencies and reduce burn and we initiated a strategic review process to maximize the value that MRD and immune medicine can deliver to patients and shareholders. We ended the year with $170 million in revenue, including 60% from MRD and 40% from immune medicine. The MRD business grew 27% versus prior year excluding milestones as we experienced outstanding growth from clonoSEQ’s volumes. This growth from MRD was offset by a decline in immune medicine mainly due to the reduction in the upfront amortization of Genentech. As a reminder, last quarter, we updated total company guidance to exclude revenue from immune medicine. We made this decision based on a strategic shift and immune medicine to focus exclusively on targeted drug discovery. Importantly, we ended the year with a strong cash position of approximately $346 million, which enables us to execute on the strategic priorities of both businesses. In MRD, drive clonoSEQ’s penetration and revenue growth with the goal of reaching profitable profitability by the end of 2025. In immune medicine, advance our targeted drug discovery efforts in cancer and autoimmunity. This includes supporting the partnership with Genentech, validating a therapeutic candidate multiple sclerosis and scaling target discovery and other autoimmune disorders. Before I go into the details of each business, I'll provide an update on the strategic review. In the third quarter of 2023, we retained Goldman Sachs to advise on a strategic review to maximize value to our shareholders. The MRD and immune medicine businesses had different value…

Thanks, Chad. Starting on Slide 15 with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was $45.8 million with 67% from MRD and 33% from Immune Medicine. MRD revenue grew to $30.8 million, up 9% from a year ago. clonoSEQ clinical performance was the main driver, partially offset by a reduction in revenue from pharma services and regulatory milestones. Excluding regulatory milestones, MRD revenue grew 18% from a year ago. clonoSEQ test volume increased by 49% 15,680 tests delivered from 10,526 tests in the same period last year. Immune medicine revenue was $15 million, down 45% a year ago driven as expected by lower Genentech amortization, which decreased 53% year-over-year. Full year 2023 revenue was $170.3 million, representing an 8% decrease year-over-year. MRD Revenue was $102.7 million, up 18% from a year ago, driven by 27% increase from MRD service revenue, partially offset by a lack of regulatory milestones. Immune medicine revenue was 67.5 million, down 31% from the prior year. As Chad mentioned, starting with the 3Q ‘23 earnings call, we opted to exclude Immune Medicine from revenue guidance given the shift in focus to target and drug discovery. Moving down to P&L, on the right-hand side of the slide, total gross margin for the quarter was 57%, representing an eight point increase versus the third quarter and a 13 point decline versus a year ago. The sequential increase was largely due to efficiencies from the lab moves. Versus the prior year, the decline was driven by lower amortization of the Genentech upfront and a lack of milestones which have a 100% margin contribution. R&D, sales and marketing, and G&A operating expenses declined 8% in total versus a year ago as we continue to place a strong emphasis on driving leverage. Net loss…

Thanks, Tycho. We're off to a running start. I'm confident in our ability to continue to grow our clonoSEQ MRD business and to demonstrate our target and drug discovery capabilities in Immune Medicine. I look forward to communicating with you on the outcome of the strategic review, which will enable us to drive success and maximize value for all stakeholders. With that, I'll turn it back over to the operator and open it up for questions.

[Operator Instructions] [Operator Instructions] Our first question comes from the line of Dan Brennan from Cowen. Your question please.

Great. Thanks. Thanks for taking the questions. Maybe Tycho, can you just walk through a little bit of how the OpEx kind of outlook for ‘24 and the revenue kind of what are we considering for burn? I know you touched upon it? But just kind of walk through the key drivers of where the burn goes?

Yeah, yeah, we talked about, $35 million per quarter. We're obviously continuing to drive efficiencies across the organization. So you're seeing leverage in sales and marketing G&A and R&D. So, as we've kind of mentioned in prior calls, there's currently no stones unturned as we kind of go through the ongoing business review.

Got it. And then, just on the MRD side of the business, the clinical and the Pharma side, just on the clinical side, so how do we think about like the volume and the realized price implicit in the ‘24 guidance?

Yes, Susan, do you want to take that?

Sure. So, Look I guess the volume, so at the midpoint of the guidance, which was issued represents over 30% growth for the overall business. We’ll talk about the clinical and on the pharma. So the clinical business we expect to have a healthy growth trajectory. We are anticipating 50% revenue growth. The revenue growth will come from both volume growth and ASP. We are focused very closely on ASP increases and on the volume side the consensus I believe is around 35% today, which we think is fair. On pharma side of the business, we are anticipating about 10% growth and I think roughly based on the fact that we anticipate continued industry-wide headwinds that we saw in the previous year, but then we do have a strong backlog, a healthy backlog of over $185 million, which we believe we will be able to continue to draw from we have in the past.

Got it. And then, maybe last one.

We did mentioned low-single-digit million in milestones for MRD pharma, as well in the prepared remarks.

Thanks, Tycho. And then maybe last one. So, Chad or Tycho, just in terms of what we're going to hear the end of the quarter in terms of the outcome of the strategic review? Maybe I know there's a couple of permeations here that could unfold kind of what can you share at this point? And just kind of any color on some of the discussions and how things have gone?

So, Dan, I can't really comment on any specific structures or alternative at the moment. What I can tell you is in conjunction, you know with our Board and with Goldman, we’re - our goal is to maximize the value of all stakeholders. We do have a very strong cash position and I can ensure that any decision we make is it going to jeopardize either part of the business and we're committed to providing an update. So, stay tuned.

Great. Okay. Thank you.

Thank you.

Thank you. One moment for our next question. And our next question comes from the line of David Westenberg from Piper Sandler. Your question please.

Hi. Thank you for taking the question. So just on the MRD business kind of the visibility, can you walk through the MRD revenue cadence expectations in the year? How should, shouldn't think about some of the milestones or other kind of payments from Pharma? And then, I just noticed a slight decrease in the sequential growth rate, and I noticed that same thing happened in Q4 of last year. Is there seasonality in the business that we haven't been modeling previously just in terms of volume growth that maybe I should say I haven't been modeling correctly?

So, I can speak to that part about the recent sequential growth and also seasonality. So, I think you're pointing to the 4% quarter-over-quarter growth for the Clinical business in Q4. So, I think one thing that we consider is that Q4 typically with fewer business days and other quarters, we do typically see a lighter growth profile than in other quarters, but importantly in Q4, we continue to see all of the leading indicators in the business that we track moving favorably. Additionally, when we broke out the US and ex US clinical businesses in Q4, we note that the US business grew at 7%, whereas the ex US business which is typically more lumpy from quarter-to-quarter grew more slowly contributing to the overall growth rate of 4%. And then finally, we started 2024 off very strong with record average daily and monthly volumes in January, February to-date is trending even more favorably. So we continue to feel very confident in the strong growth trajectory of that business. And I do think seasonality just based on the number of business days can be a factor. There are other aspects of seasonality that we typically see - for example, in certain summer months, but overall, probably nothing different than you might see in an average business.

And then, Dave, we mentioned in the prepared comments for guidance, we expect MRD revenue to be 45% in the first half 55% in the back half. So more back[Indiscernible].

Got it. Got it. Okay. No, that's great. And then, just as we look at the drivers that drew growth in 2024, I mean, 2023 and as we start to cycle those drivers, I mean, how should we think about the impact that you had from Epic? What inning are you in the Epic integration the DBCL integration or ordering pattern and kind of kind of conversion of blood? I mean, I know that's three different areas, but if you can give those three areas kind of what inning we are in and just to get a sense on how much more growth - how much you can compound this growth in that business? Thank you. I'll stop there.

Sure, yeah. So, I mean I think you're right to think that the growth drivers in 2023 to be worked out in 2024 and in some cases we are in the very early innings in some of those growth drivers for the previous calendar year that we will be able to adapt further in 2024. So, for example Epic integration, very early days in 2023, top of the first inning. We only saw our first five accounts set up to utilize the integration by the end of Q4 and all of those went live just in each, either one in September and the other four were completed in December. So we haven't yet seen significant lift albeit anecdotally in those accounts. We are seeing really nice results. So we continue to work toward additional Epic integrations. They are a one-by-one process. We anticipate having 15 to 20 as previously stated by the end of the year, 15 to 20 additional and I think then we will see growth in those accounts, but for the overall business, it's going to take some time for us to be a very meaningful impact, material impact. We - as Chad noted earlier, we signed another agreement with Flatiron Health, which will really start to have impact on the business in the second half of ‘25. The second thing you asked about DLBCL. We saw a really nice growth trajectory in DLBCL aligned with our internal expectations, and we continue to promote that very actively as well as focus on data generation. We have a number of studies that we are hoping to advance in 2024 that will continue to support the frontline and surveillance setting in used case for the app as well as some nice real world evidence that we will be advancing…

Great. That was a lot of great detail. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Mark Massaro from BTIG. Your question, please.

Hey guys. Thanks for taking the time. You've steadily increased the percentage of clonoSEQ tests in blood. I think it was 39% this quarter. Is there a point in time where you think blood can become maybe the majority of your clonoSEQ volumes. And is there a certain target that you have even if it's out like say, three to five years?

Absolutely, we think the majority of our tests, blood-based testing is all related to the community, as well. And as we continue to increase and bring on community accounts, the percentage of tests that are done in blood will continue to increase. And so, I don't know if I can give you an exact dated when it's going to become a majority, but that that number is growing very rapidly. And we see it being a steadily increasing percentage of our overall test mix.

Okay. Excellent. I know at JPMorgan you guys provided the 25% to 30% revenue CAGR for MRD between 2023 and 2027. So obviously, pretty solid top-line growth and then you've maintained your expectations to hit MRD profitability in the second half of ‘25. I guess, I'm asking on the cost side. So obviously, you can get to profitability through revenue growth, but I'm just curious are there certain costs that that might be able to come out of the clonoSEQ assay? And maybe if you could speak to input costs or and then maybe some of the instrumentation or reagents that are used. I’d just be curious to see what type of levers you might have on the COGS side?

Yes, so, absolutely, as we kind of previously mentioned and I'll reiterate, we are looking and we have been testing the NovaSeq and we're looking at a switch for the NovaSeq by the end of this year. And that will have a significant reduction in the cost of goods sold. But in addition to that, as Tycho's said no stone is being left unturned. We're looking at, you know, our operating cost as well and we continue to refine the business to sort of figure out how we can increase the profitability profile over time. So, yes, the answer is yes. We are absolutely looking at the cost side of the equation.

And there's another couple of things we've highlighted we're doing a lens overhaul, in the first half of the year that will have implications for overhead. We are reducing the number of extractions that we process. So there is a lot in terms of the workflow.

Okay, and then my last question is just on mantle cell lymphoma. Can you just talk about maybe remind us the size of the market and timing of commercial launch and what you think that might do to expand sort of that portfolio?

Yeah, sure. Mantle cells are relatively smaller indication more similar to perhaps AOLs in myeloma in the in the context of our existing covered indications. That said it is an area of unmet need for monitoring and certainly an area of high interest for MRD based on our interactions with clinicians to-date. We already have significant existing volume with several KOLs in the space and anticipate that Medicare coverage, which we are actively seeking today will be the trigger for us to begin proactively commercializing that indication. We're looking forward to continuing to interact with - and are actively engaged with them now. So we expect to have more information this year.

Excellent. I'll keep my questions there. Thanks guys.

Thanks, Mark.

Thank you. One moment for our next question. And our next question comes from line of Tejas Savant from Morgan Stanley. Your question, please.

Hello. Hi. This is [Indiscernible] on the call for Tejas. Earlier this year, you talked about potential for FDA to accept MRD as a primary surrogate endpoint in multiple myeloma. Could you elaborate on what you're hearing and how quickly we could see that associated upside for MRD business?

Yeah, what we've heard is through the International myeloma working group that several members of that committee had heard that the FDA was considering multi myeloma as a primary endpoint. So we are waiting for that decision. I don't have any more resolution into the timing of that. But we're certainly hoping that that comes in the first couple of quarters of this year. But again, it's hard to predict a government body. In terms of acceleration, obviously we have deals that have written into the contract that upon approval of the drug of our data is used as a primary endpoint that we - there are payments due. So, it would certainly be beneficial to the business.

Great. Thank you. And then, a separate follow-up, you talked about the limbs overhaul and NovSeq switch as some of the cost actions that are underway? Could you quantify the uplift in margins from those initiatives?

Yeah. I don't think I'm going to get that granular. I can talk a little bit about pacing and limited to first half of this year. We've been pretty clear that NovaSeq really won't have an impact until 2025. One thing we have said is, at scale, the MRD business should easily be north of 70% gross margin. That includes both clinical and Pharma, but, kind of consistent with other CLIA Labs, but we're not going to break out contributions from limbs versus, the Nova transition specifically.

Got it. And then,

ASPs will also help here by the way.

Okay. And maybe just one slip in one more question here. In terms of the Flatiron – the Flatiron OncoEMR agreement, how much additional accounts, how much incremental would it be to the two Epic agreement that you already have?

You mean in terms of access to accounts?

Yes.

And so, Flatiron is engaged with - they have access to about 40% of the community oncology - community oncologists in the US 40. And they are also they're currently implemented in 250 accounts, which is a bit of a number that's hard to interpret because, it's large – these are very large accounts, but the business potential for us is tremendous. I mean just the top 15 accounts that have utilized OncoEMR has 33,000 relevant patients for our disease indications. So, I think I'll leave it at that.

At a high level think about and why we do this. Think about Epic as way being integrated into the academic and medical centers and institutions and Flatiron, being integrated into the community oncology and network practices. And so that we're trying to cover all bases and they're one of the largest EHR providers within the community and gives us access. One of the benefits to Flatiron that we don't have with Epic, it's a faster, I mean it takes it takes a while to do the upfront setup cost and they're backlog on timing. But we're looking kind of at a fourth quarter of this year implementation, but once they hit once they hit kind of the button they can push it out to many of the sites all at the same time as opposed to having to go kind of one-by-one on the Epic integration. So, certainly excited about it and excited about what we're seeing early on from the Epic integrations that we've already done. So continuing to invest in making it easier for a doctor to order a test is something that we believe is going to lead to more testing ordered. And it’s just very simply. It's a very simple equation.

Got it. Thank you so much for that color.

You bet.

Thank you. One moment for our next question. And our next question comes from the line of Andrew Brackmann from William Blair. Your question please.

Hi guys. Good afternoon. Thanks for taking my question. I just want to circle back on pricing here for a minute. I think in the past you sort of talked about some improvements coming from reducing Medicaid mix and then also revenue cycle management. We just sort of get an update on where those initiatives stand and how you are thinking about those impacts in 2024? Thanks.

Yeah, I’d just kind of reiterate some of the things I mentioned in my prepared remarks. We’re really excited about the work that we put in and how it's going to already starting to play out on a ASP increases. So we're kind of reducing non-contracted claims auto policy claims and just working on a lot of a blocking and tackling on the appeals process prior off process et cetera. So, all those things are working. In terms of Medicaid, you'll naturally as we continue to expand into going to more indications Medicaid is an overall percentage of our test mix, excuse me kind of wands up going down in a large percentage of Medicaid also relates to AOL. So, overall our initiatives on are working. What we've talked about just in terms of quantifying that is a $200 increase over the next two years and we've already we’ve already starting to see that work.

Okay, that's perfect. And then, I just want to go back to your comments around for a gating R&D investments for specific proof points within the Immune Medicine side of things. Any color that you can give us with respect to some of the things you might be looking for as you're thinking about what level of spend you might be comfortable there? Thanks for taking the questions

And I am going to turn that over to showed Sharon Benzeno, who runs the IM business.

Yeah, thanks for the question. So, of course on the heels of our discovery of the first novel target using our platform it's a Target that we've identified in multiple sclerosis. Obviously a devastating disease. And this year we're very focused on further validation of the target as being causative of multiple sclerosis. We're using both in vitro and in vivo MS disease models to ensure that data on that front we expect in the first half of the year. And then in parallel we are of course starting to think about what drug modality to use to be able to go after the target. In parallel, this year we’re also deploying and have already deployed our antibody discovery platform. We completed at the end of last year a successful proof-of-concept in MS for antibody discovery approach. And so, we're pretty encouraged by parallel processing those two work streams with the goal to ultimately have antibody candidates that we can designate as therapeutic candidates to advance over the next year - during the next two years into the clinic.

Great. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Sung Ji Nam from Scotiabank. Your question please.

Hi, thanks for taking the questions. Maybe if I can pull it a little further on the MRD Pharma side, obviously, solid backlog there, but could you maybe talk about the trends you guys are seeing that’s specific to Adaptive? Are you seeing any child cancellations or it is mostly child delays or kind of lengthening of the studies?

Go ahead.

I think probably one thing that's relevant to notice that the indications that we are in the trends that we're seeing in the broader market with regard to investment in clinical trials over the last several years in multiple myeloma, which is the largest contributor to our pharma business. The number of trials are steadily increasing. The number peaked in 2021 and since then it has been declining. And so, I think one thing to be aware of is that, for our specific business, we have a very strong position in that indication potentially maybe even stronger if and when the FDA accepts the MRD as a surrogate for accelerated approval. But we are competing for a smaller subset of trials or drawing kind of I should say smaller subset of trials over time. In other indications like in Non-Hodgkins Lymphoma, the trends are different. The number of trials hasn't started to decline. It seems relatively consistent over the last several years. And so, that's a big area of focus for us in terms of growth is driving an increased penetration in the non-Hodgkins lymphomas whereas we have likely less growth opportunity just in the in the context of a smaller shrinking market in multiple myeloma over the longer term.

Gotcha. Great. And then just going back to the question on the MCL PTCL market opportunity there. My understanding is that, not DLBCL is roughly 25%, 30 % of NHL and then, that there's about 60% of the aggressive subtypes of NHLs. So is the 60% of NHL kind of be potential adjustable market, do you think in the future? Or is it too early to tell just kind of curious how as we think about the potential market size?

Yeah, I think we're – it’s early to say we're still developing a lot of data in the non-Hodgkins Lymphoma and indications beyond the first few. And so, what percentage of that total addressable market we can ultimately tap into remains to be seen. But I will say that the assay is technically is applicable in any of these lymphoma and it will just be a question of which evidence we determine to invest in developing.

But we have the same data that ias you did at that DLBCL represents about 50, 50 plus 50% to 60% of all NHL. So that is one area as we mentioned that we're going to be aggressively focused on and the other two that we’re following with Medicare on this year are MCL and CTCL.

Gotcha. And then one quick one for Tycho. Sorry if I missed it, but the $14 million amortization for Genentech this year, is that should be modeled that ratably throughout the year?

Yeah, I mean I think that’s right way to do it. I mean, it was just around multi myeloma, yeah, just kind of ratably for the year is fine.

Great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Salveen Richter from Goldman Sachs. Your question, please.

Hey guys. Good evening. This is Elizabeth on for Salveen. Two questions from us today. So the first is on your partnership with Flatiron Health. Can you provide some color just around how that partnership is structured? And if that would include milestone payments or would it be more kind of a continuous revenue recognition for clonoSEQ? And then, second is on the Epic partnership, just curious if you've had any feedback from users or physicians and what you're learning thus far in the early days about how this integration works and how it's being used? Thank you.

I’ll go with the first one Elizabeth, and then I'll kick it over to Susan to provide more color on the Epic integration early day learnings. As far as Flatiron, what I can't go into the specifics of the agreement, you know to be able to protect Flatiron’s position in the industry, what I can tell you is your question is, it doesn't entail kind of milestone payments. It's basically a setup fee and an annual fee it’s I think the most I can elaborate at this point. But Susan do you want to talk about Epic?

Sure. Yeah, the feedback has been very positive to-date. In fact, we've seen several of our early sites come back after just a short time of having experience with the integration in advance to expand the scope of the integration for example bringing on more physicians or expanding to the in-patient setting versus outpatient only. And we've seen increases in both the number of ordering physicians and the volumes that are flowing through in each of the accounts where we integrated to-date. I think the most, the most important improvement is simply the reduction in manpower required to enter orders and to not only enter orders, but to receive the results from orders as they now land directly into the EMR in the place where you would find other test results versus kind of having to be manually updated uploaded and searched for. The other benefit of Epic integration is discrete data delivery, which is going to enable more streamlined real world evidence analysis, which more and more of our accounts are coming to us in expressing an interest in performing. So I think this will be a tool not only for clinical efficiency, but also for expanding research and sites around MRD.

Got it. That's helpful. Thank you.

Thank you. One moment for our next question. And our next question is a follow-up from the line of Rachel Vatnsdal from JPMorgan. Your question, please

Perfect. Hey, good afternoon. Thanks so much for taking the questions. I want to follow up on some of the ASP comments earlier. So you noted that you expect to lift ASP by $200 over the next two years. So, can you just talk about how should we think about the cadence of that step up over the next 24 months? Will it be linear? $any comments there would be helpful.

Hi, Rachel. Yeah, I would at this point, model it out is linear. I think the reality is, you know ASPs based on age collections and a variety of different factors that can vary month-to-month even quarter-to-quarter, but we're seeing kind of all the leading indicators point to kind of a linear growth to over $200 an ASP increases over the next two years.

Great. And then just as a follow-up, can you walk us through your updated- I'm thinking around the state biomarker bills. What type of impact will that really have on the business? And, then do you have any of that benefit embedded in the guide for the 2024 year, as well?

It's a great question and we don't have that specifically baked into the guide, but we are optimistic right, which they we’re increasingly optimistic based on, the discussions and conversations that we've been having that the enforcement of the state biomarker kind of laws are starting to take hold. Just to give some context I said on the board of coalition for 21st century medicine and we're working kind of hard on these initiatives. And if you look at Evamed, Aqua and all the industry associations, it's a it's a prominent area of focus. Obviously, you're fighting the insurance company lobbies that are trying to not pay. But net-net I think from a national position that's coming down on the stage, you are seeing incremental evidence of kind of positive trends and insurance companies are starting to comply with this legislation. So, again, I don't think it's going to be an overnight success in obviously. We're hoping more states and act the biomarker legislations, but you will see over time incremental and no it's not it's not baked into the guide.

Right. That's it for me. Thank you.

Thank you. This does conclude the question-and-answer session, as well as today's program. Thank you. ladies and gentlemen for your participation. You may now disconnect. Good day.