Good day, and welcome to Adaptive Biotechnologies Third Quarter Financial Results [Operator Instructions]. As a reminder, this call may be recorded. I would now like to turn the call over to Karina Calzadilla, Head of Investor Relations. Please go ahead.

Thank you, Michelle. Good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies third quarter 2024 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the third quarter of '24. 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 of our corporate Web site. 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 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 Chief Financial Officer. Additional members from management will be available for Q&A. With that, I'll turn the call over to Chad. Chad?

Thanks, Karina. Good afternoon. And thank you for joining us on our third quarter earnings call. As shown on Slide 3, results for the quarter are a clear testament of our continued strong execution on the top and bottom line. MRD revenue increased 52% year-over-year, driven by both clinical and pharma. This quarter, we reached two catalysts that will drive MRD revenue growth. One, Medicare set a new gapfill rate of $2,007 for our clonoSEQ test, which is a 17% increase from our previous rate under the episode structure. And two, we secured Medicare coverage for mantle cell lymphoma. Operating spend had another significant decline of 11% versus prior year and 5% sequentially excluding q time costs. Sequencing gross margin further increased 6 percentage points compared to last quarter as we successfully executed efficiencies in workflow leading to lower per sample cost. And cash ended at approximately $267 million, which represents a burn reduction of 38% in the first nine months this year compared to the same period a year ago. Due to our strong year-to-date performance, we are raising the lower end of our previous MRD revenue guidance. We are reducing our full year operating expenses and lowering our annual cash burn target. Kyle will share more in his detailed remarks. Now let's take a closer look at the MRD business on Slide 4. clonoSEQ clinical revenue grew 39% versus prior year. Tests delivered reached a new record representing 30% growth year-over-year and 6% sequentially with growth observed across all marketed indications. Multiple myeloma continues to be the largest contributor at 41% of volume followed by ALL at 34%, CLL at 10% and DLBCL at 6%. Other clonoSEQ key indicators continue to trend positively. Blood based testing represented 41% of tests and we expect it to continue to increase…

Thanks, Chad. Let's start with revenue for the third quarter on Slide 7. Total revenue in the third quarter was $46.4 million with 81% from MRD and 19% from Immune Medicine, representing 22% growth from the same period last year. MRD revenue grew 52% versus prior year to $37.5 million dollars with clinical and pharma contribution of 56% and 44% respectively. clonoSEQ test volume including international increased 30% to 19,600 tests delivered from 15,072 tests in the same period last year. ASP in the US grew 3% versus prior year despite a $1.8 million reserve charge we took this quarter related to aged claims from 2023. MRD pharma sequencing revenue grew 21% versus prior year, reflecting healthy recovery from last year's biopharma industry pressures. Immune Medicine revenue was $9 million down 32% from a year ago, driven by an anticipated 56% decrease in Genentech upfront amortization, partially offset by 4% increase in Immune Medicine pharma and academic services. Moving down the P&L. I want to highlight that sequencing margin, which excludes milestones in Genentech amortization was 56% for the quarter. This represents a significant increase of 13 percentage points versus prior year and 6 percentage points sequentially. This improvement is mainly attributed to lower overhead costs from efficiencies in the production lab and direct labor leverage, which combined drove lower cost per sample. Total operating spend for the quarter inclusive of cost of revenue was $79.1 million, representing an 11% decrease from last year. This decrease continues to be mainly driven by our focus on driving leverage across functions with R&D once again being the biggest contributor of this decline given more targeted investments in Immune Medicine. As you can see from the segment reporting table at the bottom of the slide, MRD adjusted EBITDA has improved sequentially throughout the…

Thanks, Kyle. We are delivering on the promises we've made. Our relentless focus on execution and disciplined capital allocation are driving growth in our MRD business with a clear path to profitability while we continue to advance our targeted Immune Medicine programs. With that, I'd like to turn it back over to the operator and open it up for questions.

[Operator Instructions] Our first question comes from Dan Brennan with TD Cowen.

Maybe the first one just on the final gapfill price. So in terms of the $1,300 realized price that now you're targeting for 2025, can you just give us a sense of kind of what you're assuming there? And maybe what's like a range of outcomes if you're more or less successful in converting some of these commercial contracts over to the higher price?

I'll start with that and Kyle, feel free to kind of jump in here. So first, I just want to say, we're extremely pleased to see close to a $300 increase in the gapfill price in terms of kind of what that means for the long term margin profile of the business. This will take some time to kind of bleed in. And so let me just explain what that means. So of the fee-for-service Medicare, it's about 20%. 37% Medicare overall fee-for-service is about 20%. We'll see kind of that impact more immediately for new Medicare patients. For commercial payers, we expect to renegotiate with contracted payers at a higher rate and bring uncontracted patients on sooner, but some of that timing of that is more uncertain. But if you look at kind of overall, the 2023 average ASP of $1,050 and now increasing to $250 to an average price of $1,300 in 2025, which obviously means that at some point in 2025, we go above the $1,300 to average at $1,300. So $200 per test is driven by initiatives that we put in place to grow ASP this year, which includes what I mentioned the expansion of payer coverage, closure of contracts with some of the remaining large outstanding payers. And there's a ton of operational enhancements that we're doing that are going on right now. And we're shifting the test mix kind of away from -- or more away from Medicaid. In addition, kind of we expect -- anticipate that at least $50 plus per test on average during 2025 will come from this new gapfill rate and how that kind of works through the variety of different payers. So we do believe -- I will put this out there, we do believe there is a potential for upside but we need to really assess the pace at which we can kind of impact the remaining payers.

And then maybe just as a follow-up, just on the MRD pharma, that's exciting as well. Just kind of what's baked in now for the guide for 2024 for MRD pharma, are you assuming any more milestones? And could you just walk through a little bit of your funnel activity in terms of studies and kind of what that might portend for kind of a pharma growth as you look beyond ‘24?

I mean, as it relates to the milestones in Q4, I'd just say we have a risk adjusted assumption there. I wouldn't say there's a big dollar amount associated to it. Relating to funnel, I mean, broadly we have roughly around $200 million in backlog but -- and ODAC is going to continue to catalyze that backlog and as well through new bookings. So I think we're pretty confident in the pharma profile, not explicitly ready to talk about 2025 guidance but I think we can assume a decent growth rate into 2025 that's probably similar to what we achieved this year.

Our next question comes from Mark Massaro with BTIG.

Maybe I'll start on the guidance. So you did beat by about $6 million in Q3 on revenue. You did not increase the upper end of the MRD guide. Can you maybe just walk me through some of the factors that might have contributed to that, recognizing that you are seeing strong growth in pharma? I just wanted to get your thoughts on either the philosophy of the guidance or any particulars that we should be aware of?

Obviously, the MRD milestone happening in Q3 drove an increase and gave us confidence to kind of derisk the low end of the range. So we're comfortable moving up. I guess, why not taking it further? I mentioned the ASP charge we took in 3Q, which we didn't previously forecast. So that's some of it. The rest of it is, pharma is challenging. I've mentioned this before, it's probably a broken record, about the quarter-to-quarter volatility. And one or two studies pushes out to the next subsequent period and that can hurt us pretty meaningfully in one quarter. The other thing is there's potential for some softness just given the hurricane impact and we're still sorting through it. But we're confident in the guidance and confident in the numbers we're putting out and we want to be just prudent just given all that's going on, so we can deliver and hit our guide.

And do I have it right in terms of the numbers on MRD pharma? Did you say you now have 10 clinical trials in MM as a primary endpoint? And just to kind of level set, I think there might be about 60 or so trials. So I'm just trying to get a sense for how many trials you think might move over to primary even if we look out, say, a year or two years?

We do now have kind of 10 multiple myeloma studies using clonoSEQ as a primary, including two that have recently been signed as new studies and three that were already converted and upgraded from secondary to primary. So that -- and the trajectory is looking good. Of all the studies that we have in myeloma, we continue to push. It'd be hard to kind of put a direct number on it and speculate but we do see kind of great traction from the ODAC decision and we do really in three areas. One is kind of new studies where we've seen kind of an increase of -- we've closed on 16 new myeloma studies year to date, 11 of which were post ODAC. And so obviously, in terms of kind of the future growth in starting new studies that's great to see. And then secondly, the impact on milestones, just -- there's an opportunity to accelerate some of these milestones, because these companies are moving quickly to get their approvals based on the new accelerated approval pathway. And then third, as kind of mentioned in the remarks, but I do think it's always worth highlighting is there's a really nice kind of interplay between kind of the pharma and clinical business. And we're seeing really an increase in efforts from pharma companies to highlight kind of the importance of MRD going for clinical management and as a measurement of treatment response. And so that kind of further bolsters our confidence kind of in the clinical business. So not a direct answer but we do expect many more to convert and for us to be able to access kind of that pool of milestones outstanding and new milestones that we sign on new contracts.

And if I can sneak one last one in, that's related to that. What are you hearing from pharma specifically about the move from secondary to primary? Maybe if you could provide any more granular details just about the potential time savings or the clinical trial enrichment and/or the probability of success. What are some of the key things you're hearing about this interest to move to the primary?

I mean, first of all, it's important to note that each company needs to independently evaluate with the FDA whether their trials are eligible for accelerated approval and whether MRD can be utilized as a primary endpoint. So it will depend in some regard on the trial design and the specifics of the therapy that's being evaluated in the setting. That said, though, certainly, companies are anticipating that there can be a significant improvement in the time frame it takes to complete the study. I mean, we're talking going from eight, nine, 10 years to get to a PFS endpoint to potentially three years to get to an MRD endpoint depending on how it's defined. And we've now seen the first two studies over the last year that have read out with MRD as a primary endpoint. And I think those studies have both been received very favorably by the clinical community, which I think is also an important thing to note. So the feedback we're getting is that it is very uniformly of interest to evaluate whether a primary endpoint could be utilized. However, there are nuances to each individual development program and certainly distinctions in exactly how much time can be saved depending on the setting and the treatment being applied.

Our next question comes from Matt Sykes with Goldman Sachs.

Maybe just pivoting over to mantle cell and the coverage you got there. I realize it's a smaller market indication relative to some of the other markets that you're in. But just given sort of the disease aggressive and recurrent nature, like how should we think about frequency of testing there and the potential volume ramp, understanding it's one smaller market but slightly different type of characteristics of the disease?

Thanks for the question and good insights underlying the question. So mantle cell is indeed a bit smaller, it's around -- an annual incidence in the US around 4,200 patients, maybe 20,000 prevalent patients. So not dissimilar to ALL, which I will note is 35% of our volume today. But that said, it's also an aggressive disease. As you noted, patients are often monitored for long periods of time, they will relapse multiple times over the course of years. And so there are a number of testing opportunities over the course of a patient's lifetime. The treatment journey is somewhat similar to some of the other indications you're familiar with for clonoSEQ like myeloma or DLBCL where there's an induction phase, there might be consolidation therapy, maintenance therapy, some patients are transplanted and then there's also later line interventions, including potentially CAR-T. And so at each of those time points much like in other malignancies we test, there's an opportunity for MRD to play a role. Now that said guidelines have not been defined for mantle cell lymphoma like they have been for myeloma for example. So that is work that remains to be done. But there is currently a monitoring modality in place which is imaging. And imaging is being done periodically for these patients at varying frequencies depending on the point in their disease trajectory and the treatment. And so we do think that over time there's quite an opportunity both for response assessment, as well as for ongoing monitoring for disease recurrence.

And then Kyle, just on -- you've made pretty impressive progress on the cost savings year-to-date. And just looking at Slide 7, just looking at sort of this quarter relative to last year's Q3, looks like G&A and R&D were some of the areas where you did most savings. Could you just kind of give us an idea among some of these categories, sales and marketing, G&A, R&D, like where is there still kind of runway for you to improve upon that and how long do you expect that runway to last?

I mean, I think the improvement we've made -- we've done a handful of restructurings throughout the year. But I'd say sales and marketing, it's a leverage story. We have the investments we've made, there's some targeted investments we want to make in reimbursement ops function but primarily looking at that as leverage. A bit similar story with G&A, we've flattened out the org quite a bit to kind of drive a lot of those savings. R&D, this is primarily a result of targeted investments in immune medicine. We do have some larger initiatives left in MRD, the NovaSeq being one of them. So I think as we continue to assess opportunities and look for opportunities for additional savings, we'll identify them. But we're not making any plans to have further reductions in those areas. You didn't ask about it but I'll also mention in ops, we're continuing to drive additional leverage through a lot of initiatives to reduce our overhead costs and flattening the organ. I think there's still some leverage there we will continue to get. But again, I don't think we have any plans for anything targeted at this time.

Our next question comes from Andrew Brackmann with William Blair.

This is Maggie Boeye on for Andrew today. I want to ask one on EMR integration. So sounds like there was some nice progress in the quarter with Epic and expanding accounts there. So can you talk about some of the learnings there now that you have 11 accounts live? And then just as you think about expanding your EMR integration work even further with Flatiron. How do you expect this to impact volume growth altogether in 2025?

So first, in terms of learning, I think over the course of the 11 integrations that we've now completed, we've gotten substantially more efficient. We've understood kind of how best to leverage the accounts resources, which are often somewhat degree limited to be able to complete these integrations effectively and to make sure that we can hit the ground running with those accounts to implement some of the tools that are helpful in standardizing testing going forward with those accounts. So that's been a big area of focus is to leverage the tools already built into Epic to increase standardization of testing time points. We have seen now with 11 accounts under our belt and six that have been in place for more than a quarter, we're starting to get a better understanding of what growth looks like in these accounts post integration. So the six accounts that have been live for at least since Q2, we saw quarter-over-quarter growth in Q3 of 13%. And that's -- it's for four of those six accounts they've been live for a year. So that's now in their third quarter post integration, they're still growing at a pace faster than the rest of the business, which is great to see. For the five accounts that went live just in the past couple of months where we were happy to see really strong month-over-month growth in October, which has been consistent with our previous experience of sort of the higher growth rates we've seen right out of the gate for new accounts. So again, we're starting to get a better consistent view of what the growth patterns look like. We have quite a few in-progress integrations that are proceeding now. We actually still expect to have a completed integration in a total of about 20 accounts by the end of this year. And we're targeting by the end of '25 that about 50% of our total order volume will flow through an integrated platform, whether that’d be Epic, Flatiron or another community EMR platform that's highly utilized in some of the large community networks. So we are -- we have kicked off the work with Flatiron and we're looking forward to bringing that as well as several other community integrations live in 2025.

And then just on -- I think, it was just mentioned on one of the last questions. But can you just update us on the progression of the rollout of NovaSeq and just how we should be thinking about the opportunity for COGS reduction there just looking into 2025 here?

We're making a lot of progress, a lot of headway. Our plans are still for it to launch in the third quarter of 2025, assuming everything goes well and everything is pointing in that direction currently. As it relates to the financial profile, depending on where volumes are at, we think annualized you can probably get 5% to 8% improvement in margin profile in the first 12 months of that. And then as volumes continue to grow, expanding margin profile from there. And I think it just reiterates our kind of long term trajectory that we believe we can get to 70% gross margin profile for the MRD business.

Our next question comes from Sung Ji Nam with Scotiabank.

This is Corey Rosenbaum on for Sung Ji. Could you remind us how much of the Genentech amortization remains, if any, following this year?

I believe we'll probably exit with around $50 million to $60 million.

And as we look to next year and MRD continues to grow at a faster pace than Immune Medicine, is the best way to think about the total OpEx spend still around 70-25 between MRD and Immune Medicine for next year?

We'll provide kind of updated guidance in February. What I can say is we're looking to kind of constrain the Immune Medicine spend. So it will be lower on a percentage basis.

Thank you. Our next question comes from Tejas Savant with Morgan Stanley.

This is Jason on for Tejas. Thank you for taking our questions and congratulations on the quarter. So maybe just starting off, there was some recent news from a large player in the diagnostic space where United Health announced that they would no longer cover multi-gene panels for behavioral health. So obviously you have a different portfolio. But was just wondering how do you think about the challenges some of these private payers have faced recently on spiraling costs weighing on their enthusiasm for genetic testing more broadly, perhaps due to more stringent prior authorization or just dragging your feet on biomarker build rollouts?

No, I think it's a good question and one I'm -- just for background, I sit on the Board for Coalition for 21st Century Medicine. We spend a lot of our time as a Board looking at the payer landscape more broadly, both on the government side and on the private payer side. And I would just say this and as with respect to clonoSEQ, it's about the value of our test and what it brings for patients. And so we consistently go to value. And if you look at health economics and outcomes research and really the overall kind of savings to health system and as it relates to the pricing of the test, I think all of those factors kind of play a role into making sure that your test is -- and I don't -- we don't comment on other people's tests or reimbursement profiles in general. I'm just speaking directly about clonoSEQ and the value that it brings and the value that's been recognized by both the government in Medicare and by private payers really across the board. As like one great example of that is, if you look at the use case that's expanding rapidly for us is taking patients off of maintenance therapy with -- in multiple myeloma. The savings that that test provides to be able to give the confidence to a clinician and for two subsequent MRD readings, take a patient off of very expensive, I won't name names, but you know the maintenance therapies in multiple myeloma are over $100 million per year. And so when you're talking about a test that costs $2,000 per year to do that, that value that it brings to payers is something that we continue to promote. But I would say, in general, being a CEO in a diagnostic business, the challenge -- I mean, this is where we're all faced with challenges on the payer side, making sure that we're getting paid at a high rate, making sure that we're collecting that cash, which is why we have such a heavy emphasis and focus on reimbursement, both on the contracting side and then reimbursement operations. It's an area that we're investing in and that we want to get the best people in and that we want to continue to progress in.

And then maybe just a quick follow-up. There was some news in September that Roche, they announced a 25% narrowing of their pipeline. So just wondering after this announcement, have you seen any impact to your partnership with Genentech?

As Roche also announced that they were reorganizing their oncology research division. They have assured us that that does not have an impact on our partnership, and that's all I can comment on at this time.

Thank you. I'm showing no further questions at this time. This does conclude the program, and you may now disconnect. Everyone, good day.