Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Third Quarter Financial Results Conference Call. 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. Thank you. Please go ahead.

Thank you, Felicia, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' third quarter 2022 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the third quarter of '22. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will be referencing a slide presentation that has been posted to the Investors section of 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 on 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 this presentation. In addition, non-GAAP financial measures will be discussed during the call, and a reconciliation of non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, CEO and Co-founder; and Tycho Peterson, Chief Financial Officer. In addition, Harlan Robins, Chief Scientific Officer and Co-founder; Nitin Sood, Head of MRD business; and 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 third quarter 2022 earnings call. As always, a big thank you to all our Adaptive employees for their dedication and for delivering another solid quarter. As we approach year-end, we are well positioned to finish strong in both MRD and Immune Medicine. This quarter, as outlined on slide three, we achieved important milestones and results. Starting with key corporate achievements. As planned, we strengthened our cash position to $528 million with an attractive non-dilutive royalty financing agreement with OrbiMed. This agreement extends our cash runway to over three years while providing the flexibility to make strategic investments. We also finalized our long-range plan update, which will enable us to achieve sustainable revenue growth while reaching adjusted EBITDA profitability in 2025 and cash flow breakeven in 2026. Tycho is going to go further in detail during his remarks. Revenue for the third quarter was $47.8 million, representing strong growth of 21% versus prior year. In our MRD business, both our clinical testing and MRD pharma partnerships delivered solid performance. Clinical volumes grew 52% versus prior year and our MRD pharma partnerships also had significant growth of 33%, excluding milestones. Our Immune Medicine business continues to execute on pharma services and drug discovery opportunities. Pharma services drove 23% growth versus prior year as we increased penetration into larger trials. And our Genentech partnership in drug discovery is on track with both our shared and private cell therapy programs. Moving to our MRD business on Slide 4. As shown in the graph, clonoSEQ clinical testing volumes continue to grow quarter-over-quarter. This quarter, tests delivered grew 7% sequentially to 9,650 tests. In the United States, our market of focus, tests delivered grew 11%, with volume growth observed across all three marketed indications. Multiple myeloma was the biggest growth driver and the largest contributor to our business. Ordering healthcare providers and ordering accounts experienced significant growth of 56% and 53% versus prior year, respectively. And unique patients tested grew 62% in the quarter. ASP is now over $1,000 per test and we expect it to grow annually in the mid-single digits as we finalize pricing agreements with non-contracted payers and improve our collection performance. Our strategy to maintain our leadership in MRD testing in lymphoid cancers continues to progress, as shown on Slide 5. First, our expanded sales force is structured into two distinct groups, key account managers and diagnostic hematology specialists. These groups serve two different customer segments with distinct sales strategies. Key account managers focus on penetrating deeper into our existing established institutions. This quarter, 85% of the growth came from existing institutional accounts, including Mount Sinai, MD Anderson, Dana Farber, Stanford, among others. Our current diagnostic hematology specialist team targets driving adoption in community practice accounts currently representing 12%. Another key driver of growth is blood-based testing, which now accounts for 30% of all clonoSEQ MRD tests. In multiple myeloma, growth in blood was over 100% year-over-year. Blood-based testing is key, and it has the potential to both increase penetration of clonoSEQ among clinicians and the number of tests run per patient. In addition, we are launching a validated diffuse large B-cell lymphoma product at ASH. In line with previous expectations, we anticipate DLBCL to contribute to clonoSEQ growth in the second half of 2023 and beyond. As a reminder, last quarter, we obtained Medicare coverage for all DLBCL patients, 75% of which are Medicare age, regardless of line of therapy, treatment regimen, or testing time point. Lastly, we are focused on enhancing the overall customer experience, including more seamless integration of clonoSEQ into clinical workflow. As such, we signed an agreement with Epic to expand access and increase ease of use for clonoSEQ. Shifting to our MRD pharma portfolio on Slide 6. Our clonoSEQ assay is currently being used by over 60 biopharma partners and in over 20% of actively industry-sponsored clinical trials in lymphoid cancers. Almost every major pharma company developing a blood cancer drug is using clonoSEQ in their trials as a secondary or primary clinical endpoint. From these partnerships, besides sequencing revenue, we are also eligible to receive milestones in excess of $370 million based on potential drug approvals from ongoing and future studies. We have line of sight to approximately half of the $370 million in milestones from 74 active trials today, which we anticipate recognizing over the next 5 to 7 years. We believe there is a significant growth opportunity for our MRD pharma business. ClonoSEQ is the gold standard in multiple myeloma trials, and we aim to replicate this success in other indications, especially in non-Hodgkin's lymphoma where there's significant ongoing drug development activity. Now turning to our Immune Medicine business on Slide 7. Our Immune Medicine business leverages our ability to sequence and characterize T cell and B cell receptors at scale to drive opportunities in various indications. We categorize our immune medicine business into two main growth areas: pharma services and drug discovery. Zooming into pharma services on Slide 8. This quarter, pharma services grew 23% year-over-year. This growth is driven by our team executing to incorporate T cell or B-cell receptor sequencing in more and more clinical trials with existing and new biopharma customers. Our portfolio today consists of more than 140 active studies with more than 85 companies. We expect this double-digit growth to continue in the coming years. Our unique ability to detect and monitor T cell and B cell responses delivers rich data back to our customers that informs biomarkers of drug response with the ability to accelerate our pharma customers' clinical development programs. As indicated on this slide, we have a diversified portfolio that supports customers in multiple indications. This includes pharma clinical trials in more than four major therapeutic areas. Approximately 50% of our current portfolio includes Phase I and Phase II trials. Our growth strategy is to continue to grow in these phases and expand into Phase III programs while bringing on new accounts. Slide 9 shows an overview of our drug discovery business. Drug Discovery leverages our end-to-end TCR and DCR discovery capabilities to develop therapeutic assets either in partnership or potentially on our own. Our partnered pipeline today focuses on our shared and private programs with Genentech to advance cellular therapies in oncology. We are also building an early-stage adaptive pipeline by investing in our core drug discovery competencies that we've built over the last several years. Specifically, the value of our true TCR discovery and our true AB antibody discovery approaches gives us a unique ability to identify and characterize therapeutic-grade TCRs and antibodies at unprecedented scale. This quarter, drug discovery grew 36% versus prior year due to accelerated amortization of our Genentech upfront. This is due to increased R&D investments and reflects progress on both our shared and private product program. I'm going to pick up at drug discovery. I'm not sure where the phone dropped. This quarter, drug discovery grew 36% versus prior year due to accelerated amortization of our Genentech upfront, which is due to increased R&D investments and reflects progress on both our shared and private product programs with Genentech. In addition to the first neoantigen-specific T cell receptor candidate that Genentech selected this year, we are on track by year-end to complete and deliver to Genentech two additional TCR data packages. These three TCR assets are the result of our established end-to-end true TCR discovery process that allows us to identify therapeutic-grade T cell receptors that are fully characterized and derisked for safety. We are also making excellent progress on our private product program. We have completed initial proof of concept to identify patient-specific T cell receptors for each patient's unique tumor mutations. We are working on product specifications toward early product development with Genentech. The next phase of our personalized prototype is to transition from the research team to the product development team in the coming months while implementing the necessary regulated workflows in our dedicated state-of-the-art South San Francisco lab. We will provide further updates as appropriate. We are excited about our Immune Medicine opportunities from Genentech and future drug discovery programs on the way. I'll now pass it over to Tycho for our financial update.

Thanks, Chad. Turning to our financial results, starting with revenue on Slide 10. Total revenue in the third quarter was $47.8 million with 58% from Immune Medicine and 42% from MRD, representing a 21% increase from the same period last year. MRD revenue of $20 million grew 26% from a year ago with clonoSEQ clinical testing and MRD pharma partnerships driving approximately 51% and 33% of the growth, respectively. This growth was partially offset by a $1.5 million decrease in MRD regulatory milestones. While we continue to anticipate milestones from our MRD partnerships, these are not within our control and will vary quarter-over-quarter. ClonoSEQ test volume, including international, increased 52% to 9,649 tests from 6,341 in the same period last year. We expect strong growth to continue through year-end. Immune Medicine revenue was $27.9 million, up 18% from a year ago. This change was driven by a $5.4 million increase from Genentech and a $1.3 million increase from pharma and academic, partially offset by a $2.5 million decrease from T-Detect COVID. Shifting to operating costs and guidance on Slide 11. Total operating expenses were $93.3 million, representing a 3% decrease from $95.8 million last year and a 3% decrease versus the prior quarter. Cost of revenue was $14.9 million compared to $14.2 million last year, representing a 5% increase, primarily driven by increased labor and overhead costs, partially offset by a decrease in material costs due to lower sample volumes. R&D expenses were $35.7 million compared to $36.1 million a year ago, representing a 1% decrease, mainly due to decreased investments in T-Detect. This was partially offset by higher drug discovery expenditures related to Genentech. Sales and marketing expenses were $21.5 million compared to $24.9 million a year ago, representing a 14% decrease largely due to our ongoing efforts to drive operating leverage. General and administrative expenses were $20.8 million compared to $20.2 million a year ago, representing an increase of 3%. This was partially driven by higher personnel costs as well as building facility and depreciation. Lastly, interest expense from a royalty financing agreement with OrbiMed was $700,000. Net loss for the quarter was $45.3 million compared to $56 million last year. Now turning to full year guidance. We are narrowing our revenue range to $185 million to $190 million from $185 million to $195 million. We now expect the contribution from our businesses to be approximately 47% from MRD and 53% from Immune Medicine at the midpoint versus 50-50 as previously anticipated. The change in guidance is response to a shift in timing related to our anticipated MRD pharma milestones. For operating expenses, we now expect the full year to be below $400 million compared to our prior expectations of $410 million to $415 million. This reflects our ongoing efforts to drive efficiencies from a number of areas. We expect our quarterly burn rate in the fourth quarter to be below $50 million and aim to further reduce it next year. Our capital position is strong, and we ended the quarter with roughly $528 million in cash and equivalents, including $125 million from our deal with OrbiMed. Slide 12 shows more details related to the OrbiMed agreement. As Chad mentioned, we are pleased to have entered into a non-dilutive royalty financing agreement with OrbiMed, a leading healthcare investor for up to $250 million. This additional cash adds to our already strong balance sheet and provides us with flexibility to support our growth profile while reaching profitability. Turning to long-term guidance on Slide 13. Following our restructuring around two business areas, MRD and Immune Medicine, we have worked extensively on our latest long-range plan to ensure that we are allocating capital prudently and investing behind the projects to support our growth profile with higher returns. As you can see from the slide, we estimate revenues to grow at a 20% to 30% CAGR through 2027, while our operating expenses are expected to grow at a much lower pace, leading to positive adjusted EBITDA in 2025. In addition, this operating model gives us the ability to reach cash flow breakeven in 2026. Importantly, given our strong cash position, we do not anticipate the need to raise additional capital to achieve these profitability targets. Our performance is solid, and our outlook is strong. So we believe we are well positioned to deliver sustainable growth with a clear path to profitability. With that, I'll hand it back over to Chad.

Okay. Thanks, Tycho. As outlined today, we are delivering on our promises. Both our Immune Medicine and MRD businesses have great momentum to achieve the respective catalysts listed on Slide 14, and we have a strong balance sheet to support future growth. I'd like to turn it back over to the operator and open up for questions.

Thank You. The first question comes from the line of David Westenberg of Piper Sandler.

Hi. Thanks for taking the questions here. So I'm going to start here with the DLBCL adoption ramp. So what are we thinking about for DLBCL adoption ramp, given the fact that I think clonoSEQ business, you did really well. Pandemic hit kind of slowed, and you had really good momentum in 2022. I think you have had a little bit of critical mass, particularly in the first half of this year with the clonoSEQ business. Do you think that you can ride that momentum in DLBCL and this is going to be faster than say, the ramp that you got in multiple myeloma?

David, it's Chad. I'll make one comment, and then I'll pass it over to Nitin to specifically address. We are still very much low penetrated in our marketed indications in myeloma, ALL, and CLL. So I think there's a significant ramp of our existing indications. And with the new launch of DLBCL, again, I'll hand it over to Nitin to specifically comment on timing and ramp.

Yes. And I just want to build on what Chad said, multiple myeloma, which is a key growth driver for us going forward, grew 17% quarter-over-quarter this quarter. So we're still at sort of 6.5%, 7% penetration in multiple myeloma. There's a lot of room for multiple myeloma to drive growth going forward into 2023. Talking specifically about DLBCL, we will launch the DLBCL CLIA-validated assay at ASH this year in December. We expect this asset to contribute to growth in the second half of 2023 as it takes time for us to educate physicians on the use of blood-based MRD testing. The current standard of care in DLBCL is imaging-based monitoring, and we have data to show that DLBCL has higher specificity than imaging and can detect recurrence earlier than imaging. So the foundation and the fundamentals are strong as we continue to position education, I think, the second half of 2023 is where we'll see the growth.

Got it. I would like to follow up on that. I believe your physicians are well-informed about the relevance of T cells and B cells, and theoretically, this could be applied to any T cell or B cell-mediated cancer. Can you share how many of these are being ordered off-label? Also, with Medicare coverage, might we see some changes in additional ASP?

Around sort of 10% of our ordering volume is outside our main indications. This includes DLBCL, CTCL, NCL, and other indications. So we'll see, obviously, we'll get paid on the DLBCL component of that test. But I think as we expand into the community, where DLBCL is treated, we'll see a greater uptick of DLBCL. In addition, we will continue to file for reimbursement for these other indications like MCLCTCL, and they'll contribute overall to increasing our ASP as well.

And David, I was just going to make another comment. It's worth noting that if you look at the number of trials right now going on in non-Hodgkin's lymphoma, particularly in DLBCL, the necessity to monitor residual disease as these new therapies hit the market really does drive clinical adoption and awareness. That's why the MRD clinical business and the MRD pharma business are incredibly synergistic. We've seen that in multiple myeloma, and you'll start to see that again in the second half of 2023.

Got It. And if I'm not being too greedy here, I'm just going to squeeze one more in for Tycho here. You mentioned additional cost cuts into 2023. Is this going to be primarily in R&D or SG&A?

Yes, the costs for T-Detect specifically are kind of out of the equation when we made that decision last quarter. I'd say we're looking at a lot of things. I mean publicly, we've talked about real estate consolidation. We've talked about workflow enhancements, leveraging sequencing costs. Obviously, Illumina is driving down costs there, there's some stuff in the cloud compute costs. But the other angle here is as we went through our long-range planning process, we came up with a list of R&D projects and triaged them and mapped them to revenue and margin. And yes, there are some opportunities to drive a little bit of R&D leverage. G&A will have some leverage as well. We'll communicate more as we give official guidance. But it's all part of a process of getting more efficient as a company and being more thoughtful about how we invest our dollars.

Appreciate it. Thank you, guys.

The next question comes from Tejas Savant of Morgan Stanley. Please go ahead.

Good morning, guys. This is Eon for Tejas. Just wanted to touch base on your partnership with Epic. I was wondering how you envision the integration of their integration into the EMR system will impact volumes once it goes live in '23?

Sure. Nitin, I'll let you cover that as well.

Yes. We initiated work with Epic and expect to have accounts up and running in 2023. We've started with four pilot accounts and expect that integration to be completed within six months. Overall, we're anticipating an impact on order volumes in the second half of 2023 and a more considerable, much bigger impact in 2024. The way we think about this is, first, Epic will sort of standardize the use of quality in accounts that we already have to drive deeper penetration in the accounts that we have. Then reduce the barrier for adoption in the newer accounts. So overall, we're pretty excited about this. We're underway, and we expect to announce more updates on this in 2023.

Got it. And then on peers in the space, I talked about hospital staffing issues, and you've also noted seeing order spikes in the past. I was wondering if this trend has changed over the past few months, and separately on the biopharma side, I'm curious. I've also noticed clinical trial sample collection and deliveries being slowed down due to staffing shortages. Are you seeing similar trends here?

Go ahead, Nitin.

Yes. I would say we're not seeing any significant impact. We see some variability here and there related to various events, but I would say both our pharma business as well as our clinical business looks set to a good start in Q4. And we're feeling pretty good that it will continue to grow robustly above 50% in 2023.

Great. Thank you.

Our next call comes from Julia Chen of JPMorgan Chase. Please go ahead.

Thank you for taking my question. This is Martha in for Julia. So I wanted to 2023 - now it's a bit too early, but can you share some color regarding upcoming headwinds and tailwinds, any type of indicators or factors that you could share with us without giving you the specific numbers?

Yes. We prefer not to discuss 2023 in detail until we are ready to provide official guidance. I mentioned in my prepared remarks that we will continue to focus on driving operating leverage. We also outlined a path to profitability during the call today. Regarding the hospital end market, do you have any additional insights on the dynamics for MRD that you would like to highlight?

Yes. I mean I think I'd just like to again, sort of highlight the fact that all the leading indicators are looking strong. The number of healthcare providers and accounts grew 50% year-over-year this quarter. It has been in the last few quarters. The number of unique patients tested grew 60%. And that combined with the fact that our penetration in both the pharma space as well as in the clinical diagnostic space is low, I think we feel we'll do very nicely in 2023. All the leading indicators look positive, and we will provide specific guidance as Nico said, in Q4.

And Sharon, can you make a couple of comments on our Immune Medicine business, particularly Genentech?

Absolutely. With Genentech, again, we're making great progress on both fronts, both the shared and private products. As Chad mentioned, we're seeing significant growth in terms of what we achieved in Q3 and look to do the same closing out this year into next year. As it relates to the Immune Medicine pharma services, similarly, we expect a good growth trajectory in 2023 and beyond with significant opportunities to penetrate in later-stage clinical trials and across multiple indications relevant to our assay.

One thing I'll add just from the financial perspective, again, we're going to wait to officially guide with the fourth-quarter call, but we will take a more conservative view around the MRD pharma milestones. You saw that in the narrowing of the range for the fourth quarter. Those can move around quarter-to-quarter, of course. As we go forward, we're going to try to kind of derisk reliance on those. So that's one area headed ahead of official guidance where we'll be a little bit more conservative.

That's very helpful. And the other question is...

Go ahead. Sorry, was there an additional question?

Operator, do you want to go to the next one?

Sure. The next question comes from the line of Derik Brian from Bank of America. Please go ahead.

Operator, if you want to go to the next question, it would be great.

The next question comes from the line of Salveen Richter of Goldman Sachs. Please go ahead.

Hey, guys. This is Elizabeth on for Salveen. Thanks for taking our question. Had a question on the drug discovery efforts and specifically the antibody therapeutics area. What are adaptive key differentiators? And can you speak to the status of those discovery efforts currently?

Sure. Sharon, do you want to take that?

Absolutely. So similar to our TCR discovery efforts with Genentech, the sheer scale at which we discover and can characterize naturally occurring potent T cell receptors applies to antibody discovery as well. The technologies and the platform that we've built and validated for the past several years allow us to identify those ultra-unique antibodies. We are pursuing additional capabilities to focus on areas that really differentiate us against targets that we may discover in areas of unmet need, like autoimmune disorders.

Got it. And when can we expect the next catalyst or milestone from that program?

Our strategy is to monetize our existing assets. As I mentioned, we have identified a portfolio of neutralizing antibodies that still remain relevant due to various existing variants. Our core strategy involves partnering in both areas. In the meantime, we are focused on developing our own potential pipeline, where antibody discovery can serve as a unique differentiator in advancing those assets, either through partnerships or independently in the future.

Got it. Thanks for the color.

Our next question comes from Derik De Bruin with Bank of America. Please go ahead.

Hi, good afternoon. This is John on for Derik. Can you hear me?

Yes. We can hear you.

All right. Yes. Apologies. I was double muted. I forgot to mute the other one. In terms of any commercial benefit down the road from your work on post-treatment line disease, is there sort of a timeframe on when you might decide that data might become positive? Along with that, thank you for the five-year long-term plan. Just wondering, looking at your profitability target by '25 and the cash flow positivity by '26, you're obviously looking to spend less and burn less cash. But if you could just provide any puts and takes there? And if I could just squeeze in one more, I was wondering what sort of contribution you're assuming from perhaps future target discovery and therapeutics. Or for instance, how much contribution you might be assuming from COVID and T-Detect COVID line, given that you've talked about how the financial contributions should be minimal in the coming quarters.

Yes. Thanks, John, a lot there. Sharon, I'll have you cover the post-treatment line disease syndrome and then Tycho, I'll have you cover some of the puts and takes on future cash flow and then how we're bringing in profitability years, and then I'll make some overall comments on strategic direction. So do you want to start?

Absolutely. In line with post-treatment line disease, because of the investment we previously have made, we are wrapping up the last time point of the cohort that we enrolled and that completes assessments in different settings of individuals with line. The goal there in the strategy is to look for opportunities that we may have with our pharma partners. There are a number of therapeutics out there now, including vaccines and other modalities. We are going to be opportunistic to leverage that data, including in the PTLD setting.

On the long-term guidance, as we've outlined, it indicates a revenue CAGR of 20% to 30%. The aim is to achieve operational expense leverage. Over the long-term plan, we anticipate low single-digit growth in operational expenses during that timeframe. One detail influencing the EBITDA positivity in 2025 is the exclusion of stock compensation, and regarding cash flow breakeven, it involves the royalty payments to OrbiMed and working capital. We are not planning to provide additional insight into the revenue projections. We prefer not to discuss partners or deals in the long-range plan at this time.

Yes. And I'll just make a comment with respect to our Immune Medicine business and our strategy. We've built a unique set of capabilities over the last several years to identify targets and find immune receptors, both T cells and antibodies against those targets. What we're doing from an investment standpoint is prioritizing opportunities to either partner or leverage those capabilities, moving into the therapeutic area. That's what I'll say about that for now. Obviously, Genentech is the first set of catalysts, but behind that, we're working on quite a few things that leverage those capabilities.

And just to round it out, the long-term guidance does not assume revenues from T-Detect. We made that decision last quarter to pause online in particular. So there's really nothing on the long-term outlook for T-Detect on the diagnostic side.

Got you. And if I could ask on the DLBCL as well. You're obviously trying to increase physician education here, and you're having conversations with the pharma sponsors, the clinical trial sponsors. Any on the physician access for better or for worse or has it held steady? What sort of work are you doing?

Nitin, do you want to take that?

Yes. If I understand the question correctly, physician access in general is improving, and it has improved quite a bit. It's also region-dependent. In certain regions, it's full on in-person meetings. In other regions, physicians have shifted to meeting virtually. Overall, we're just driving growth in multiple ways. I think Epic integration is going to help a lot, expanding into DLBCL, and the community is going to help a lot. So there are many catalysts for growth going forward.

Appreciate the color. Thank you.

Okay. If that is all, thank you for your participation in today's call. This does conclude the program. You may now disconnect. Thank you.