Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies Second Quarter 2023 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. 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, Head of Investor Relations.

Thank you, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies second quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the second 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 a slide presentation that has been posted in the Investors section of our corporate website. During the call, management will make projections and other forward-looking statements 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 Tycho Peterson, our Chief Financial Officer. Additional members from management 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 second quarter 2023 earnings call. I want to thank all of our Adaptive employees for their continued dedication and execution. We’re halfway through the year with solid six months of results and key milestones achieved. Revenue for the quarter was $48.9 million, representing 12% growth versus the prior year. This growth reflects strong performance from clonoSEQ clinical testing and the achievement of our first milestone in drug discovery, which more than offset an anticipated reduction in our Genentech amortization. Our R&D programs in oncology and autoimmune disorders continue to progress. Both programs in cancer with Genentech are advancing, and we’re pleased to see the IND acceptance for our first candidate in cell therapy. Given our efforts to streamline our organization and improve operating efficiencies, we achieved gross margin improvement of 8 percentage points related to sequencing alone versus the prior quarter. We remain focused on achieving operating leverage and ensuring our path to profitability with our current cash on hand. Earlier today, we announced that Nitin Sood, Head of our MRD business, is leaving Adaptive to take a new position at a multinational public company. Susan Bobulsky, who has led the clinical business for the past five years, will assume additional responsibilities and report directly to me. I want to thank Nitin for his leadership and the important contributions he’s made in laying a solid foundation for our MRD business, and we wish him success in his new endeavor. Let’s now take a closer look at MRD business. Total MRD for the quarter, including clinical testing and pharma grew 22% versus prior year. Strong clonoSEQ clinical volume growth is trending in the right direction. Tests delivered grew 52% year-over-year with double-digit volume growth in all marketed indications. Multiple myeloma continues to be the largest contributor and the main growth driver. Ordering healthcare providers and ordering accounts grew 44% and 37% versus prior year, respectively. Blood-based testing increased in all indications and grew 16% sequentially. Now approximately 37% of all MRD tests are in blood. Community accounts, which accelerate penetration in blood, continued its growth trajectory and now contributes 21% of clonoSEQ volume versus 11% a year ago. MRD Pharma grew 14% excluding regulatory milestones. The slight slowdown in growth reflects macro factors impacting the broader biopharma industry as trials are getting extended and portfolios reprioritized. That said, strength in bookings reflects healthy demand for the business going forward. On slide 5, we set record high volumes quarter-over-quarter, with volume growing 13% sequentially to over 13,660 tests delivered. Our strategy to drive clonoSEQ volume is working, and we reaffirm our commitment to end the year with over 50% volume growth versus 2022. ASPs were impacted in the quarter due to growth in out-of-policy indications and higher Medicaid contributions. However, we have a targeted ASP plan focused on closing remaining payer contracts and policy gaps, as well as increasing resources for claim management to improve collections. We are confident these initiatives will enable re-acceleration of ASP growth for the next several years. Epic integration is progressing well, and we are excited to bring our first pilot sites live this month with additional integration sites to follow. This marks a milestone for our partnership with Epic and demonstrates our commitment to investing in the clonoSEQ customer experience. As shown on slide 6, the final analysis of the MASTER study was presented during the EHA conference in June. This study shows that for patients who discontinued therapy after two consecutive negative clonoSEQ tests, over 85% of them in the standard or high-risk category did not progress after three-year follow-up data. These data have been very well received by physicians and are driving adoption of clonoSEQ for making critical therapy decisions for patients. In summary, the setup for MRD is strong in both clinical testing and pharma, and we look forward to continuing to fuel its growth. Switching to our Immune Medicine business on slide 7, we generated $23 million in revenue this quarter from drug discovery and pharma services, with drug discovery contributing more than 75% of the revenue. Our IM pharma services business was impacted this quarter by macro factors affecting the broader biopharma industry, including strategic and budget reprioritization. This was an important quarter for drug discovery. We recognized the first IND development milestone from our cell therapy partnership with Genentech. Genentech secured the FDA IND acceptance for the first neoantigen-directed T-cell therapy product candidate. This IND acceptance reaffirms the value of our TCR discovery platform and our ability to identify and characterize clinical grade therapeutic T-cell receptors, which is a cornerstone of our drug discovery capabilities. We are thrilled by this acceptance and look forward to supporting Genentech as it gears up for the first in-human trial with this potentially life-saving therapy for patients with solid tumors. Our personalized program is also maturing. We are on track to standardize our end-to-end workflows and are making good progress in building the required regulated infrastructure and our dedicated South San Francisco laboratory. As you can see in slide 9, in addition to our cancer cell therapy partnership with Genentech, we’re executing to deliver on our key R&D proof points in autoimmunity. This includes focusing resources on high-value R&D programs to discover novel targets starting in multiple sclerosis. We aim to identify at least one novel disease-specific target by year-end. We’re excited by the progress we’re making and look forward to providing an update as we advance these programs during the second half of this year. I’ll now pass it over to Tycho.

Thanks, Chad. Turning to our financials on slide 10. Total revenue in the second quarter was $48.9 million, with 53% from MRD and 47% from Immune Medicine, representing a 12% increase from a year ago, primarily attributable to growth from the clonoSEQ clinical business and the Genentech IND milestone. MRD revenue grew to $25.9 million, up 21% from a year ago with growth from both clinical testing and pharma partnerships, partially offset by a lack of MRD regulatory milestones. ClonoSEQ test volume, including international, increased 52% to 13,664 tests delivered from 8,998 tests in the same period last year. Immune Medicine revenue was $23 million, up 3% from a year ago, driven by recognition of the IND milestone, which more than offset the decline in Genentech amortization and pharma services. Now moving down the P&L on slide 11. Total gross margin for the quarter was 63%, representing a 13 percentage-point increase versus last quarter and a 6-point decline versus a year ago. The sequential increase was mainly attributed to the IND milestone as well as a 4% decrease in cost of revenue. Other OpEx, including R&D, sales and marketing, and G&A, declined 5% in total versus a year ago, mainly due to a 13% decline in R&D. In total, OpEx including cost of revenues remained stable year-over-year and sequentially while revenue grew 12% and 30% respectively during the same periods. We look forward to continuing to optimize our processes to further enhance margins through various efforts including streamlining the organization, disciplined R&D investments, and completion of the lab move with updated lab information management systems. We are evaluating switching from NextSeq to NovaSeq X, which we expect to contribute to significant savings going forward. Our interest expense from a royalty financing agreement with OrbiMed was $3.6 million, which was offset by interest income. Net loss for the quarter was $47.7 million compared to $52.1 million last year. We ended the quarter with approximately $417 million in cash, equivalents, and marketable securities, which, as Chad noted in his comments, will bridge us to profitability without the need for additional capital. Now turning to our outlook on slide 11. We are reiterating full year guidance of $205 million to $215 million in revenues. At the midpoint, we continue to expect the contribution from our businesses to be approximately 55% from MRD and 45% from Immune Medicine. Within our MRD business, we expect over 50% growth in clonoSEQ test volumes as well as MRD regulatory milestones in the back half of the year. We expect second half revenues to be more heavily weighted toward the fourth quarter, mainly attributed to drug discovery deals that we expect to close by year-end. Cash preservation remains a priority, and we now expect our burn for the remainder of 2023 to average $35 million per quarter versus the $40 million previously estimated. Q2 financial results were solid, and we remain committed to driving additional operating leverage and achieving positive EBITDA in 2025 and cash breakeven in 2026.

Thanks, Tycho. As discussed during our call, our MRD and Immune Medicine businesses are performing well, and we are looking at ways to maximize the potential value of each business to best serve our patients and our shareholders. In our MRD business, we are executing to increase clonoSEQ penetration and solidify our market-leading position. In our Immune Medicine business, we continue to advance our partner programs with Genentech and our internal R&D efforts in autoimmunity. With that, I’d like to turn the call back to the operator and open up for questions.

Our first question comes from Rachel Vatnsdal of JPMorgan Chase. Please go ahead.

First up with Nitin’s announced departure, can you walk us through the management transition plan for MRD and if you expect any strategic changes in that business going forward? As a follow-up, you flagged some of the temporary delays around clinical trials and reprioritization of portfolios at pharma. Could you walk us through how long you think that those delays in reprioritization could really weigh on the MRD business?

Thanks for your questions, Rachel. First, with respect to Nitin, I want to thank him for all his contributions to the business. There’s going to be a seamless transition that we are more than prepared for. We have an incredibly strong bench. Susan Bobulsky is going to lead the clinical business and report directly to me. She’s been leading the clinical business with direct oversight of the sales team for the last several years and is really a fantastic leader who has been with the company for 10 years. The business is in good shape. We’re firing on all cylinders. ClonoSEQ volumes are growing at a very fast pace. We’re committed to over 50% volume growth this year, and as mentioned during the call, all metrics are pointing in the right direction. We expect a seamless transition. Nitin, do you want to make any comments?

Thanks, Chad. This decision has been difficult, as Adaptive has been a truly rewarding place for me to work at. The MRD business is on a solid foundation. Our latest quarterly results demonstrate that. We have a market-leading position in hem cancer MRD with the best performing products, strong clinical evidence, broad reimbursement, and we are the product of choice in pharma. Susan is a fantastic leader and has been a key player in building the business from the ground up. We have a dedicated and committed team that’s deeply passionate about improving the lives of hem cancer patients. I’m confident it’ll do extremely well in the future and continue on the growth trajectory that we’ve demonstrated over the last few quarters.

Could you give us a comment on clinical trials reprioritization?

We’ve been closely monitoring the business and we don’t have a firm timeline. We’ll give you guys an update every quarter. A lot of our business in the MRD pharma space comes from multiple myeloma. We’re in pretty much every trial in multiple myeloma. So, there’s some reprioritization of the portfolio going in multiple myeloma, but many of these trials are competing for the same patient pool. As a result, there have been some delays in enrollment, but we keep a close eye on it. We will update you as we hear more.

One more question on margins. Gross margin came in at 63% during the quarter, a nice improvement sequentially versus Q1. Could you walk us through the components of the increase there? How should we think about gross margins evolving for the rest of the year and into 2024? What are those margin drivers?

I think we lost the room that has Tycho, Chad, and Sharon. Can we come back to that question? This is Harlan. I think I’ll get in trouble for answering a financial question. So, let’s wait for Tycho to return and we’ll get back to that.

Can you hear us, Harlan?

Karina, are you back on?

Yes, we are back on. Hold on, I’m going to call again.

Did you hear the question around gross margin?

As it relates to gross margins, versus the prior quarter, milestones within our business in both the MRD and Immune Medicine business came in at 100%. We saw the lack of milestones have an impact on the first quarter. Conversely, in the second quarter, we had the IND milestone with Genentech that had a significant positive impact. I did call out in the prepared comments the lower cost of revenues, which drove about an 8-point improvement in sequencing margins. We’re continuing to streamline the organization and drive efficiencies in the lab. We’re in the midst of a lab move. We are evaluating NovaSeq. So we have several drivers for continued margin improvement around the sequencing business. There was a step-down in Genentech amortization, and no MRD milestones, which was a headwind this quarter. And cost of revenue was higher due to overhead spending in the lab as we move our lab into the headquarters right now. This move should ultimately lead to lower costs on the backend, but did weigh on it a little bit. Importantly, we had an 8% sequential improvement in sequencing margins, and we have several additional steps we’re evaluating.

Our next question comes from Dan Brennan of TD Cowen.

You talked about clonoSEQ ASPs. Could you give a bit more color on that? What was the expectation? You mentioned a couple of the headwinds and actions you’re taking to get the ASPs going in the right direction?

The quarter ASP was impacted by three different factors. One is growth in indications that remain out of policy, looking at DLBCL and MCL as an example. The second was testing for Medicaid patients, which increased to 12% of our product mix. And third, prior authorization hurdles with some payers. We have an ASP acceleration plan in place focused on closing remaining payer contracts and policy gaps, and increasing our resources for claim management and prior authorizations to improve our collections. We expect to reverse the trend in the second half and are committed to an acceleration onward while aiming for a $1,600 ASP price point by 2027.

In regards to biopharma, where are we in the evolution of some of the temporary pressures on spending and patient availability? How do we think about growth trajectories for Q3?

We talked about it being a backend loaded year, more skewed toward the fourth quarter. Last year, we had about 55% of total revenues in Q4, and it will be a bit higher this year. We are expecting MRD to grow in Q3 at a higher rate than the first half. Keep in mind, we had a significant year last with Genentech amortization. We have growth in pharma services and new drug discovery deals expected to close by Q4. Our diversified portfolio includes 120 active trials across 60 companies. Our commitment remains to a 20% CAGR for that business over the next five years.

Our next question comes from David Westenberg of Piper Sandler.

I want to dive in more on the ASPs. You had good momentum, so could you talk about how those uncovered indications tend to grow faster? Was there a lot of marketing or just under-penetration?

Our DLBCL grew 28% quarter-over-quarter, albeit from a lower base. There are industry-related factors that complicate collections, especially with Medicare Advantage from private payers. While increasing new indications may impact ASPs, they bode well for the future as we close those policy gaps. Overall, we expect to reverse trend in the second half of the year toward the $1,600 ASP by 2027.

Are you seeing headwinds from getting tests run outside the first four covered indications in Medicare?

Yes, indeed. Our tests are confirmed on a test-by-test basis for private payers, rather than on an episode of care basis like Medicare. We expect ASP acceleration and are addressing coverage of indications like multiple myeloma and others with private payers.

Thank you. We will move on to our next question. Our next question comes from Mark Massaro of BTIG.

Thanks for taking the questions. Tycho, you maintained the clonoSEQ volume guidance for 50% plus, which is great to see. You previously discussed targeting mid-single-digit growth in ASPs. Given the headwinds you called out, is that still on target or could it drift into 2024?

We're expecting improvement in the back half of the year versus the first half. There’s noise in both quarters regarding Medicaid. We’re committed to achieving our target of $1,600 ASP over time. We will update on the third quarter regarding ASPs for the full year.

Can you call out what the milestone payment was in the quarter?

The IND acceptance from Genentech was $7.8 million for a $10 million milestone, which we amortize over time. There was no milestone for MRD.

I don’t think any changes to reimbursement rates for clonoSEQ were noted. So, it sounds largely related to the mix with higher Medicaid and prior authorization. How quickly do you think progress can be made on the prior auth side?

We’re working on converting high-ordering accounts with many Medicaid patients to roster billing accounts. We are implementing workflows for prior authorization now; this is not a long-term effort. Progress is being made with Medicare Advantage and private payers covering at Medicare rates. We have approximately 75 million lives covered, and expect to increase this significantly in 2024.

Our next question comes from Salveen Richard of Goldman Sachs.

I wanted to ask about the impact of the Epic integration on MRD going forward. What do you expect in terms of the cadence of growth from that integration?

We’re starting our first Epic integration this month with several customers. There’s substantial interest in more sites eager to integrate clonoSEQ testing into their EMR systems. Rollout depends on IT resources available at each center, but we expect this to grow month over month, with full penetration anticipated in 2024 while contributing to over 50% volume growth.

When can we expect updates on the personalized products from Genentech?

We haven’t disclosed specific timelines on the personalized product. We are developing prototypes with Genentech and optimizing our processes. Updates will come as we generate more data. Genentech has begun sharing data for a lung cancer patient case that illustrates our end-to-end process.

Our next question comes from Tejas Savant of MS. Please go ahead.

Following the IND acceptance milestone from Genentech this quarter, can you speak to the next events that could trigger a milestone? Should we expect a similar amount upon IND acceptance of additional candidates?

We haven't disclosed the milestone amounts, but they do stack. The more advancements across the development of candidates, the higher the economics. We are excited about this first IND clearance and have other TCRs being advanced.

Could you provide an update on the evolving landscape for using MRD status as a regulatory endpoint?

We continue to advocate with our pharma partners for the use of MRD as a regulatory endpoint, aiming to elevate it from surrogate to primary endpoint. We believe we’re making progress based on recent data, though we can’t predict a specific timeline for FDA action.

Does the full approval of BLINCYTO influence the incorporation of MRD in clinical trials?

Yes, having full approvals that utilize MRD in trials helps the case. We’re primarily focused on multiple myeloma and have additional data readouts that could catalyze private payer contracts into 2024.

We have line of sight to $400 million in eligible milestones, which is not baked into our guidance yet. If FDA does endorse MRD as a primary endpoint, that represents additional upside.

Our next question comes from Dan Leonard of Credit Suisse.

I’d like to get an update on your integration of clonoSEQ with community EMRs.

Epic isn't the only EMR of choice in the community. We are looking at which EMR systems will offer the best integrations for ease of ordering. We want to make the test as accessible as possible.

Can you speak to your expectation for more drug discovery deals in Q4?

The drug discovery deals for Q4 are based on existing data developed through our TCR and antibody discovery platforms. Discussions are well underway and we expect future development deals as well.

Our next question comes from Derik de Bruin of Bank of America.

Year-over-year consensus is looking for about 40% growth in 2024. Is that reasonable to expect?

We haven’t put out guidance yet for 2024, but we are committed to significant double-digit growth. Strong trajectories for clonoSEQ volumes will continue well into the future. We will provide more specifics with our guidance.

Can you talk about upcoming milestones for your autoimmune program?

For our R&D in autoimmunity, we're targeting to discover at least one novel target in one indication, focusing on multiple sclerosis and IBD. We're generating data to accelerate target identification using our platform capabilities.

Thank you. I'm showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.