Earnings Call Transcript - ADPT Q1 2023

Operator, Operator

Good day, and thank you for being here. Welcome to the Adaptive Biotechnologies First Quarter 2023 Conference Call. I would now like to turn the call over to one of today's speakers, Karina Calzadilla, Head of Investor Relations. Please proceed.

Karina Calzadilla, Head of Investor Relations

Thank you, Britney, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies first quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the first 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 to the Investor 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 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. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-founder; Nitin Sood, Head of the MRD business; and Sharon Benzeno, Head of the Immune Medicine business will also be available for Q&A. With that, I'll turn the call over to Chad Robins. Chad?

Chad Robins, CEO and Co-founder

Thanks, Karina. Good afternoon, everybody, and thank you for joining us on our first quarter 2023 earnings call. First, I want to thank all our Adaptive employees for their continued dedication and execution. This quarter's results represent a solid start to the year, laying the foundation for us to deliver on our 2023 annual goals. As shown on Slide 3, revenue for the quarter was $37.6 million, which reflects a 26% reduction in Genentech amortization, offset by strong recurring revenue growth from both our immune medicine and MRD businesses. We continue to streamline our organization and improve operating efficiencies. We recently announced the consolidation of the President and Chief Operating Officer roles under Julie Rubinstein to better align operations with our path to profitability. Our research and development efforts in drug discovery continue to progress. Both programs in cancer cell therapy with Genentech are advancing and are on track to achieve the respective goals set for this year. And our drug discovery team is making great progress towards novel targets in autoimmunity. Let's take a closer look at our MRD business on Slide 4. Our MRD business is firing on all cylinders. MRD revenue growth for the quarter showed strong growth of 20% versus the prior year. ClonoSEQ test volume grew 57% with double-digit volume growth in all marketed indications. Multiple myeloma continues to be the biggest growth driver and largest contributor. DLBCL launch is progressing well and now represents 3% of ClonoSEQ orders. Ordering healthcare providers and ordering accounts experienced significant growth of 58% and 56% versus the prior year, respectively. Blood-based testing, a key component of our growth strategy, increased in all indications and grew 30% versus the prior quarter. Now, approximately 35% of all MRD tests are in blood compared to 31% last quarter. This growth in blood testing is mainly driven by our sales force strategy to penetrate community accounts. Community accounts continued to grow quarter-over-quarter and now contribute about 18% of ClonoSEQ volume versus 15% in the fourth quarter of last year. In addition, MRD Pharma, a core component of our MRD business, grew 23% excluding regulatory milestones. We continue to grow our MRD partnerships. This quarter, we entered into a new translational pan-portfolio partnership with Takeda for the use of MRD as a clinical endpoint. Not only do we have a healthy sequencing revenue stream from these partnerships, but we also now have $400 million in future eligible milestones based on additional drug approvals from ongoing and future studies. Zooming in on ClonoSEQ test volume on Slide 5. As you can see from the chart, we continue to set record high volumes quarter-over-quarter. This quarter, volume grew 15% sequentially to over 12,000 tests delivered. In the United States, our market of focus, tests delivered grew 16% from last quarter. Our strategy to drive ClonoSEQ volume is working and we continue to drive ASP expansion with new payers and improved collections. Of note, this quarter a new ClonoSEQ PLA code was approved, which allows us to uniquely identify ClonoSEQ in our claim submissions. As noted on Slide 6, we are on track to achieve key milestones in 2023 for MRD. Our EPIC integration is on schedule as we look to bring pilot sites live next quarter with additional integration sites to follow. We also continue to expect meaningful data readouts in DLBCL and multiple myeloma in blood and therapy discontinuation. The setup for MRD is strong, and we are confident that we will achieve over 50% ClonoSEQ test volume growth this year versus 2022. Switching to our Immune Medicine business on Slide 7. We generated more than $16 million in revenue this quarter from 2 distinct areas: pharma services and drug discovery. Pharma services generate revenue from multiple sources as we provide valuable immune receptor data to our biopharma customers, accelerating their therapeutic programs. We have a healthy portfolio with more than 120 active studies that is set up to deliver sustainable growth of 20% to 30% CAGR over the next 3 to 5 years. Revenue from drug discovery this year reflects an expected deceleration due to the reduced amortization of the Genentech upfront payment. As you can see from the slide, there are multiple sources of revenue from pharma services that will contribute to growth. In addition, as we advance our drug discovery efforts, new revenue streams will drive future value. Our drug discovery programs in cancer and autoimmune disorders are on track to achieve the milestones shown on Slide 8. We are making progress on our 2 cancer cell therapy programs with Genentech. For the first share of TCR candidate, we expect the first IND acceptance this year and continue to support Genentech to the clinic. For the personalized program, we are building the regulated infrastructure in our dedicated lab and are executing to optimize our process for clinical readiness. In our internal autoimmune programs, we are advancing our R&D efforts to identify and validate novel targets. We also are expanding our therapeutic TCR and antibody platforms with the goal of developing therapeutic assets to be able to drug these targets. We look forward to providing you with more updates as we progress. I'll now pass it over to Tycho.

Tycho Peterson, CFO

Thanks, Chad. Turning to our financial results, starting with Slide 9. Total revenue in the first quarter was $37.6 million, with 57% from MRD and 43% from Immune Medicine, representing a 3% decrease from the same period last year, which was primarily attributable to the expected step down in Genentech amortization and a $3 million MRD regulatory milestone comp. MRD revenue grew to $21.4 million, up 20% from a year ago, with strong growth from both clinical testing and pharma partnerships. ClonoSEQ test volume, including international, increased 57% to 12,079 tests delivered from 7,698 tests in the same period last year. Immune Medicine revenue was $16.2 million, down 22% from a year ago, driven predominantly by Genentech amortization. Moving down the P&L. Total operating expenses, including cost of revenue, were $94.8 million, representing a 7% decrease from $101.7 million in the same period last year. Notably, R&D, sales and marketing, and G&A all declined year-over-year. Cost of revenue was $18.7 million, driven by higher usage of our production lab to process revenue samples as well as a transitory increase in overhead due to the ongoing lab consolidation into our headquarters in Seattle. Finally, interest expense from our royalty financing agreement with OrbiMed was $3.5 million, which was almost entirely offset by interest income. Net loss for the quarter was $57.7 million compared to $62.8 million last year. We ended the quarter with approximately $441 million in cash, equivalents, and marketable securities. Now turning to our outlook on Slide 10. We are reiterating full-year revenue guidance of $205 million to $215 million. At the midpoint, we expect the contribution from our businesses to be approximately 55% from MRD and 45% from Immune Medicine, and we expect revenue to be back half weighted. Within our MRD business, we expect over 50% growth in ClonoSEQ test volume and MRD regulatory milestones in the mid to high single-digit millions. As we drive operating efficiencies, we are also reiterating our full-year OpEx targets, including cost of revenue to be below 2022 OpEx of $385.5 million. Cash preservation remains a priority. And we expect our burn for the remainder of 2023 to average around $40 million per quarter, which is unchanged from guidance at the beginning of the year. Of note, the Q1 cash burn was higher due to usual bonus payouts in March. Q1 financial results were solid and in line with our expectations and we are on track to deliver full-year guidance. Importantly, we have a strong cash position to fuel growth and execute on our long-term goals. We remain committed to driving additional operating leverage and achieving positive EBITDA in 2025 and cash breakeven in 2026. I'll now turn the call back over to Chad.

Chad Robins, CEO and Co-founder

Thanks, Tycho. As discussed during the call, we had a solid start to the year and we are focused on 3 main areas: first, execute on our MRD business to further solidify our leadership position; second, in Immune Medicine, advance our partner programs with Genentech and our internal R&D efforts in autoimmunity; and third, manage capital allocation and drive operational efficiencies. With that, I'd like to turn it back over to the operator and open it up for questions.

Operator, Operator

Our first question comes from Mark Massaro with BTIG.

Mark Massaro, Analyst

Mark from BTIG. Congrats guys on the quarter. I guess I didn't hear too much about the integration with EPIC other than you expect to complete it by the end of this year. I would love to just kind of get a sense for operationally what needs to happen. Are you getting close? What are some of the challenges and opportunities of achieving that by year-end?

Chad Robins, CEO and Co-founder

Sure. Nitin, do you want to take that one?

Nitin Sood, Head of MRD Business

Yes. Yes. So I think the EPIC integration is really progressing nicely. We defined the user interface in EPIC to order ClonoSEQ, how the results will look ClonoSEQ. We've done a lot of testing, end-to-end testing. And it all is progressing very well. And we'll go live with a couple of pilot sites to do a proper thorough end-to-end integration testing, and this will be sometime in Q3. And then, we're simultaneously lining up accounts that we'll bring online with EPIC in the second half of the year. And that's also progressing very nicely, and we're seeing a lot of interest from our installed base in this integration. And I think the real gating factor I see is the IT resources and IT bandwidth available at each of our sites. But I'm fairly confident that we'll get this completed and we'll roll it out in the second half of the year. Based on the precedents from our industry peers, I'm expecting a small impact in the second half of 2023, but really a big impact in 2024.

Mark Massaro, Analyst

Okay, great. So it's nice to see DLBCL pick up to 3% of orders. I think in the past, you've talked about how DLBCL is an indication that includes MRD assessment based on ctDNA. Related to this, I think we recently saw Quest Diagnostics acquire Haystack Oncology, which I thought was interesting. I would love to hear maybe your latest thoughts on what your view is on solid tumor MRD, if that's an area of interest and where you might be in terms of thinking about tackling this internally or externally?

Chad Robins, CEO and Co-founder

Sure. Let me share a few thoughts, and then Nitin can address some of the technology aspects. We are continuously looking for ways to grow our brand and utilize our channels effectively, ensuring that these strategies align with our business objectives. It's important to note that there is a substantial market opportunity in the hematology sector that we need to focus on, execute, and commercialize. Currently, that is our primary focus. Additionally, we have approximately 70 sales representatives in the field who maintain exceptional relationships with hematology and oncology professionals, and that is an area we aim to capitalize on. Furthermore, we have established a brand in minimal residual disease, particularly among our clinicians and in collaborations with pharmaceutical companies and clinical trials, which we are also considering. Regarding the Haystack acquisition, I find it encouraging to see mergers and acquisitions occurring within the MRD sector, as it adds validation to the area. There are large companies that are showing increasing interest in MRD, which is promising. The ClonoSEQ franchise benefits from multiple competitive advantages, including FDA regulation in various instances, broad payer support, and strong integration in clinical trials. With that said, regarding circulating tumor DNA, I will now turn it over to Nitin for his insights on our initiatives in that area. Nitin?

Nitin Sood, Head of MRD Business

Yes. I mean, I think the circulating tumor DNA technology that we have is uniquely focused towards B cells and sort of lymphoid malignancies. And therefore, we're uniquely positioned to really excel in that area. And then, we have a very strong infrastructure in terms of generating clinical data. We have relationships with all the KOLs. We've got over 100 publications in this area. Even most recently, we saw Grail publish data in this area. But again, their sensitivity was 1 in 1,000. We are 1 in 1 million. They demonstrated data in the setting pretreatment, whereas our data is post-treatment when the tumor burden is much lower. So again, our technology is very suited for lymphoid malignancies. And we are continuing to innovate in that area and we'll continue to release new products in that area. But as Chad said, we're constantly evaluating market areas and product expansion opportunities. And when we have something, we'll share that with you guys.

Operator, Operator

Our next question comes from the line of David Westenberg with Piper Sandler.

David Westenberg, Analyst

So we're seeing a significant number in the sequential order, and I'd like to discuss customer or patient retention. Can you provide insights on some of your older cohorts, particularly from 2018 and 2019? Since you've been in the market longer than Terra, it would be helpful to understand the ordering behaviors from those years. Additionally, could you remind us whether you receive reimbursement beyond the fourth test from either CMS or private payers? I'm trying to consider how this impacts the overall dynamics of your business.

Chad Robins, CEO and Co-founder

Sure. Nitin, go ahead.

Nitin Sood, Head of MRD Business

Yes. The only thing I want to mention is that our Medicare reimbursement is currently limited to four tests. However, we are working to expand Medicare coverage to include a single test beyond those four. In terms of private payers, coverage is based on each individual test, so when patients are tested with more than four tests, we will be covered by our private payers. Regarding repeat testing, on average, we currently see 1.6 tests per patient, though this varies by indication and is higher in ALL compared to other indications. We expect this average to rise to 2 tests per patient as we improve our clinical utility and evidence, while also continuing to educate physicians on the use of ClonoSEQ throughout the patient journey.

David Westenberg, Analyst

Got it. All right. And then I'll just ask one more short one. Can you talk about maybe some of the consolidation of the President's role? Maybe why wasn't that separated from the beginning? And then if we should expect any other kind of positions in the future that might be consolidated? I mean I think you had no changes to kind of your OpEx and burn since last quarter, so I'm guessing not. But just wanted to ask that. And I'll hop back in queue after that.

Chad Robins, CEO and Co-founder

Yes. First, I want to make it clear that there are no performance issues or disagreements with Mark Adams. He has done an excellent job in building a strong leadership team, which is now in place and I believe it will flourish under this new structure and Julie's leadership. As you know, having followed us for a long time, Julie has held nearly every executive role within the company and has deep knowledge of almost every function at Adaptive. The main reason for this change is to better align our operations, research and development, and commercial efforts across the company so we can work towards profitability and achieve our goals. This represents the next phase in the evolution of the company where we identified an opportunity to consolidate these roles under one individual.

Operator, Operator

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

Derik De Bruin, Analyst

You had some really solid growth in your Pharma Services business. I'm just curious. We've heard some other companies talk about maybe a little bit of slowing, reprioritization of pipelines in the pharma space. Can you sort of talk about what you're seeing there? Any sort of slowdown or changes in terms of how some of your customers are growing or thinking about it? And it's basically just sort of like a temperature check on what you're sort of seeing in the biopharma services space.

Chad Robins, CEO and Co-founder

Yes, Derik, I’ll share some thoughts, and perhaps Tycho or Sharon may want to add their perspectives. First, I want to clarify that we haven't observed any significant slowdown from our major pharmaceutical customers. However, there are two areas we are monitoring closely. The first is the Inflation Reduction Act, and the second pertains to macroeconomic challenges impacting funding for small and mid-sized biotech companies that might utilize our services. We are attentive to these factors, but they are already reflected in our guidance range. Therefore, there’s nothing else to report that indicates a further impact on our business.

Derik De Bruin, Analyst

Yes. I mean you have relatively small emerging biopharma exposure will be my guess?

Chad Robins, CEO and Co-founder

We have a broad range of biopharma exposure, including small, midsize, and almost all large pharmaceutical and biotech companies that utilize our services in some capacity, whether in MRD trials or through our Immune Medicine business.

Derik De Bruin, Analyst

As we emerge from the pandemic, the comparisons are somewhat unusual due to the Omicron variant last year. How should we view order pacing now that we are returning to more traditional seasonal patterns? Can you provide insight into how we should analyze order and test volume in the ClonoSEQ business over the next couple of quarters?

Chad Robins, CEO and Co-founder

Sure. Nitin, you want to comment on ClonoSEQ as over the next few quarters?

Nitin Sood, Head of MRD Business

Yes, I believe all the leading indicators are looking very positive. New healthcare providers and accounts have increased by over 50%. The number of unique patients tested has risen by more than 70%. All four areas we operate in have shown double-digit growth quarter-over-quarter. Our sales team's productivity has improved by 77% compared to last year. Our community business has grown by 45% quarter-over-quarter, and blood testing has increased by 30% quarter-over-quarter. Additionally, we are expanding into DLBCL and another non-Hodgkin lymphoma indication called mantle cell lymphoma, for which we will seek Medicare coverage next month. The integration of EPIC is progressing well, and the reach and effectiveness of our sales team are increasing, considering our current low market penetration. I anticipate continued growth in 2023 of over 50% and beyond. I am very optimistic about the ClonoSEQ diagnostic business and equally confident in our pharmaceutical business, as we have a robust pipeline of new deals underway. I expect that segment to grow by over 20% for the rest of the year as well.

Tycho Peterson, CFO

Derik, it's Tycho. I want to remind you that we had anticipated the year to be weighted towards the second half. When considering ClonoSEQ, keep in mind the EPIC integration we discussed earlier and the ramp-up in DLBCL. We also doubled our sales force a year ago, and we're now marking that anniversary. So, think about the momentum building as we move into the latter half of the year.

Derik De Bruin, Analyst

Thanks for the reminder, Tycho. Can you give us some sense of the test volume or the revenue volume split between the different indications, ALL, multiple myeloma, CLL, and NHL? I'm just curious about our position in those markets and would like to understand the revenue mix from the different indications.

Chad Robins, CEO and Co-founder

Sure. Nitin, do you want to take that?

Nitin Sood, Head of MRD Business

Yes, we are primarily focused on multiple myeloma and ALL, which are our two main indications. We estimate that we are about 20% penetrated in the ALL market and around 7% to 8% penetrated in the multiple myeloma market, with less than 5% penetration in CLL and DLBCL. Looking ahead to 2027, I anticipate that our overall market penetration will exceed 20% across all indications. A significant portion of growth will come from increased penetration in multiple myeloma and DLBCL, where we have a larger patient population. This, combined with a steady rise in average selling price, will drive our revenue for the foreseeable future.

Operator, Operator

Our next question comes from the line of Tejas Savant with Morgan Stanley.

Yuko Oku, Analyst

This is Yuko on behalf of Tejas. Following up on the previous question about EPIC integration, with pilot sites underway, how significant is EPIC integration for community adoption of ClonoSEQ?

Chad Robins, CEO and Co-founder

Nitin?

Nitin Sood, Head of MRD Business

Yes. So I think EPIC is primarily in our academic setting. That's where we see most of our EPIC installation going forward. We are looking at other EMRs that are dominant in the community setting. Once we learn and get operational excellence going with EPIC, we look at other EMRs as well. But in the interim, our penetration in the community is so small that just our expansion of our sales team with a focus on the community, that's what's driving the growth in community. As I've stated before, we had a very solid performance from our community business. Last year, 8% of our tests came from the community. In Q1, this was 18% of our tests. I expect for the full year, 20% of our business to come from the community. And again, in the next 3 to 4 years, I expect 50% of our order volume to come from the community.

Yuko Oku, Analyst

Okay. And then also, you mentioned additional data presentation during your prepared remarks to be presented this year. Should we anticipate any of these or other data points to be presented at ASCO?

Chad Robins, CEO and Co-founder

We're focused on the American Society of Hematology meeting at the end of the year, where more data presentations will take place.

Operator, Operator

Our next question comes from the line of Tom Stevens with Cowen & Company.

Tom Stevens, Analyst

Just a couple on the gross margin and the consolidation. So I guess how long do you expect that consolidation to take? How much does it cost in dollar terms? And how much do you expect it to save in 2024? And then I've got a follow-up to that.

Tycho Peterson, CFO

Yes, we haven't addressed a few important points. The significant effect on gross margins this quarter was due to Genentech amortization and milestones related to MRD, which have very high margins, particularly 100% for the MRD milestones. As those revenues decreased, it negatively impacted gross margins. I did mention that we're relocating our lab to our headquarters in Seattle, and that is an ongoing process. It will take a few more months, but I don't want to specify a timeline. It's in progress, but we haven't calculated any savings from this move yet. We will continue to reassess our operating expense targets each quarter and provide updates as more information becomes available.

Tom Stevens, Analyst

And then you mentioned.

Tycho Peterson, CFO

I could add one more thing, Tom. We're doing a lot of work on comps right now. I mean, this is a big initiative internally, really kind of looking at our overall margins. So it is something that we will be communicating more on and hopefully providing some guidance around this as we go forward. We historically haven't really talked a lot about gross margins, but it is a big focus internally.

Tom Stevens, Analyst

That's really helpful. And then just a follow-up on multiple-myeloma blood. So it sounds like if you're presenting at ASH at the end of this year, we shouldn't expect any impact on your kind of ClonoSEQ volumes from blood multiple myeloma until maybe mid-'24?

Chad Robins, CEO and Co-founder

Actually, Tom, every quarter, we're getting more tests for multiple myeloma kind of done in blood. We continue to kind of sell the merit of blood-based testing. So obviously, the continued data readouts will help with clinical utility and comparability studies. But the reality is, and part of our growth trajectory is based on kind of the increase in blood-based testing across kind of multiple indications, including multiple myeloma.

Tom Stevens, Analyst

And then just one last one, more on the weed. So your milestone pipeline for MRD looks about $50 million bigger. I guess, like does that change any of your pacing expectations? And kind of where do you expect the pacing of that $400 million to kind of be in the out years, especially with the Takeda deal?

Tycho Peterson, CFO

Yes. So you did hear that we reiterated our guidance for this year, mid-single digit millions in milestones. We're obviously not commenting on 2024 at this point. But what we've talked about is that we've got line of sight to around half of those $400 million in 74 active trials. Next year will be a bigger year for milestones for sure, just kind of based on what we know about trial readouts. And when we officially guide, you'll hear more about it then. Keep in mind, all the milestones at this point are also on secondary endpoints. Should the FDA move forward to endorse MRD as a primary endpoint that would be upside relative to what we've previously talked about.

Operator, Operator

Our next question comes from the line of Andrew Brackmann with William Blair.

Dustin Scaringe, Analyst

This is Dustin on the line for Andrew. This is just a more broader strategic question. It's been some time since you've reorganized the business into the immune medicine and MRD segments. Just wondering how that reorganization has helped you guys in terms of commercialization and capital allocation?

Chad Robins, CEO and Co-founder

Yes, that's a great question, and it has been beneficial, especially regarding our focus. We now have two dedicated teams with clear objectives for what they need to achieve, not just this year but also for the company's long-term strategic plan. If you review our MRD objectives, which are well-defined, we know exactly what is required. Similarly, in our immune medicine business, both in our partner program and our R&D initiatives for drug discovery, we have clearly established milestones and critical decisions. This clarity allows us to make informed choices about our capital allocations and understand the growth trajectory for each of these businesses.

Dustin Scaringe, Analyst

And then, one more maybe on your long-term guidance. You guys laid out earlier this year. And in terms of the range, the 20% to 30%, just wondering what could bring you to the high end of that range? What could be sources of upside there? And then looking at the lower end of the range of 20%, what could bring you guys down there? And then additionally, once the first quarter, we can expect some sort of adjusted EBITDA profitability, if you have any visibility there?

Tycho Peterson, CFO

Sure. I mean, some of the swing factors in the outlook are around MRD, obviously, clinical volume growth to the extent there's upside there that could be a factor. We talked about MRD milestones earlier and how we've been fairly thoughtful about kind of risk-adjusting those. We put a 30% to 50% probability of success on those milestones to the extent there's better out there that would be upside. Immune medicine, obviously, additional pharma deals would be a potential driver beyond what we've modeled and anything with Genentech that is upside relative to either timing or incremental programs that we haven't announced or signed, so those would be the main things. Anything Chad or Sharon, do you want to add on it?

Chad Robins, CEO and Co-founder

I think that captures well, Tycho.

Tycho Peterson, CFO

And it's all organic. If we take a different approach regarding solid tumors, that would also be an incremental change. We won't be providing detailed figures on the quarter for EBITDA. As we approach our guidance for 2025, we will discuss it more, but I'm not going to get into specifics at this moment.

Operator, Operator

Our next question will be coming from the line of Salveen Richter with Goldman Sachs.

Elizabeth Webster, Analyst

This is Elizabeth on for Salveen. I wanted to ask on the drug discovery efforts. So it sounds like this year is really a year for building the infrastructure and building up the engine to drive the drug discovery vertical. So I wanted to know what you hope to learn this year as you optimize for the personalized product and any kind of concrete timelines you can share there on potential INDs? And then what you're also hoping to learn on the autoimmune drug discovery front.

Sharon Benzeno, Head of Immune Medicine Business

Yes. As Chad mentioned, we have one IND acceptance for our first cell therapy program included in our 2023 guidance. We cannot provide additional timing on other INDs at this moment, but we will share updates as they become available. Regarding our fully personalized approach, we are expanding our regulated infrastructure in South San Francisco with a dedicated lab to support this vision, especially as we work with our partner Genentech towards clinical readiness, and we will keep you updated on our progress. Alongside Genentech, our internal pipeline is concentrating on utilizing our existing capabilities in autoimmunity, particularly in multiple sclerosis and IDD. Our goal is to develop at least one novel target in autoimmunity by generating sufficient data that would justify further investments, with the aim of broadening our pipeline and initiating clinical trials.

Elizabeth Webster, Analyst

And when do you think we'll have some more clarity on that internal pipeline and kind of concrete guidance around milestones for that program?

Sharon Benzeno, Head of Immune Medicine Business

Yes. Right now, as we said, we're heads down in terms of R&D to get to that novel target. We're certainly excited by the progress we're making. So we're not in a position right now to elaborate. But certainly as we get more information, the goal really is to validate that target and then assess based on compelling data, whether it warrants further investments. And we'll certainly update as these progress throughout the year.

Operator, Operator

Our next question comes from the line of Dan Leonard with Credit Suisse.

Dan Leonard, Analyst

So I have a question on gross margin. The 50% gross margin figure in the quarter, is that the right baseline now to think about the business absent milestone payments?

Tycho Peterson, CFO

I mean, look, as I said before, the 2 big drags were Genentech amortization and the lack of MRD milestones, right? So in any given quarter, we have more MRD milestones, which are 100% margin that will live. So it will continue to be lumpy. The other kinds of factors were higher costs of running in our production lab. We had a little bit of scrap that we had to deal with too. But yes, look, I mean, the milestones would be the big swing factor quarter-to-quarter. So just keep that in mind as you're thinking about it.

Chad Robins, CEO and Co-founder

We have discussed margins at scale being in the 70-plus percent range. However, we have a very rigorous internal program to focus on our margins. This effort is something Julie is leading in collaboration with Tycho.

Dan Leonard, Analyst

I appreciate that. And then as my follow-up, can you speak to how the Pharma Services business is performing within immune medicine and what is the outlook?

Chad Robins, CEO and Co-founder

I think Nitin commented on 20% plus growth for Pharma Services, but I think that was just specific for MRD.

Sharon Benzeno, Head of Immune Medicine Business

Yes, happy to elaborate. So as we've mentioned last year in 2022, our Pharma Services business in Immune Medicine substantially grew by 67% versus 2021. And so we aim to continue this trajectory with double-digit percent growth. The 20% to 30% CAGR over the next 3 to 5 years does apply to our pharma immune medicine business in terms of our forecast. The growth this year, as you saw, the contribution in Q1 2023 was $7 million or so, almost half of the $16 million for immune medicine. So we're excited by the various growth levers and sources of revenue that we're generating from our immune medicine business and aim to grow that through this year and the years beyond.

Operator, Operator

At this time, there are no more questions and this call will now be concluded. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.