Adaptive Biotechnologies Corporation

Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies first quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone you will then hear an automatic message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to one of your speakers for today, Karina Casadilla, Head of Investor Relations. Please go ahead.

Thank you, Brittany, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnology's 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 will be referencing to a slide presentation that has been posted to the investor section in our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal security laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements, depending on a number of factors which are set forth in our public filings with the SEC and listed in this presentation. In addition, non-GAAP financial measures will be discussed during the calls, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robbins, our CEO and co-founder, and Tycho Peterson, our Chief Financial Officer. In addition, Harlan Robbins, adaptive chief scientific officer and co-founder, Nathan Sood, head of MRG business, and Sharon Benzino, head of immune medicine business, will be also available for Q&A. With that, I'll turn the call over to Chad Robbins. Chad?

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 three, 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 Rubenstein 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 four. Our MRD business is firing on all cylinders. MRD revenue growth for the quarter had strong growth of 20% versus prior year. Colonoseq 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 Colonoseq orders. Ordering healthcare providers and ordering accounts experienced significant growth of 58% and 56% versus prior year respectively. Blood-based testing, a key component of our growth strategy, increased in all indications and grew 30% versus 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 from our Salesforce strategy to penetrate community accounts. Community accounts continue to grow quarter over quarter and now contribute about 18% of Colonial Seek 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 PAMP 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 into Clonacy test volume on slide five. 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 cloning volume is working, and we continue to drive it ASP expansion with new payers and improve 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 six, 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 DLVCL and multiple myeloma in blood and therapy discontinuation. The setup for MRD is strong, and we are confident that we will achieve over 50% clonacy test volume growth this year versus 2022. Switching to our immune medicine business on slide seven. We generated more than $16 million in revenue this quarter from two distinct areas, pharma services and drug discovery. Pharma services generates 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 percent TAGR over the next three to five 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 eight. We are making progress on our two cancer cell therapy programs with Genentech. For the first shared 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. Thanks, Chad.

Turning to our financial results, starting with slide nine, 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 is primarily attributable to the expected step down in genetic 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. Colonial-seq 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 a royalty financing agreement with OrbitMed 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 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 clonal sleep 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 break even in 2026. I'll now turn the call back over to Chad.

Thanks, Tycho. As discussed during the call, we had a solid start to the year, and we are focused on three 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.

Thank you, Chad. Thank you all. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. Please stand by while we compile the Q&A roster. OK. Our first question comes from the line of Mark Massaro with B-I, with B-T, I'm sorry, IG. Mark, your line is now open.

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

Sure. Nitin, you want to take that one?

Yes. Yeah, so I think the Epic integration is really progressing nicely. You know, we've defined the user interface in Epic to order Colonoseq, how the results will look in Colonoseq. We've, you know, 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 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 install 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. And 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.

Okay, great. So it was 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. You know, related to this, you know, 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.

Sure. Maybe I'll make a few comments, Mark, and then I'll hand it over to Nitin to discuss some of the technology. I mean, we're always looking for ways to expand our brand and either leverage our brand or leverage our channel. But we want to do that in a way that makes the most sense for us as a business um i should point out that there's you know a pretty significant uh total adjustable market opportunity in front of us just in the hematology space that we need to operate execute on and commercialize uh and and and that that that's our main area of focus right now um that being said you know we do look at opportunities where like for example you know we've got 70 reps in the field that have i would say kind of best in class exceptional relationships with the HEMOC. And so that's one area that we look to leverage. And then secondly, to your question, we also have a brand in MRD, particularly not only with our clinicians, but with pharmaceutical companies and clinical trials. So that's another area that is under consideration as well. With respect to the Haystack acquisition, In general, I think it's great to see M&A in the space around MRD. I think it's incredibly validating. And you've got some extremely large players out there that I think are increasingly interested in the MRD space. So I think that's great. And they're earlier stage, right? And one of the main advantages of really the Colonial Seek franchise is that it has several competitive modes around the business, including the fact that, you know, we're regulated by the FDA many indications. We've got wide pair coverage, and we're deeply penetrated into clinical trials. So, you know, that being said, with respect to circulating tumor DNA, maybe I'll pass it over to Nitin to give some comments on kind of what we're doing there. Nitin?

Yeah, I mean, I think, you know, the circulating tumor DNA technology that we have, you know, is uniquely focused towards, you know, B cells and lymphoid malignancies. And therefore, you know, we're uniquely positioned to really excel in that area. And then, you know, we have a very strong, you know, infrastructure in terms of generating clinical data. We have relationships with all the KOLs. You know, we've got over 100 publications in this area. You know, even most recently, we saw Grail publish some data in this area. But again, their sensitivity was one in a thousand. We are, you know, one in a million. You know, they demonstrated data in setting, you know, pretreatment, whereas our data is, you know, post-treatment when the tumor burden is much lower. So, again, our technology is, you know, 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, you know, we're constantly evaluating market areas and product expansion opportunities. And, you know, when we have something, we'll share that with you guys.

Excellent. I will hop back in the queue.

All right. Thank you, Mark. so much for that. Our next question comes from the line of David Westenberg with Piper Sander. David, give us one moment for your line to be open.

Hi, thank you for taking the question. Okay, so we're back to a really big number on the sequential order. So I kind of want to just maybe talk about the customer or the patient stickiness here. Maybe let's go back, if we can. Can you talk about some of your older cohorts? Maybe, you know, because you've been around in the market for even longer than Tara, you know, 18, 19. You have some 18, 19 cohorts. Can you talk about some of the ordering behaviors from some of those cohorts from back then? And also, can you remind us if you are reimbursed past that fourth test with either CMS or some of the private payers? Just trying to think about how we can think about that waterfall theft in your business.

Sure, Nitin, go ahead.

Yeah, I mean, I think the only comment I'll make here is that, you know, our Medicare reimbursement is limited to the four tests, but we are working on, you know, expanding that to add Medicare coverage for single tests beyond those four tests. That's in the works. You know, as it relates to private payers, you know, it's based on individual tests. So when a patient gets tested beyond four tests, we will be covered with our private payers. And then in terms of, you know, repeat testing, which I think the intent of your question, you know, we're currently averaging 1.6 tests per patient, you know, and this varies by indication. It's much higher in ALL. It's lower in other indications. And our expectation is that, on average, this will go up to two tests per patient as we expand our clinical utility, our clinical evidence set, and we continue to educate our physician population about the use of Clomacic across the patient's journey.

Yeah. Got it. All right. Then I'll just ask one more short one. Can you talk about maybe some of the consolidation of the president's role? You know, maybe why wasn't that, you know, 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 op-ex and burn since last quarter, so I'm guessing not. But, you know, just wanted to, you know, ask that, and I'll hop back into you after that. Thank you.

Yeah, thanks for the question there, David. First, I want to just get out on the table. There are absolutely no performance issues or disagreements with Mark Adams. He actually did a really nice job in building a top leadership team, and it's really that team is in place and I think will thrive under this new structure and under Julie's leadership. David, I think, as you know, having covered us for a long time, Julie's done almost every role, executive role within the company and has intimate knowledge and working knowledge of almost every function at Adaptive. And so the real reason that we did this is we wanted to align our operations and our R&D and commercial efforts across the company so that we could drive towards profitability and really executing on all our goals. So, you know, again, this is just kind of the next iteration of the company and evolution where we thought there was an opportunity to consolidate these roles under one person.

Got it. Thank you.

All right. Thank you so much for that. Everyone, I want to make a quick note. Please do not ask your question until you hear me say your line is open. We don't want the speakers to miss anything. Our next question comes from the line of Derek DeBruin with Bank of America. One moment, Derek. Your line is now open.

Great. Thank you. Hey, good afternoon. Hey, you had some really solid growth in your pharma services business. I'm just curious. We've heard some other companies talk about you know, 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? It's basically just sort of like a temperature check on what you're sort of seeing in the pharma services space.

Yeah, yeah. Derek, I'll make some comments and maybe Tycho or Sharon want to pile on here. But, you know, I think there's – First of all, you know, there's nothing material to report in terms of kind of a slowdown from our former customers. You know, that being said, I think there's two areas that we're closely watching. One is the IRA, the Inflation Reduction Act, and the second is just in terms of macroeconomic headwinds with kind of, you know, lesser degrees of funding for kind of small and mid-sized companies. kind of biotech companies that would potentially use our services. So it's something we're keeping an eye on, but we don't see, and it's also reflected, frankly, in our guidance range. And so there's nothing to report kind of above and beyond that, at least in terms of impact on our business.

Yeah. I mean, you have relatively small emerging biopharma exposure, would be my guess.

We do. Yeah, we have some. You know, our biopharma exposure really is kind of across the board from small and mid-sized to, you know, almost all large pharma and biotech can use us in some capacity, whether for in MRD trials or for pharma services from our immune medicine business.

So as we're sort of like, we're sort of out and finished the pandemic and obviously, you know, comps were a little bit weird because of the Omicron last year. How should we think about order pacing now that we're sort of back to more seasonal traditional sort of things? Can you just sort of help us sort of look at how we should think about order and test volume in the ClonoSeq business as we go for the next couple of quarters?

Sure. Nitin, you want to comment on ClonoSeq test volume over the next few quarters?

Yes. I mean, I think, look, you know, all the leading indicators look very favorable. New HCPs and accounts grew greater than 50%. Unique patients tested grew greater than 70%. All the indications, all four indications that we play in grew a double digit quarter over quarter. Salesforce productivity has increased by 77% from a prior year. Our community business grew by 45% quarter over quarter. Blood testing grew by 30% quarter over quarter. And then, you know, with expansion into DLBCL, And, you know, we're expanding into another non-Hodgkin's lymphoma indication called mantle cell lymphoma, where we'll be fighting for Medicare coverage next month. The upcoming Epic integration, which is going really well. The increased reach and effectiveness for sales team. The low penetration we already have. I think I expect the growth to continue in 2023 above, you know, 50%. you know, onwards beyond that as well. So, you know, from my standpoint, I'm very optimistic about the colonoscopy diagnostic business. And likewise, I feel fairly strongly about our pharma business. We have a very strong pipeline of new deals that we're working through. So I expect that to be, you know, above 20% for the remainder of the year as well. Got it.

And just to help calibrate. Yep.

Hey, Derek, it's Tycho. I just want to remind you, you know, we had guided for the year to be kind of back half-weighted. If you think about Clonal Seek, you know, just think about the Epic integration we talked about earlier and the DLBCL ramp, right, just kind of, you know, getting off. And obviously, we doubled the sales force a year ago. We're kind of anniversaring that now. But just think about, you know, momentum building in the back half of the year.

Got it. Thanks for the reminder, Tycho. Hey, can you just, you know, can you give us some sense on the I don't know, either the test volume or the revenue volume split between the different indications, ALL, multiple myeloma, CLL, and NHL. You know, now that you've got, I'm just sort of curious in terms of where we are and where you think you are penetrated in those markets. And just would like to get a sense of the flavor on just for what the revenue mix is from the different indications.

Sure, Nitin, you want to take that?

Yes. So I think we're primarily, you know, driven by multiple myeloma and ALL. That sort of is our two major indications. And I would say we are sort of close to 20% penetrated in the ALL market. We're probably 7% to 8% penetrated in the multiple myeloma market. And then, you know, sub 5% in CLL and BCL. And so longer range, you know, sort of in the, you know, by 2027 or so, I expect our overall market penetration to be above 20% across all the indications. And, you know, really a lot of growth will come from continued penetration, multiple myeloma, and DLBC, where we have the highest patient numbers. And then, you know, that combined with, you know, steady increase in ESP, you know, will drive revenue for the foreseeable future.

Great. Thank you very much.

All right. Thank you so much, Derek. Our next question, one moment, comes from the line of Taya Savant with Morgan Stanley. Okay. One moment, your line is now open.

Hi, this is Yuko on Fortejas. Thank you for taking our questions. Following up on the previous question here regarding Epic integration, with pilot sites underway, how much of a driver is Epic integration for community uptake of Clonaseq?

Yes.

So I think Epic is primarily in our academic 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. And as I've stated before, we had a very solid performance from our community business. A year ago, 8% of our tests came from the community. In Q1, this was 18% of our tests. And I expect for the full year, 20% of our business to come from community. And again, in the next three to four years, I expect 50% of our order volume to come from the community.

Thank you so much for that color. 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?

We're looking at ASH, which is kind of the – in terms of our conferences – sorry. At the American Society of Hematology meeting at the end of the year is where kind of more of the data presentations will be presented. Okay, great. Thank you.

All right. Thank you.

All right.

Thank you so much. Our next question comes from the line of Tom Stevens with Cohen and Company.

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 I've got a follow-up to that.

Yeah, we haven't. So, I mean, a couple things to think about. The big impact on gross margins this quarter was, you know, Genentech amortization and MRD milestones, right? Those are very high margin, you know, 100% in the case of the MRD milestones. So, you know, as those revenues were down, that weighed on gross margins. You know, I did mention, yeah, we're moving our lab into our headquarters in Seattle. You know, that's an ongoing process. You know, yeah, I mean, a couple more months. I don't want to put a firm timeline on it. It's happening. And we haven't quantified any savings from that. We'll kind of come out and reevaluate our OPEX targets every quarter and update you as we have more information.

Great. And then you mentioned... Sorry, I should add one more thing, Tom.

We're doing a lot of work on COGS right now. I mean, this is a big initiative internally, really kind of looking at our overall margins. So it is something 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.

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

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

Got it. And then just one last one, more on the weed. 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?

Yeah, so, you know, you did hear that we reiterated our guidance for this year, mid-single-digit, you know, millions in milestones. Rob is not commenting on 2024, you know, at this point. But what we've talked about is that, you know, we've got lineups by to around half – half those 400 million in 74 active trials. Next year will be a bigger year for milestones, for sure, just kind of given 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. So should the FDA move forward and endorse MRD as a primary endpoint, that would be upside relative to what we previously talked about.

Great. That's all I have for tonight. Thank you, guys. Thanks, Tom.

All right. Thank you so much. Our next question comes from the line of Andrew Brackman with William Blair. Your line is now open.

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

Yeah, it's a really good question, and it's helped quite a bit, particularly in the area of focus, right? We now have two focused, dedicated teams with very clear objectives as to what they need to deliver, kind of not only this year, but in terms of the long-range strategic plan of the company. So we've, you know, if you look at kind of our MRD objectives, which are clearly laid out, we know exactly what we need to do. And then similarly in the immune medicine business, both in our partner program and then in our R&D programs for drug discovery, we have very clearly defined kind of milestones and kind of go, no-go decisions. So from, you know, a perspective, you know, of capital allocations, we can be very clear as to what we're investing in and what the growth trajectory looks like in each one of those businesses.

Great. Thanks for that. And then one more maybe on your long-term guidance you guys laid out earlier this year. In terms of the range, you know, 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, when's the first quarter we can expect some sort of adjusted EBITDA profitability if you have any visibility there? Thank you.

Sure. I mean, some of the swing factors, you know, in the outlook are, you know, around, you know, MRV, obviously clinical volume growth, you know, to the extent there's upside there, that could be a factor. You know, we talked about MRV milestones earlier and, you know, how we've been, you know, 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 odds there that would be upside. Immune medicine, obviously, you know, additional pharma deals would be a potential driver beyond what we've modeled. And, you know, anything with Genentech that, you know, is upside relative to, you know, either timing or incremental, you know, programs that we haven't announced or signed. So, yeah, those would be the main things. Chad or Sharon, you would add?

I think that captures it well, Tycho.

Yeah, and it's all organic, obviously, if we did, you know, something, and you talked about solid tumor earlier. I mean, if we moved down another path, that would be incremental, too. You know, we're not going to get granular on the quarter, right? We kind of laid out the, as we get closer, and obviously we've died for 25, but we'll talk about it. I don't want to get that granular at this point. Still to yourself.

Okay, great. Thanks, Tycho. That's it from us.

All right. Thank you so much for that. Our next question will be coming from the line of Salveen Richter with Goldman Sachs. Your line is now open.

Hey, guys. Good evening, and thanks for taking the question. 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, you know, building up the engine to drive the drug discovery vertical. So 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. Thank you.

Yeah, thanks, Elizabeth. So, as Chad mentioned, in terms of the IND, there's the one IND acceptance for the first cell therapy program that is included in our 2023 guidance. No additional timing on additional INDs are ones that we're in a position to certainly highlight or discuss, but certainly we'll provide updates as appropriate. Related to the fully personalized approach, absolutely, we are scaling. our regulated infrastructure in South San Francisco with our dedicated lab to enable a fully personalized approach, especially as we have line of sight with our partner Genentech for clinical readiness. And we'll provide updates as that advances. In addition to Genentech, our internal pipeline, as we've indicated, is focused to leverage our existing capabilities in autoimmunity. Specifically, we've highlighted multiple sclerosis as an area of focus, as well as IBD. And there, we are very focused in terms of a proof point to get to at least one novel target in autoimmunity where we generate sufficient data to warrant additional investments with the goal of expanding the pipeline and entering into the clinic.

Got it. 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?

Yeah, 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 the 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.

Great. Thanks so much.

Thank you so much for that. Our next question comes from the line of Dan Winner with Credit Suisse. One moment. Your line is now open.

Great. Thank you. 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?

I mean, look, as I said before, the two big drags were Genentech and the lack of MRD milestones, right? So in any given quarter, if we have more MRD milestones, which are 100% margin, that will lift. So it will continue to be lumpy. You know, the other kind of, you know, factors were, you know, higher costs of running in our production lab. We had a little bit of scrap that we had to deal with too. But yeah, 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.

And we have talked about kind of margins at scale being in the 70 plus percent range, but that, you know, it's, we have, as Tycho mentioned, a very kind of rigorous internal program to look at how we are kind of focused on our margins. And that, again, is also one of the reasons is something that Julie is driving in coordination with Tyco.

Appreciate that. Thank you. 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? I think Nitin commented on 20% plus growth for pharma services, but I think that was just specific for MRD.

Yeah, 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 three to five years does apply to our pharma immune medicine business in terms of our forecast And the growth this year, as you saw, the contribution in Q1 2023 was of $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.

Okay. Thank you.

All right. Thank you so much for that. All right. 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.