Adaptive Biotechnologies Corporation

Thank you for standing by. At this time, I would like to welcome everyone to today's Adaptive Biotechnologies 2023 third quarter earnings call. All lines have been placed on mute to prevent any background noise. Just know after the speaker remarks, there will be a question and answer session. And if you'd like to ask a question during that time, simply press star one on your telephone keypad. Once again, that is star one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. I'd now like to turn the call over to Karina Calzadilla, Head of Investor Relations. Karina, please go ahead.

Thank you, Greg, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' third quarter 2023 earnings conference call. Earlier today, we issued a press release reporting adaptive financial results for the third quarter of 2023. The press release is available at www.adaptivebiotech.com. We are conducting a live podcast 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 call, 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. Additional members from management will be available for Q&A. With that, I will turn the call over to Chad Robin. Chad?

Thanks, Corina. Good afternoon, everybody, and thank you for joining us on our third quarter 2023 earnings call. This quarter marks a pivotal moment in Adaptive's evolution. As we have previously shared, we have two compelling businesses in MRD and immune medicine. They are at disparate stages of maturity with different investment requirements operating models, and distinct value drivers. To maximize the full potential of each business, we have hired Goldman Sachs to assist with a review of strategic alternatives. We will provide clarity on the path forward by early next year. Why are we making this decision now? MRD is a pure play diagnostic business with strong moats supporting ClonoSeq's established position as the gold standard in Heme MRD. Its continued momentum and success will require focused commercial execution to drive increased penetration in current and new indications, as well as further investment in operational scale to solidify its path to profitability. In contrast, immune medicine is now fully focused on drug discovery supported by a major achievement this quarter with the discovery of a novel target in multiple sclerosis. These data validate our target discovery approach in autoimmunity with the ability to unlock additional novel targets in multiple autoimmune indications. The combination of our drug discovery platform with Genentech and Oncology and the discovery of this first novel autoimmune target gives us a clear path to successfully build a broad and differentiated therapeutics business. We are confident in the value these businesses can deliver to patients and shareholders and expect that this ongoing strategic review will yield the best path forward to maximize their respective potential. In light of this process and the evolution of our immune medicine business into a dedicated drug discovery model, with line of sight to long-term value creation, we are updating total company revenue guidance for the year to exclude revenue from the immune medicine business. However, as you will hear from Tycho, we will provide you with MRD guidance for the remainder of 2023. Importantly, we continue to drive operational efficiencies throughout the organization. We completed the lab move this quarter. which is essential for future margin improvement. And we maintain a healthy cash position with about $371 million in cash on the balance sheet. Let's now take a closer look at our MRD business, starting with clinical testing on slide four. Clonacy clinical testing continues to generate record high volumes quarter over quarter. This quarter, volume grew 10% sequentially and 56% versus prior year to over 15,000 tests delivered. Growth came from all marketed indications with multiple myeloma as the largest contributor and the main growth driver. Ordering accounts and ordering healthcare providers grew 30% and 33% versus prior year, respectively. Business in the community segment grew 25% quarter over quarter, contributing 21% of clonacy volume in Q3 versus 13% a year ago. Blood-based testing increased in all indications and grew 14% sequentially, contributing 36% of all MRD tests. Included among the many presentations highlighting ClonoSeq data at ASH this year will be new evidence demonstrating the prognostic value of blood-based ClonoSeq testing in myeloma. Speaking of data, in Q3, we saw two important new ClonoSeq datasets published, one in mantle cell lymphoma, where ClonoSeq's deep sensitivity of 10 to the 6th was shown to have prognostic power, and one in pH-positive ALL. where ClonaSeq was favorably compared to the current PCR-based monitoring standard. Last quarter, we saw downward pressure on our ASPs driven by well-understood factors. Actions we have taken to address these pressures are already beginning to contribute to positive ASP trends as we saw consistent month-over-month increases in Q3 and 3% overall ASP growth versus Q2. These positive trends, I'm happy to say, are continuing into the fourth quarter. Our plan to further optimize ASP is focused on coverage expansion, growth in contracted lives, improvement in payer mix, and operational enhancements to improve collections. Specifically, we have invested in resources dedicated to claims management, transitioned the majority of our commercial payers to the new unique Klonosig CPT code, and closed additional payer contracts and policy gaps. We are confident these and other planned initiatives will accelerate ASP growth for the next several years. In addition, Epic integration continues to progress. We launched our first site, UC Davis Health, this quarter and we have four more sites that we anticipate launching by the end of 2023. We also have a vetted list of interested accounts and anticipate 20 to 25 sites integrated by the end of 2024. Revenue declined 4% in the quarter versus prior year due to broader macroeconomic factors. Now I'm actually looking at slide five on MRD Pharma. Revenue declined 4% in the quarter versus prior year due to broader macroeconomic factors impacting the biopharma industry. Like many of our peers, we are seeing pressure from some studies pausing or slowing down while companies reprioritize portfolios and specific assets. This has resulted in lower sample volume across our portfolio prospective trials. Despite these transitory headwinds, The overall health of the business is strong, with over 190 million in backlog anticipated by year end. We launched an updated version of our ctDNA assay for use by our pharma partners in research and clinical trials for DLBCL. We plan to leverage the updated assay in our upcoming DLBCL FDA submission and deploy it for clinical testing and studies in other heme malignancies. We also continue to add meaningful partnerships to our portfolio. This week, we announced a new translational agreement with Beijing to measure MRD across its pipeline. In summary, the setup for MRD is solid. Execution to drive top line revenue growth while improving cost efficiencies is essential to drive this business towards profitability by 2025. Turning to immune medicine on slide six. As mentioned earlier, We achieved a key milestone in the discovery of a novel druggable target in multiple sclerosis. This target was discovered based on our unique ability to accurately identify a specific set of TCRs that are found only in MS patients. This MS target sheds light on potentially new T cell biology that may be the trigger to this devastating disease. It also validates our novel target discovery approach, which uses our established drug discovery platform. This discovery was accelerated by our ability to accurately identify T cell signatures of disease, which is enabled by combining our improved machine learning AI models that we built with our partner Microsoft and our existing TCR characterization capabilities. we're applying this exact same approach to discover novel targets and additional autoimmune disorders that we've strategically prioritized. Regarding our cancer cell therapy partnership with Genentech, this quarter, our early product development team has successfully built out our personalized process workflow in South San Francisco under regulated conditions. With the key building blocks now in place, we're starting end-to-end testing that defines the foundation for future clinical readiness of our fully personalized process. In summary, we continue to make great progress in our target and drug discovery programs in cancer and autoimmunity. Our immune medicine business remains laser focused to execute on additional key R&D and future clinical proof points that drive meaningful value inflections for our partnered and wholly owned drug discovery pipeline. With that, I'll now pass it over to Tycho.