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.

Thanks, Chad. Turning to our financials on slide seven, total revenue in the third quarter was $37.9 million, with 65% from MRD and 35% from immune medicine, representing a 21% decline from the same period last year. The MRD business overall has been strong, driven by high-volume growth of Clomaseq. The total revenue decline in 3Q was primarily driven by a 61% reduction in genetic amortization, and a 14% decrease in MRD pharma and immune medicine pharma services due to the biopharma headwinds that we previously discussed, partially offset by strong clonal seat clinical performance. MRD revenue grew 24% from a year ago to $24.7 million. Clonal seat clinical was the main driver, with test volume, including international, increasing 56% to 15,072 tests delivered from 9,649 tests in the same period last year. MRD pharma declined 4%, and no milestones were recognized in the quarter. Immune medicine revenue was $13.3 million, down 52% from a year ago, with lower genetic amortization driving 85% of the decline. Immune medicine pharma services, which saw a 29% decline versus the prior year, also experienced downward pressure from biopharma. Moving down the P&L on slide 8, total growth margin for the quarter was 49%. The decline in gross margin versus the prior year was largely attributable to lower amortization of the Genentech upfront, which has 100 percent margin contribution, and incremental one-time costs from the lab move. Versus the second quarter, the decline was mainly driven by no milestones compared to the Genentech milestone we realized last quarter, in addition to product mix tied to reduced pharma services and incremental costs from completion of the lab move. We continue to focus on optimizing operations to further enhance margins. This includes the implementation of a new LIMS ecosystem by mid-2024, which will allow us to reduce overhead and increase the productivity of direct labor in the lab. In addition, after completing a technical feasibility review, we'll be switching from NextSeq to NovaSeq sequencers next year. We expect completion by late 2024 brings significant savings in material costs in 2025. Importantly, other OpEx excluding cost of revenue declined 11% versus the prior year and 12% versus the prior quarter, as we continued to be laser-focused in driving operating leverage and efficiencies across the organization. Interest expense from a royalty financing agreement with OrbitMed was $3.7 million, which was offset by interest and other income of $4.3 million. Net loss for the quarter was $50.3 million compared to $45.3 million last year. We ended the quarter with approximately $371 million in cash, equivalents, and marketable securities. Now turning to updated guidance on slide nine. As Chad mentioned, given the ongoing strategic review, we are updating total company revenue guidance for 2023 to exclude immune medicine revenue. Going forward, immune medicine will resemble a more traditional drug discovery biotech model and we want to ensure that we do not trade off short-term revenues for long-term value, and accordingly, we will not be providing revenue guidance for that business going forward. For MRD, we continue to expect clonal seek test volumes to grow over 50% for the full year versus 2022. ASPs in the fourth quarter are expected to grow mid-single digits sequentially. We expect pharma services to continue experiencing downward pressure from biopharma industry spending in the fourth quarter, and MRD milestones are expected to be in the low single digits. Putting it together, we expect total MRD revenue for 2023 to be in the range of $100 to $105 million. As we continue to drive operating efficiencies, our total company full-year OpEx target, including cost of revenue, is expected to be around $375 million, a decrease of approximately 3% from last year. Cash burn for the third quarter was $46 million and higher than anticipated due to lower farmer service revenues, but we expect the 4Q burn to be more normalized at around $35 million. Q3 had important achievements in both businesses, and we remain focused on driving execution while managing our spending prudently as we close the year and complete the strategic review. I'll now turn the call back over to Jen.

Thanks, Daiko. I am confident in the potential value of MRD and immune medicine, and we look forward to arriving at an optimal outcome that maximizes each business to best serve our patients and our shareholders. With that, I'd like to turn the call back over to the operator and open up for questions.

Thank you. At this time, I would like to remind everyone, again, in order to ask a question, press star, then the number one on your telephone keypad. Once again, star one on your telephone keypad. And we'll pause just a moment to compile the Q&A roster. And our first question today comes from the line of Mark Mazzara with BTIG. Mark, please go ahead.

Hey guys, thank you for the time and the questions. The first one is just, I guess, why now? I think there's been some discussion about synergies or lack thereof of the two businesses. Just curious why you're conducting this formal strategic review at this time and maybe just any comments you have about the two businesses and should we read into this that there are just not parallel synergies between the two?

Yeah, thanks, Mark. And we have been talking, you know, for the last kind of 18 months about having two distinct business opportunities. And we are evaluating all options with our partners at Goldman Sachs to maximize the value of both business. You know, really, it's a fact that, you know, we have two distinct businesses, and there are different stages of maturity. They have different value drivers, and they also have different investment requirements. I mean, if you look at the MRD business, It's a commercial stage diagnostic business. It's the gold standard in MRD. But that business, it's all about execution. On the top line, we've got to drive volumes, increase ASPs. And on the cost side, it's about bringing down the cost of goods sold and achieving scale to get to profitability by 2025. But IAM is a very different business. It's a very different business model. It's much more akin to a traditional biotech business or therapeutics business. The business takes more time. It has very high potential, but revenue at present isn't the driver. It's about generating data. It's about developing assets and going through clinical trials and really about showing additional proof points that are milestone and catalyst driven. And it's become increasingly clear where each business is. It's really the natural point to look at a separation as MRD has now kind of achieved that scale. And at the same time, we've had really what we consider a really nice breakthrough discovery in our platform and MS that we think is going to apply to multiple other kind of autoimmune disorders. So now's the time and we're ready to go.

Okay, great. So obviously, I understand they require different capital needs and investment. But as for why you're choosing to withdraw the immune medicine business from your guidance, I guess, you know, can you maybe peel the onion back a little bit as for that reason?

Yeah, a lot of it is because if you look at MRD, which has a very known trajectory, what we don't want to do, it's a really different story in immune medicine where we don't want to trade off or mortgage the short-term for long-term value creation. There are a number of deals which we could do that we want to make sure that we're doing in the right context to really maximize the potential for the long-term value of that business. And in some sense, being forced to do deals under certain time pressures and constraints would, I think, give away value that would inure to our shareholders.

Okay, great. And last one for me. I might have missed it, but Can you just walk through the split between MRD revenue from clinical versus pharma? Obviously, you talked about the pharma having some headwinds, and you certainly maintained your volume guide for 50% for the year, but maybe just any additional clarity on how you're thinking about the clinical versus pharma breakout.

Okay, do you want to... Yeah, yeah. So, I mean, just for, you know, you're asking on the breakout in the third quarter or what we're expecting for the fourth quarter?

Both would be great, but I'll take either.

Yeah, I mean, look, the clinical business, you know, if you kind of look, so we didn't have any milestones there, right? If you kind of look at, you know, U.S. pulmonocytes, It's about a 60-40 split overall is kind of the right math for this quarter between clinical and pharma. We mentioned pharma was down a little bit sequentially versus the second quarter. Clinical volumes had a nice sequential step up. And then for the fourth quarter, it should be similar, kind of 60-40 split.

That's really helpful. Thanks, guys.

Thanks, Mark. And your next question comes from the line of Dan Brennan with TD Cohen. Dan, please go ahead.

Great, thanks for the questions. Maybe the first one, just on the strategic review, looks like there's a lot of options on the table. Is the idea that the immune medicine business, you'll look to sell that? Could that business come out as a standalone business and trade publicly? Or is there a potential that both businesses get sold? I'm just trying to think through, obviously, you know, the press release discusses strategic options, things are on the table. Just what are the permeations that are being considered?

Yeah, thanks, Dan. We are evaluating all options. They're all on the table that we think can maximize value. You know, obviously, we can't comment on any M&A at this time. All we can say, I mean, if you look at MRD, it's a differentiated business with a clear category leading position with real strategic value. And so that provides us a range of viable options to pursue. You know, and the same thing on the immune medicine business. It's, you know, we think we've got some very differentiated targets and are moving forward. And, you know, those could be standalone businesses and do very well as, you know, standalone publicly traded companies. But, again, all options are on the table right now.

Are there things without immune medicine on the MRD side that you guys would do differently in terms of, you know, you want to get the profitability, the balance sheets in good shape? I don't know. But in terms of maybe you'd want to be more aggressive, maybe you'd want to get more scale, maybe you want to add in other businesses. I don't know. When you think about MRD on its own, operating? Strategically, how does that business look on its own?

That's a really great question. Actually, if you peel back the onion a little bit, to use your term, one of the main reasons we're doing this is that we have dedicated focus on each one of the businesses. What we've found over the last 18 months or so is there's been kind of a competition for kind of resources. Software is a good example of that, competition for resources, competition kind of for mind share, et cetera. So there are ways that we could potentially accelerate, you know, on the top line in MRD, and at the same time, I think there are additional ways that we can have kind of operating leverage in the model, and that is certainly something we would kind of look to achieve, you know,

by looking at these as a standalone business.

Maybe I'll take one more, just in terms of you discussed pricing and the benefits there. Could you just give us a sense of where pricing could head to with all the initiatives that you're making on the Klonoskeek side?

I can just touch on the third quarter and then maybe I'll hand it over. But, you know, we ended up just north of $1,000. September was the highest month. You know, I can say based on trends in October, we're confident, you know, the fourth quarter is going to, you know, see this mid-single-digit increase that we mentioned in the prepared comments. So, you know, the initiatives that we've implemented are working. But, you know, Susan, do you want to maybe touch on that a little more?

Yeah, we certainly see the opportunity for continued ASP increases and, frankly, acceleration in the growth of ASP in 2024 and beyond. The ASP plan that Chad alluded to is focused, again, on coverage expansion, growth in contracted lives, shift in our payer mix, and operational enhancements to improve collections. We've undertaken already a number of initiatives aligned to those categories, and we have quite a few more planned for launch in January and beyond. And through that, we expect to see an acceleration of the growth rate on ASP in 2024 And beyond that, we're not providing specific guidance, but we do certainly see potential for continued improvements.

Maybe I'll see a final one. Sorry. MRD for 24, any early look? I mean, farm is so uncertain. You've called it out. Others have called it out. But maybe we're hopefully near a bottom here. Just any early way to think about 24 on the MRD side of the business?

Thank you.

Yeah, we're not providing specific guidance yet for 24.

I can tell you, though, from the clinical business standpoint, we continue to see not only the ASP growth that Tycho and Susan just alluded to, but our volumes continue to grow, and we do expect another great year in terms of volume growth in 2024.

It might be worth mentioning we also had a significant backlog in MRD Pharma, you know, 190 million, so that bodes well for the future health of the business.

Great. Thank you.

Thanks, Dan. And our next question comes from the line of Rachel Battensdahl with J.P. Morgan. Rachel, please go ahead.

Hey, this is Noah. I'm for Rachel. Thanks for taking my question. You know, reframing some of the topics we've touched on here a little bit more specifically. You know, I understand you're refocusing here on the MRD business. Can you give us a sense of the levers you can possibly pull to continue protecting and strengthening the balance sheet? You know, it seems like the quarter had some decent bright spots, for example, excluding some one-time costs in the lab, move completion, gross margins in 3Q were 55% versus that 49%. And then also you've noted here at conferences that the switch from the NextSeq to the NovaSeqX project, you know, is ongoing. It could be a meaningful cost saver. So could you give us any sort of quantitative sense as to how much some of these cost-saving mechanisms could protect your margins and manage your cash burn? You know, heading into next year, assuming we're just looking at the, you know, the MRD business. And then if you want to loop in any updated thoughts and remind us of how that OrbiMed deal could play into that. And I have additional polls. Thank you.

Sure. And, hey, Noah, good to hear from you. So a couple thoughts on margins this quarter. You know, milestones are a big factor, you know, coming 100%. We didn't have any milestones this quarter, so that did weigh a little bit on margins. We had lower genetic amortization also, you know, impacted us. But, importantly, we finalized the lab move, and, you know, that did have some one-time costs in the quarter. If you exclude, you know, the lab move costs, gross margins were, you know, closer to 55%. So just, you know, looking at it a little bit sequentially, you know, the Genentech milestone we saw in the second quarter was 7.5 million. Again, no milestone in the third quarter. There was some product mix, you know, impact. Pharma services is higher margin. And as we discussed on the call, that's lower than expected. You know, going forward, you know, we're fairly comfortable that that's, you know, business at scale is a 70 plus percent margin business. And, you know, we've got a number of initiatives. We've got a limbs overhaul we talked about. There'll be labor and workforce efficiencies on the back of that. You know, you mentioned the switch to NovaSeek. That really will benefit us on 2025. You know, we'll kind of implement it in the latter part of 2024, but I would really think about that contributing in 2025. But Like other CLIA lab businesses, 70-plus percent at scale is easily doable for our business overall.

Yeah, the other thing is as we move labs from one building to another, we continue to look at the real estate portfolio, and we're looking at ways to kind of offload one of our buildings as well, which will provide kind of additional leverage.

And, you know, we think the MRD business can – No, just one follow-up. You asked about MRD specifically. We think that business can be profitable in 2025.

That was my next question. I was just thinking, if we're looking at just the core MRD business, would you like to talk about the hitting potential growth rates of the 2022 to the 2027 revenue CAGR of 20 to 30 or the EBITDA margin break even in 2025 or cash flow break even in 2026 on just the core MRD business. And then I have one last one.

Yeah, I mean, again, I think we think MRD can be profitable in 2025. We've kind of given you, you know, a number of the components around, you know, how we think about ASPs increasing and then, you know, volume growth, you know, over 50% this year. And, you know, it should be, you know, sustainable. A lot of larger numbers obviously start to factor in as you get, you know, further out. But we're very comfortable that this, you know, will continue to be, you know, high in the double digits, you know, in terms of volume growth overall.

Awesome. Okay. And then related to that, you know, like law of large numbers thing, you know, can you talk about if you thought about any of the closest, you know, core MRD adjacencies that, you know, maybe you could move into or, you know, pull forward some of the investment in those to be in the near term as part of your like overall TAM story, you know, maybe not officially areas that you're definitively going into, but maybe some areas you've considered as potential portfolio adjacencies that could be easy growth drivers as we sort of think about refreshing the long-term growth story here. Dr. Susan, you want to take that?

Sure. We have looked at a number of adjacencies. I mean, first and foremost, the most obvious ones are other lymphoid malignancies in which we have not commercialized the assay, so additional non-Hodgkin's lymphoma indications in particular, and we do have plans in place to move forward with commercialization, including securing reimbursement from Medicare and private payers over the next couple of years. Additionally, there are adjacencies in the myeloid malignancies, and perhaps in other tumors. At this time, we are exploring opportunities in the myeloid space, very early stages, to understand the feasibility of particular technologies and the opportunity. And then in the solid tumor space, we have done some review but have no plans at this time.

Awesome.

Thank you so much.

Really appreciate taking the questions.

Thanks, Noah. And our next question comes from the line of Tejas Savant. Tejas, please go ahead.

Good evening, guys. This is Edmund on for Tejas. Thank you for taking my questions. I just wanted to touch upon the Epic EMR integration. With some of your pilot sites now live, I know you guys have talked about volume contributions really inflecting in 2024, but what have you seen so far in terms of volume inflection at these sites?

Sure. Thanks for the question, Edmund. We only have one site live as of today and not quite two months of experience with that site, but what I can say is that we have seen growth in that account in that short time, both in HCP users as well as in volumes. And additionally, that site's positive feedback has led them to expand the scope of the integrations previously limited to the outpatient setting, now expanding to inpatient and including the potential to place standing orders, which are new features they've added since the initial go-live. We have four more sites scheduled to go live by the end of this year, so we'll be able to start getting more robust, albeit still anecdotal, evidence to support understanding of how Epic may contribute to growth in 2024 and beyond. And again, we expect to have as many as 25 sites live by the end of 24, at which point I think we'll be more well-positioned to comment on likely growth opportunities. But we do expect lift from Epic. Other companies who have implemented Epic have seen lift and will be eager to comment further when we have a little more evidence.

Got it. That was super helpful. And then just wanted to clarify, I think you guys have just commented that you anticipate about 190 million in backlog by year end for the trial side of the business. What are your expectations on mix between pharma and SMIDS in the backlog and between retrospective and prospective trial mix?

Did you say between pharma and what?

Small gaps. Oh, sorry. Got it. Sorry. Well, I can comment that the majority of new studies that we book, when you ask about prospective and retrospective, the majority are prospective studies, and we expect that to continue to be the case.

Yeah, we don't have a mix, but I will also say kind of the majority of our client profile is kind of large-cap pharma and not SMIDS and small-cap, although we certainly do have kind of a, I would say, kind of called 15% to 20%. that you would traditionally classify as SMIDs, but the majority are large pharma.

Got it. And then with the ASH conference just around the corner in December, are there some key publications, presentations, or data points that we should be watching out for?

Yes, indeed. In particular, we are excited about some data that's going to be presented by investigators from the University of Chicago on the use of our assay in blood. So in this particular study, ClonoSeq was used at early time points during first-line therapy in multiple myeloma to assess response in both blood and bone marrow and to compare that assessment to the commonly used serum biochemical markers that are part of traditional myeloma response assessment criteria. The study will show that ClonoSeq in blood is strongly prognostic of outcomes and provides greater insight than traditional blood-based markers. And the authors have suggested in the abstract, which is now available publicly, that the insights that have been gained from this work could be useful in the future if validated to inform treatment intensification in MRD-positive myeloma patients. So we expect to leverage that data to advance the adoption of our blood-based testing in myeloma patients. by using it to help guide use of interim blood-based testing as a complement to Mero, and by showcasing the favorable prognostic comparison when you measure early response with clonoseq in blood versus serum biomarkers in blood.

Got it.

Thank you for the time today.

Thanks, Edmund. And let's see here, one more reminder, if you'd like to ask a question, again, star one on your telephone keypad. And our next question comes from the line of Salveen Richter with Goldman Sachs. Salveen, please go ahead.

Hi, this is Lydia on for Salveen. Thanks so much for taking our question. So we just have one on the immune medicine business. You noted that a novel target has been identified in MS. So what are the next steps for this program and what is the path to monetization here? And then can you just discuss the forward growth outlook for this business more broadly? Thank you.

Yeah, Sharon, I will turn it over to you to answer that.

Yeah, hi, thanks for the question. So, yeah, we're excited, as we mentioned. We've been focusing on identifying novel targets in autoimmunity, and multiple sclerosis is the first lead program where we've identified that novel target. We're actively... confirming and continuing to validate both in in vitro and in vivo MS disease models and ultimately building out a preclinical package to drive the target. So that's in MS and now that we've unlocked and proven out this approach in MS of course in parallel our pipeline includes other autoimmune disorders And our goal overall is, of course, to eventually be able to bring therapies against these targets into the clinic, either on our own or with a partner.

Thanks so much. Thanks, Lydia.

And our next question comes from the line of David Westenberg with Piper Sandler. David, please go ahead.

Hi. Thank you for taking the question. Just had a question on the immune medicine business in terms of inbound interests or conversations that you've had with what could be considered strategic partners, but maybe could be customers right now. Have they desired any kind of exclusivity on certain kinds of work you've done for them or any other kinds of inbound or strategic conversations you've had? I know that some of that's sensitive, but any kind of color, that would be great.

Hey, David. The only thing I could say at this time is from in the discussions we've had under confidentiality, kind of showing the work we've done on the MS target, there's a tremendous amount of excitement to look at ways that we may partner. And as we said, going under a strategic review and part of the kind of rationale for not doing kind of a short-term deal is we're assessing kind of what the kind of optimal partnership is if we go down that route versus kind of developing the asset further ourself. And so I think just more broadly on the immune business, whether exclusivity, non-exclusivity, really can't, not at liberty to comment on specific deal structures at this time. Gotcha.

And sorry if I missed it. I've been in and out of Wi-Fi connection and phone connection. was there any kind of data that we had with DMS? And, you know, is there any kind of parameters we should look like in terms of, I don't even know what they would be quantitatively, like sensitivity, specificity? I'm a diagnostic guy, so I do tend to think of things that way. But, you know, anything we should look for in the data that says, you know, this is going to be really, really exciting. Just help us frame that. Thank you.

Sharon, if you can kind of take that, that would be great.

Yeah, absolutely. So as you can imagine, we have a lot of data, which gives us confidence about the target we've identified and are continuing to generate that data to further validate, including in the preclinical setting. Our plan is to publish on these new findings. Importantly, because of this novel discovery, we've focused and have submitted this quarter a couple of core patent applications that protect our findings in MS, but also cover more broadly our differentiated target discovery approach in autoimmunity. And in addition, this includes also data on potential new T cell biology we've uncovered that informs how, if you will, a revved up immune system attacks normal healthy and in the case of MS, possibly triggers the disease. So a lot of data forthcoming that we are excited and will share when appropriate.

Thank you for taking my questions.

Thanks, David. Thanks, David. And our final question today comes from the line of Derek DeBruin with Bank of America. Derek, please go ahead.

Afternoon. This is John on for Derek. Lots been covered, but I wanted to ask on the macro. Great to hear on the bookings, but in terms of the continuing pharma pressure, I was wondering if you think there would be some sort of a budget flush in 4Q, and what's your expectation there, and do you see that turning around in the next couple of quarters, or do you perhaps see that turning around maybe like in the second half of 24?

Yeah, thanks for the question, John. So typically in Q4, you're right that we do experience higher volumes in revenue as pharma companies flush out their budgets. But that said, given the industry softening we've been observing of late, we don't anticipate as big of a lift this year in Q4. That said, you know, importantly, we still do have a very significant backlog and healthy bookings. And we haven't seen a lot of studies being canceled. So our backlog has grown, and we believe that most of the reprioritization is being completed. So we do expect the higher backlog that we've built, 20% higher than last year, will fuel revenue growth in 2024 and beyond.

Gotcha. Appreciate it. And then just wanted to ask you, you've talked about the moving pieces of the ASP, but the long-term target of $1,600 in 2027, does that still stand?

Yeah, we're confirming kind of long-term targets and are making great strides to get there.

Awesome. Thank you. Great. Thank you. Operator, are there any other questions?

My apologies. It would help if I would talk unmuted. No, there are no further questions. Did you have any closing remarks, folks?

No, thank you for joining the call.

Thank you.

And ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect. Have a great day, everyone.