Adaptive Biotechnologies Corporation

Thank you for standing by and welcome to the Adaptive Biotechnologies fourth quarter and full year 2023 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Karina head of investor relations. Please go ahead.

Thank you, Jonathan, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnology's fourth quarter and full year 23 earnings conference call. Earlier today, we issued a press release reporting adaptive financial results for the fourth quarter and full year of 23. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of these calls and will be referencing to a slide presentation that has been posted in the investor section on our corporate website. During the call, management will be making 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 businesses of today. Actual results may differ materially from today's forward-looking statement depending on a number of factors which are set forth in our public filing 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'll turn the call over to Chad Robbins.

Thanks, Karina. Good afternoon, everyone, and thank you for joining us on our fourth quarter and full year earnings call. As you can see on slide three, 2023 was a year of transformation for Adaptive. Key milestones were achieved for both MRD and immune medicine. We executed OpEx reduction initiatives to drive efficiencies and reduce burn. and we initiated a strategic review process to maximize the value that MRD and immune medicine can deliver to patients and shareholders. We ended the year with $170 million in revenue, including 60% from MRD and 40% from immune medicine. The MRD business grew 27% versus prior year, excluding milestones, as we experienced outstanding growth from Clonacy test volumes. This growth from MRD was offset by a decline in immune medicine mainly due to the reduction in the upfront amortization of Genentech. As a reminder, last quarter we updated total company guidance to exclude revenue from immune medicine. We made this decision based on a strategic shift in immune medicine to focus exclusively on target and drug discovery. Importantly, we ended the year with a strong cash position of approximately $346 million, which enables us to execute on the strategic priorities of both businesses. In MRD, drive ClonoSeq penetration and revenue growth with the goal of reaching profitability by the end of 2025. In immune medicine, advance our target and drug discovery efforts in cancer and autoimmunity. This includes supporting the partnership with Genentech, validating a therapeutic candidate in multiple sclerosis, and scaling target discovery in other autoimmune disorders. Before I go into the details of each business, I'll provide an update on the strategic review. In the third quarter of 2023, we retain Goldman Sachs to advise on a strategic review to maximize value to our shareholders. the MRD and immune medicine businesses have different value drivers, investment needs, and talent requirements. We are evaluating various alternatives to unlock the full potential of each business, and we are on track to communicate a final outcome at the end of this quarter. Let's now take a closer look at our MRD business, starting with clinical testing on slide six. Clonacy clinical revenue in the fourth quarter grew 56% versus prior year, and 25% versus prior quarter with growth coming from both volume and ASP. Volumes continue to grow quarter over quarter with 15,680 tests delivered in Q4 representing a 49% increase versus prior year and a 4% increase sequentially. As a reminder, fourth quarter is typically impacted by fewer business days. We are off to a great start this year with record high Clonacy orders year to date. Growth came from all marketed indications and multi-myeloma continues to be the largest contributor. In addition, the actions we put in place to improve collections and expand coverage are working. ASPs in the fourth quarter grew double digits sequentially. we continue to be laser-focused on driving ASP growth by reducing out-of-policy and non-contracted claims and further optimizing revenue cycle management. As such, we anticipate an increase of approximately $200 in ASP per test over the next two years. It is encouraging to see positive trends on ClonoC key indicators as shown on slide seven. Blood-based testing increase in all indications contributing 39% of ClonoC tests We expect this percentage to grow as we generate more clinical data in blood and commercialization in non-Hodgkin's lymphoma. Blood-based testing is also a key driver of the quarter-over-quarter growth we are seeing in the community, which now contributes nearly one in four Clonaseq tests. Recent data presented at ASH showed evidence that Clonaseq MRD from blood predicts progression-free survival early in the treatment cycle of multi-myeloma patients. Ordering healthcare providers and ordering accounts grew 33% and 29% versus prior year, respectively. EMR integration is a key element of our growth strategy and central to our efforts to further enhance our customer experience. We completed Epic integrations with our first five accounts and expected to complete 15 to 20 more this year, including several of our largest accounts. Last week, we signed an important new integration partnership with Flatiron Health. a leading provider of EHR software and services for community oncology. We look forward to executing this partnership and expect to make Clonaseq available to practices via the molecular profiling integration and Flatiron's OncoEMR system in 2025. Looking at MRD Pharma on slide eight. Full year revenue was essentially flat versus prior year due to broader macroeconomic factors impacting the biopharma industry. which resulted in lower sample volume across our portfolio prospective trials. That said, we saw some recovery in the fourth quarter, which experienced 23% growth sequentially. Despite these transitory headwinds, we ended the year with a healthy backlog of about 185 million, and we signed two important PAN portfolio collaborations with Takeda and Beijing. 2023 was a great year for ClonoSeq. We are well positioned to cement our leadership as a gold standard in MRD team for clinicians, patients, pharma partners, and payers. Looking ahead, as shown on slide 9 and 10, our priorities for MRD are clear. First, further increase penetration by growing blood-based testing, expanding into new indications like MCL and CTCL, adding new use cases through data generation and enhancing the customer experience through EMR integrations. Second, improving margins through ASP increases and operating leverage with the primary goal of reaching positive adjusted EBITDA in the second half of 2025 and cash flow breakeven in 2026. Turning to immune medicine on slide 12. In 2023, our immune medicine business achieved two key milestones. One, FDA IND acceptance was secured for the first T cell therapy product candidate under our partnership with Genentech. And two, we discovered a novel druggable target in multiple sclerosis, which sheds light on potentially new T cell biology that may be causative trigger to this devastating disease. These immune medicine milestones further sharpened our focus in target and drug discovery, specifically in high value opportunities in cancer and autoimmunity. As shown on slide 13 in cancer, we continue to support Genentech in the development of two categories of TCR-based cell therapy products. On the first shared product, we're engaged with Genentech's development team as it gears up for a first in human trial. For the fully personalized program, we completed building our regulated process workflow. And this year, we're initiating end-to-end testing for future clinical readiness. The valuable immune receptor data that we have been generating for over a decade is a treasure trove of information that, together with our partner Microsoft, we use to develop and train AI ML models to help accelerate our target and drug discovery efforts. In autoimmunity, our focus is to further validate the MS target in known disease models. In parallel, we are deploying our antibody platform to identify a therapeutic candidate that specifically binds to this self-antigen and blocks a potential causative event in MS. In addition, we're applying the exact same approach that we use in MS to discover novel targets and additional prioritized autoimmune indications. including type 1 diabetes and rheumatoid arthritis. As you can see on slide 14, in 2024, we will gate our R&D investments based on key proof points that drive future value for both our partnered and wholly owned drug discovery pipeline. I'll now pass it over to Tycho.