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.

Thanks, Chad. Starting on slide 15, with revenue for the fourth quarter and full year, Total revenue in the fourth quarter was $45.8 million, with 67% from MRD and 33% from Immune Medicine. MRD revenue grew to $30.8 million, up 9% from a year ago. Colonial Seat clinical performance was the main driver, partially offset by a reduction in revenue from pharma services and regulatory milestones. Excluding regulatory milestones, MRD revenue grew 18% from a year ago. Colonial Seat test volume increased by 49% to 15,680 tests delivered, from 10,526 tests in the same period last year. Immune medicine revenue was $15 million, down 45% a year ago, driven, as expected, by lower Genentech amortization, which decreased 53% year over year. Full year 2023 revenue was $170.3 million, representing an 8% decrease year over year. MRD revenue was $102.7 million, up 18% from a year ago, driven by a 27% increase from MRD service revenue, partially offset by a lack of regulatory milestones. Immune medicine revenue was $67.5 million, down 31% from the prior year. As Chad mentioned, starting with our 3Q23 earnings call, we opted to exclude immune medicine from revenue guidance given the shift in focus to target and drug discovery. Moving down the P&L, on the right-hand side of the slide, total gross margin for the quarter was 57%. representing an 8-point increase versus the third quarter and a 13-point decline versus a year ago. The sequential increase was largely due to efficiencies from the lab move. Versus the prior year, the decline was driven by lower amortization of the Genentech upfront and a lack of milestones, which have 100% margin contribution. R&D, sales and marketing, and G&A operating expenses declined 8% in total versus a year ago, as they continue to place a strong emphasis on driving leverage. Net loss for the quarter was $69.5 million compared to $40.2 million last year. For the full year, operating expenses, excluding the $25.4 million one-time impairment charge in the fourth quarter, which was related to our legacy lab and headquarters space, were $371.9 million compared to $385.5 million in 2022, representing a 4% decrease. This reflects ongoing efforts to drive operating efficiencies, partially offset by higher cost of revenue. Full year net loss was $225.3 million compared to $200.4 million in 2022, while adjusted EBITDA was a loss of $116.4 million compared to a loss of $121.6 million in 2022. We ended the year with approximately $346 million in cash, equivalents, and marketable securities. Now, turning to 2024 guidance on slide 16. As mentioned in our last earnings call, revenue guidance will be provided only for the MRD business since immune medicine resembles 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. We expect full-year revenue for MRD to be between $130 and $140 million. At the midpoint, we anticipate a 65% and 35% contribution from clinical and pharma services, respectively. Guidance includes conservative MRD Pharma Services growth as we continue to monitor broader impacts from the biopharma industry. It also includes MRD milestones in the low single-digit millions, which could have upside depending on clinical trial outcomes. With respect to trends throughout the year, we expect MRD revenue to be 45% to 55% weighted between the first and second half, respectively. Of note, given that our immune medicine efforts are focused on target and drug discovery, revenue from our IM Pharma collaborations will be used to offset R&D investments. Finally, our collaboration with Genentech continues to advance, and we expect to recognize roughly $14 million in amortization of the upfront this year. Moving down the P&L, we expect operating expenses, including cost of revenue, to be between $360 and $370 million for the year. This deceleration in spending reflects our ongoing efforts to optimize resources and drive operating efficiencies while supporting healthy top-line growth. We continue to be thoughtful about our cash position. Excluding potential one-time costs from the strategic review, we expect the burn to average $35 million per quarter, representing an annual reduction of 10% versus 2023. With that, I'll hand it back over to Chad.

Thanks, Tycho. We're off to a running start. I'm confident in our ability to continue to grow our colonoscopy MRD business and to demonstrate our target and drug discovery capabilities in immune medicine. I look forward to communicating with you on the outcome of the strategic review, which will enable us to drive success and maximize value for all stakeholders. With that, I'll turn it back over to the operator and open it up for questions.

Certainly. One moment, ladies and gentlemen, for our first question. Our first question comes from the line of Dan Brennan from Cowan. Your question, please.

Great. Thanks for taking the questions. Maybe, Tycho, can you just walk through a little bit of how the OPEX kind of outlook for 24 and the revenue kind of what are we considering for burn? I know you touched upon it, but just kind of walk through the key drivers of where the burn goes.

Yeah, yeah, we talked about, you know, 35 million per quarter. We're obviously, you know, continuing to drive efficiencies across the organization. So you're seeing leverage in sales and marketing, GNA and R&D. So, you know, as we've kind of mentioned in prior calls, there's kind of no stones unturned as we kind of go through, you know, the ongoing business review.

Got it. And then just on the MRD side of the business, the clinical and the pharma side, just on the clinical side, so how do we think about the volume and the realized price implicit in the 24 guidance?

Yes, Susan, do you want to take that?

Sure. So let's start with, I guess, the volume. So at the midpoint of the guidance, which we've issued, represents over 30% growth for the overall business. Let's talk about the clinical and then the pharma. So the clinical business, we expect to have a healthy growth trajectory. We are anticipating 50% revenue growth. The revenue growth will come from both volume growth and ASP. We are focused very closely on ASP increases. And on the volume side, the consensus, I believe, is around 35% today, which we think is fair. On pharma side of the business, we are anticipating about 10% growth, and that's, I think, roughly based on the fact that we anticipate continued industry-wide headwinds that we saw in the previous year, but that we do have a strong backlog, a healthy backlog of over $185 million, which we believe we'll be able to continue to draw from as we have in the past.

Got it. And then maybe last one. Let me just give my email.

We just mentioned low single-digit million in milestones for MRD pharma as well in the prepared items.

Thanks, Tycho. And then maybe last one. So, Chad or Tycho, just in terms of what we're going to hear at the end of the quarter in terms of the outcome of the strategic review, maybe I know there's a couple of permeations here that could unfold. What can you share at this point and just kind of any color on some of the discussions and how things have gone?

Dan Bauschard- You so I Dan I can't really comment on any of the specific structures are alternative at the moment. Dan Bauschard- What I can tell you is in conjunction, you know with with with our board and with Goldman where our goal is to maximize the value of to all stakeholders. Dan Bauschard- You know, we do have a very strong cash positions and you know I can ensure that any decision we make isn't going to Jeff jeopardize you know either part of the business and. We're committed to providing an update, so stay tuned.

Great. Okay. Thank you.

Sure. Thank you. One moment for our next question. And our next question comes from the line of David Westenberg from Piper Sampler. Your question, please.

Hi. Thank you for taking the question. So I'm just on the MRD business, kind of the visibility. Can you walk through the MRD revenue cadence expectations in the year? How should we choose to think about some of the milestones or other kind of payments from pharma? And then I just noticed a slight decrease in the sequential growth rate. And I noticed that same thing happened in Q4 of last year. Is there seasonality in the business that we haven't been modeling previously, just in terms of volume growth? Maybe I should say I haven't been modeling correctly.

So I can speak to the part about the recent sequential growth and also seasonality. So I think you're pointing to the 4% quarter over quarter growth for the clinical business in Q4. So I think one thing that we consider is that Q4 typically with fewer business days than other quarters, we do typically see a lighter growth profile than in other quarters. But importantly, in Q4, we continue to see all of the leading indicators of the business that we track moving favorably. Additionally, when we broke out the U.S. and ex-U.S. clinical businesses in Q4, we note that the U.S. business grew at 7%, whereas the ex-U.S. business, which is typically more lumpy from quarter to quarter, grew more slowly, contributing to the overall growth rate of 4%. And then finally, we started 2024 off very strong with record average daily and monthly volumes in January. February to date is trending even more favorably, so we continue to feel very confident in the strong growth trajectory of that business. And I do think Seasonality, just based on number of business days, can be a factor. There are other aspects of seasonality that we typically see, for example, in certain summer months. But overall, probably nothing different than you might see in an average business of our industry.

And Dave, we mentioned the prepared comments for guidance. We expect MRD revenue to be 45% in the first half, 55% in the back half. So more back end.

Got it, got it. Okay. No, that's great. And then just as we look at the drivers that drew growth in 2024, I mean, 2023, and as we start to cycle those drivers, I mean, how should we think about the impact that you've had from Epic? You know, what inning are you in in the Epic integration, the DBCL ordering pattern, and, you know, kind of the conversion of blood? I mean, I know that's three different areas, but if you can give those three areas, kind of what inning we're in, just to get a sense on how much more growth – or how much you can compound this growth in that business. Thank you, and I'll stop there.

Sure, yeah. So, I mean, I think you're right to think that the growth drivers in 2023 will continue to be the growth drivers in 2024, and in some cases, we're in very early innings in some of those growth drivers for the previous calendar year that we will be able to advance further in 2024. So, for example, Epic Integration, very early days in 2023, top of the first inning. We only saw our first five accounts set up to utilize the integration by the end of Q4, and all of those went live just in, you know, either one in September and the other four were completed in December. So we haven't yet seen significant lift, albeit anecdotally, in those accounts. We are seeing really nice results. So we continue to work toward additional Epic integrations. They are a one-by-one process. We anticipate having 15 to 20, as previously stated, by the end of the year, 15 to 20 additional. And I think then we will see growth in those accounts. But for the overall business, it's going to take some time for there to be a very meaningful impact, a material impact. As Chad noted earlier, we've signed another agreement with Flatiron Health, which will really start to have impact on the business in the second half of 25. The second thing you asked about was DLBCL. We saw a really nice growth trajectory in DLBCL aligned with our internal expectations, and we continue to promote that very actively, as well as focus on data generation. We have a number of studies that we are hoping to advance in 2024 that will continue to support the frontline and surveillance setting use case for the assay, as well as some nice real-world evidence that we'll be advancing in other NHL indications, which will continue to build the overall business in non-conscious lymphoma more generally. So I do think the LBCL, combined with other indications like mantle cell lymphoma in the NHL category, will be growth drivers in 2024, more meaningfully than they have been in previous years. And then the last thing you asked about was blood. We had some very nice data at ASH 2023 just at the end of last year, which we've been actively leveraging in promotional conversations for multiple myeloma in blood. We expect to expand the analysis of that data set early this year and see it published as well as present some additional data utilizing circulating tumor DNA in multiple myeloma, particularly in the setting of extramedullary disease We have a number of other data sets that we're exploring, which we may be able to utilize this year. And so I think this will be a continued data generation year for multiple myeloma. But that said, we've seen the blood-based, percentage of blood-based tests continually increase quarter over quarter, both for myeloma as well as for our business more generally. We're up to nearly 40% of tests in blood, MRD tests in blood today. as of Q4, and we continue to expect to drive that, which will contribute to increased testing in the community and frequency of testing.

Great.

That was a lot of great detail. Thank you. Thank you. One moment for our next question. And our next question comes from the line of Mark Macero from BTIG. Your question, please. Hey, guys.

Thanks for taking the time. You've steadily increased the percentage of Clonaseq tests in blood. I think it was 39% this quarter. Is there a point in time where you think blood can become maybe the majority of your Clonaseq volumes? And is there a certain target that you have, even if it's out, like, say, three to five years?

Well, absolutely, we think it can be the majority of our tests. Blood-based testing is related to the community as well, and as we continue to increase and bring on community accounts, the percentage of tests that are done in blood will continue to increase. So, you know, I don't know if I can give you an exact date of when this can become a majority, but that number is growing very rapidly, and we see it being a steadily increasing percentage of our overall test mix.

Okay, excellent. I know at JP Morgan, you guys provided the 25% to 30% revenue CAGR for MRD between 2023 and 2027. So obviously, pretty solid top-line growth, and then you've maintained your expectations to hit MRD profitability in the second half of 2025. I guess I'm asking on the cost side. So obviously, you can get to profitability through revenue growth, but I'm just curious are there certain costs that might be able to come out of the ClonoSeq assay? And maybe if you could speak to input costs or maybe some of the instrumentations or reagents that are used. I'd just be curious to see what type of levers you might have on the COGS side.

Yes, so absolutely. As we kind of previously mentioned, and I'll reiterate, we are looking at it. We've been testing the Novaseq And we're looking at a switch to the novice by the end of this year, and that will have a significant reduction in the cost and cost of goods sold. But in addition to that, as Tycho said, no stone is being left unturned. We're looking at, you know, our operating costs as well. And we can continue to refine the business to figure out how we can increase the profit profitability profile. over time. So yes, the answer is yes, we are absolutely looking at the cost side of the equation.

And there's a couple other things we've highlighted. We're doing a limbs overhaul in the first half of the year. That'll have implications for overhead. We're reducing the number of extractions that we process. So there is a lot in terms of the workflow.

Okay. And then my last question, it's just on mental cell lymphoma. Can you just talk about, maybe remind us the size of the market and you know, timing of commercial launch and, you know, what you think that might do to expand sort of a portfolio.

Yeah, sure. Mantel cells are a relatively smaller indication, more similar to perhaps ALLs and myeloma in the context of our existing covered indications. That said, It is an area of unmet need for monitoring and certainly an area of high interest for MRD based on our interactions with clinicians to date. We already have significant existing volume with several KOLs in the space and anticipate that Medicare coverage, which we are actively seeking today, will be the trigger for us to begin proactively commercializing that indication. We're looking forward to continuing to interact with Moldex and are actively engaged with them now, so we expect to have more information this year.

Excellent. I'll keep my questions there.

Thanks, guys.

Thanks, Mark.

Thank you. One moment for our next question. And our next question comes from the line of Tejas Savant from Morgan Stanley. Your question, please.

Hello. Hi. This is Yuko on the call for Tejas. Earlier this year, you talked about potential for FDA to accept MRD as a primary surrogate endpoint in multiple myeloma. Could you elaborate on what you're hearing and how quickly we could see that associated upside for MRD businesses?

Yeah, what we've heard is through the International Myeloma Working Group that several members of that committee had heard that the FDA was considering multi-myeloma as a primary endpoint. So we are waiting for that decision. I don't have any more resolution into timing of that, but we're certainly hoping that that comes in In the first couple of quarters of this year, but again it's hard to predict you know, a government body in terms of you know acceleration, you know, obviously we have we have deals that. have written into the contract that upon approval, the drug of our data is used as a primary endpoint that we there are payments do so, it would it would certainly be certainly beneficial to the business.

Great, thank you. And then a separate follow-up. You talked about the LIMS overhaul and NovaSeq switch and some of the cost actions that are underway. Could you quantify the uplift in margins from those initiatives?

Yeah, I don't think we're going to get that granular. You know, I can talk a little bit about pacing and LIMS's first half of this year. You know, we've been pretty clear that the NOVA-Seq really won't have an impact until 2025. You know, one thing we have said is, you know, at scale, you know, the MRT business should easily be north of 70% gross margin. You know, that includes both clinical and pharma. But, you know, kind of consistent with other CLIA labs. But we're not going to break out contributions from LIMS versus, you know, the NOVA transition specifically.

Got it.

ASPs will also help there, by the way.

Yep. Sorry, go ahead.

Okay.

Maybe just slip in one more question here. In terms of the Flatiron Uncle EMR agreement, how much additional accounts, how much incremental would it be to Epic agreement that you already have?

I mean, in terms of access to accounts? Yes. So, Flatiron is engaged with, they have access to about 40% of the community oncology, community oncologists in the U.S., 4-0. They are also, they are currently implemented in 250 accounts, which is a bit of a a number that's hard to interpret because, you know, some of these are very large accounts. But the business potential for us is tremendous. I mean, just the top 15 accounts that have utilized OncoEMR have 33,000 relevant patients for our disease indications. So I think I'll leave it at that.

You go at a high level, think about why we do this. Think about as epic as... being integrated into the academic and medical centers and institutions and Flatiron being integrated into the community oncology and network practices. So we're trying to cover all bases and they're one of the largest EHR providers within the community and give us access. One of the benefits to Flatiron that we don't have with Epic. It's a faster, I mean, it takes a while to do the upfront setup costs, and they're backlogged on timing, but we're looking kind of at a fourth quarter of this year kind of implementation, but once they hit kind of the button, it can push it out to many of the sites all at the same time, as opposed to having to go kind of one by one on the Epic integration. Certainly excited about it and excited about what we're seeing early on from the Epic integrations that we've already done. So continuing to invest in making it easier for a doctor to order a test is something that we believe is going to lead to more tests being ordered. It's just very simply, it's a very simple equation.

Got it. Thank you so much for that, Culler.

You bet. Thank you. One moment for our next question. And our next question comes from the line of Andrew Brackman from William Blair. Your question, please.

Hi, guys. Good afternoon. Thanks for taking the question. I just want to circle back on pricing here for a minute. I think in the past you sort of talked about some improvements coming from reducing Medicaid mix and then also revenue cycle management. Can we just sort of get an update on where those initiatives stand and how you're thinking about those impacting 2024? Thanks.

Yeah, I'll just kind of reiterate some of the things I mentioned in my prepared mark. We're really excited about the work that we put in and how it's kind of already starting to play out on ASP increases. So we're kind of reducing non-contracted claims, out-of-policy claims, and just working on a lot of the blocking and tackling on the appeals process, prior auth process, etc., So all those things are working. In terms of Medicaid, naturally as we continue to expand into more indications, Medicaid is an overall percentage of our test mix kind of winds up going down, and a large percentage of Medicaid also relates to ALL. Overall, our initiatives are working. What we've talked about just in terms of quantifying that is a $200 increase over the next two years, and we're already starting to see that work.

Okay, that's perfect. And then I just want to go back to your comment around sort of gating R&D investment for specific proof points within the immune medicine side of things. Any color that you can give us with respect to some of the things you might be looking for as you're thinking about what level of spend you might be comfortable there. Thanks for taking the question.

Yeah, Andrew, I'm going to turn that over to Sharon Benzino, who runs the IM business.

Yeah, thanks for the question. So, of course, on the heels of our discovery of the first novel target using our platform, it's a target that we've identified in multiple sclerosis, obviously a devastating disease. And this year, we're very focused on further validation of the target as being causative of multiple sclerosis. We're using both in vitro and in vivo MS disease models to ensure that data on that fund we expect in the first half of the year. And then in parallel, we're of course starting to think about what drug modality to use to be able to go after this target. In parallel, this year, we're also deploying and have already deployed our antibody discovery platform. We completed at the end of last year a successful proof of concept in MS for our antibody discovery approach. And so we're pretty encouraged by parallel processing those two work streams with the goal to ultimately have antibody candidates that we can designate as therapeutic candidates to advance during the next two years into the clinic.

Great. Thank you. Thank you. One moment for our next question. And our next question comes from the line of Sung Chi Nam from Scotiabank. Your question, please. Hi.

Thanks for taking the question. Maybe if I can probe a little further on the MRD pharma side, obviously, you know, solid backlog there, but could you maybe talk about the trends you guys are seeing that's specific to adaptive? Are you seeing you know, any trial cancellations or are these mostly trial delays or kind of lengthening of the studies?

Go ahead.

I think probably one thing that's relevant to note is just the indications that we are in and the trends that we're seeing in the broader market with regard to investment in clinical trials. Over the last several years in multiple myeloma, which is the largest contributor to our pharma business, the number of trials was steadily increasing. The number peaked in 2021 and since then has been declining. And so I think one thing to be aware of is that for our specific business, we have a very strong position in that indication, potentially made even stronger if and when the FDA accepts MRD as a surrogate for accelerated approval. But we are competing for a smaller subset of trials or drawing from, I should say, a smaller subset of trials over time. In other indications like in non-Hodgkin's lymphoma, the trends are different. The number of trials hasn't started to decline. It seems to be relatively consistent over the last several years, and so that's a big area of focus for us in terms of growth is driving increased penetration in the non-Hodgkin's lymphomas, whereas we have likely less growth opportunity just in the context of a smaller or shrinking market in multiple myeloma over the longer term.

Gotcha. Great. And then just going back to the question on the MCL, CTCL market opportunity there, my understanding is that DLBCL is roughly 25, 30% of NHL. And then there's about 60% of the aggressive subtypes of NHL. So is the 60% of NHL kind of the potential adjustable market, do you think, in the future? Is it too early to tell? Just kind of curious as we think about the potential market size.

Yeah, you know, I think it's early to say. We're still developing a lot of data on non-Hodgkin's lymphoma and indications beyond the first few, and so what percentage of that total addressable market we can ultimately tap into remains to be seen, but I will say that the assay technically is applicable in any lymphoma, and it will just be a question of which evidence we determine to invest in developing.

We have the same data as you do that the that ZLBCL represents about 50 plus, 50 to 60% of all NHL. So that is one area, as we mentioned, that we're aggressively focused on. And the other two that we're filing with Medicare on this year are MCL and CTCL.

Gotcha. And then one quick one for Tycho. Sorry if I missed it, but the $14 million amortization for Genentech this year, should we model that rate of relief throughout the year?

Yeah, I mean, I think that's the right way to do it. I mean, yeah, it'll shift around month to month, but yeah, just kind of rate of relief for the year is fine.

Great.

Thank you.

Thank you. As a reminder, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. Our next question comes from the line. That's Salvine Richter from Goldman Sachs. Your question, please.

Hey, guys. Good evening. This is Elizabeth on for Salvine. Two questions from us today. So the first is on your partnership with Flatiron Health, can you provide some color just around how that partnership is structured and if that would include milestone payments or would it be more kind of a continuous revenue recognition for ClonoSeq? And then second is on the EPIC partnership. Just curious if you've had any feedback from users or physicians and what you're learning thus far in the early days about how this integration works and how it's being used. Thank you.

yeah i'll come for the first one elizabeth and then i'll kick it over to susan to provide more color on the uh epic integration early early day learnings um as far as flat iron well i can't go into the specifics uh of the agreement um you know to be able to protect flat iron's position in in the industry um what i can tell you is your question is it doesn't entail kind of milestone payments um you know it's it's basically a You know, a setup fee and an annual fee is, I think, the most I can elaborate at this point. But Susan, you want to talk about Epic?

Sure. Yeah, the feedback has been very positive to date. In fact, we've seen several of our early sites come back after just a short time of having experience with the integration and asked to expand the scope of the integration, for example. bringing on more physicians or expanding to the inpatient setting versus outpatient only. We've seen increases in both the number of ordering physicians and the volumes that are flowing through in each of the accounts where we've integrated to date. I think the most important improvement is simply the reduction in manpower required to enter orders and to not only enter orders but to receive the results from orders as they now land directly into the EMR in the place where you would find other test results versus kind of having to be manually uploaded and searched for. The other benefit of Epic integration is discrete data delivery, which is going to enable more streamlined real-world evidence analysis, which more and more of our accounts are coming to us and expressing interest in performing. This will be a tool not only for clinical efficiency, but also for expanding research insights around MRD in heme.

Got it. That's helpful. Thank you.

Thank you.

One moment for our next question.

And our next question is a follow-up from the line of Rachel Vatsendale from JPMorgan. Your question, please.

Perfect. Hey, good afternoon. Thanks so much for taking the questions. I wanted to follow up on some of the ASP comments earlier. So you noted that you expect to lift ASPs by $200 over the next two years. So can you just talk about how should we think about the cadence of that step up over the next 24 months? Will it be linear? Any comments there would be helpful.

Hi, Rachel. Yeah, I would, at this point, model it out as linear. I think the reality is, you know, ASPs, you know, based on age collections and a variety of different factors, they can vary month to month, even quarter to quarter. But we're seeing kind of all the leading indicators point to kind of a linear growth to over $200 in ASP increases, you know, over the next two years.

Great. And then just as a follow-up, can you walk us through your updated thinking around these state biomarker bills? What type of impact could that really have on the business? And then do you have any of that benefit embedded in the guide for the 2024 year as well?

It's a great question, and we don't have it, you know, specifically baked into the guide, but we are optimistic. I would say we're increasingly optimistic based on, you know, the discussions and conversations that we've been having that the enforcement of the state biomarker laws are starting to take hold. Just to give some context, I sit on the board of Coalition for 21st Century Medicine, and we're working kind of hard on this initiative. And if you look at AdvaMed, ACLA, and all the industry associations, it's a prominent area of focus obviously you're fighting the insurance company lobbies that are trying to not not pay but net net I think from a national position that's coming down on the states you are seeing incremental evidence of kind of positive trends and insurance companies are are starting to comply with this legislation so you know again I don't think it's going to be an overnight kind of success and obviously we're hoping more states are enact the biomarker legislations, but you will see kind of overtime incremental and no, it's not baked into the guide.

Great. That's it for me. Thank you.

Thank you. This does conclude the question and answer session as well as today's program. Thank you, ladies and gentlemen, for your participation. You may now disconnect. Good day.