Adaptive Biotechnologies Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 14, 2024

There are 14 speakers on the call.

Operator

Thank you

Speaker 1

for standing by, and welcome to the Adaptive Biotechnologies 4th Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. As a reminder, today's program is being recorded. And now I'd like to

Speaker 2

Thank you, Jonathan, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' 4th quarter and full year 'twenty three earnings conference call. Earlier today, we issued a press release reporting Adaptive Financial Results for the Q4 and Full Year of 2023. The press release is available at www.adaptivebiotech. .Com.

Speaker 2

We are conducting a live webcast of this call and will be referencing to a slide presentation that has been posted in the Investors section on our corporate website. During the call, management will be making projections and other forward looking statements within the meaning of federal securities 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 filing with the SEC 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.

Speaker 2

Additional members from management will be available for Q and A. With that, I'll turn the call over to Chad Robbins. Chad?

Speaker 3

Thanks, Karina. Good afternoon, everyone, and thank you for joining us on our Q4 and full year earnings call. As you can see on Slide 3, 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.

Speaker 3

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 $170,000,000 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 clonoSeq 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.

Speaker 3

Importantly, we ended the year with a strong cash position approximately $346,000,000 which enables us to execute on the strategic priorities of both businesses. In MRD, drive ClonaSeq 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.

Speaker 3

In the Q3 of 2023, we retained 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 6. Clonaseq clinical revenue in the 4th quarter grew 56% versus prior year and 25% versus prior quarter with growth coming from both volume and ASP.

Speaker 3

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, 4th quarter is typically impacted by fewer business days. We are off to a great start this year with record high ClonaSeq orders year to date. Growth came from all marketed indications and multiple myeloma continues to be the largest contributor. In addition, the actions we put in place to improve collections and expand coverage are working.

Speaker 3

ASPs in the 4th 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 2 years. It is encouraging to see positive trends on clonoC key indicators as shown on Slide 7. Blood based testing increased in all indications contributing 39 percent of clonoC tests.

Speaker 3

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 can now contribute nearly 1 in 4 clonoSeq tests. Recent data presented ASH showed evidence that clonoSeq MRD from blood predicts progression free survival early in the treatment cycle of multiple myeloma patients. Also ordering healthcare providers and ordering accounts grew 33% 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.

Speaker 3

We completed Epic integrations with our first five accounts expected to complete 15 to 20 more this year, includes 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 Onco EMR system in 2025. Looking at MRD Pharma on Slide 8. 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 of prospective trials.

Speaker 3

That said, we saw some recovery in the 4th quarter, which 23% growth sequentially. Despite these transitory headwinds, we ended the year with a healthy backlog of about $185,000,000 And we signed 2 important pan portfolio collaboration with Takeda in BeiGene. 2023 was a great year for ClonaSeq. We are well positioned to cement our leadership as a gold standard in MRD AIM for clinicians, patients, pharma partners and payers. Looking ahead, as shown on Slide 9 and 10, our priorities for MRD are clear.

Speaker 3

1st, Further increased 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. 2nd, improving margins through ASP increases and operating leverage with the primary goal of reaching positive adjusted EBITDA in the second half of twenty twenty five and cash flow breakeven in 2026. Turning to Immune Medicine on Slide 12. In 2023, our immune medicine business achieved 2 key milestones. 1, FDA IND acceptance was for the 1st T cell therapy product candidate under our partnership with Genentech.

Speaker 3

And 2, 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 and high value opportunities in cancer and autoimmunity. As shown on Slide 13, in cancer, We continue to support Genentech in the development of 2 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 our 1st 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.

Speaker 3

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 AIML 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 and D investments based on key proof points that drive future value for both our partnered and wholly owned drug discovery pipeline.

Speaker 3

I'll now pass it over to Tycho.

Speaker 4

Thanks, Chad. Starting on Slide 15 with revenue for the Q4 and full year. Total revenue in the Q4 was 45,800,000 with 67% from MRD and 33% from immune medicine. MRD revenue grew to $30,800,000 up 9% from a year ago. Clinical performance was the main driver, partially offset by a reduction in revenue from pharma services and regulatory milestones.

Speaker 4

Excluding regulatory milestones, MRD revenue grew 18% from a year ago. Colonoscopy test volume increased by 49% to 15,680 tests delivered from 10,526 tests in the same period last year. Immune medicine revenue was $15,000,000 down 45% a year ago, driven as expected by lower Genentech amortization, which decreased 53% year over year. Full year 2023 revenue was $170,300,000 representing an 8% decrease year over year. MRD revenue was $102,700,000 up 18% from a year ago driven by a 27% increase from MRD service revenue, partially offset by a lack of regulatory milestones.

Speaker 4

Immune medicine revenue was $67,500,000 down 31% from the prior year. As Chad mentioned, starting with our 3Q 'twenty three 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 and L, on the right hand side of the slide, Total gross margin for the quarter was 57%, representing an 8 point increase versus the 3rd quarter and a 13 point decline versus a year ago. 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.

Speaker 4

R and D, sales and marketing and G and A operating expenses declined 8% in total versus a year ago as we continue to place a strong emphasis on driving leverage. Net loss for the quarter was $69,500,000 compared to $40,200,000 last year. For the full year, operating expenses excluding the $25,400,000 one time impairment charge in the 4th quarter, was related to our legacy lab and headquarter space were $371,900,000 compared to $385,500,000 in 2022, representing 4% decrease. This reflects ongoing efforts to drive operating efficiencies, partially offset by higher cost of revenue. Full year net loss was $225,300,000 compared to $200,400,000 in 2022, while adjusted EBITDA was a loss of 116,400,000 compared to a loss of $121,600,000 in 2022.

Speaker 4

We ended the year with approximately $346,000,000 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 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 $130,000,000 140,000,000 At the midpoint, we anticipate a 65% 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.

Speaker 4

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% 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 I'm pharma collaborations will be used to offset R and D investments. Finally, our collaboration with Genentech continues to advance and we recognize roughly $14,000,000 in amortization of the upfront this year. Moving down the P and L, we expect operating expenses including cost of revenue to be between $360,000,000 $370,000,000 for the year.

Speaker 4

This deceleration in spending reflects our ongoing efforts to 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 $35,000,000 per quarter, representing an annual reduction of 10% versus 2023. With that, I'll hand it back over to Chad.

Speaker 3

Thanks, Tycho. We're off to a running start. I'm confident in our ability to continue to grow our clonoSeq 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.

Speaker 1

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

Operator

Great. Thanks for taking the questions. Maybe Tycho, can you just walk through a little bit of how the OpEx kind of outlook for in 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?

Speaker 4

Yes, yes. I mean, we talked about $35,000,000 per quarter. We're obviously continuing to drive efficiencies across the organization. So you're seeing leverage in sales and marketing, G and A and R and D. So as we've kind of mentioned in prior calls, there's kind of no stones unturned as we kind of go through the ongoing business review.

Operator

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 like the volume and the realized price implicit in the 2024 guidance?

Speaker 3

Yes. Susan, do you want to take that?

Speaker 5

Sure.

Speaker 2

So let's start with, I guess,

Speaker 6

the volume. So At the midpoint of the guidance, which we've issued, represents over 30% growth for the overall business. 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.

Speaker 6

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 $185,000,000 which we believe we'll be able to continue to draw from as we have in the past.

Operator

Got it. And then maybe last one.

Speaker 4

We did mention low single digit million in milestones for MRD Pharma as well in the prepared comments.

Operator

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. Kind of what can you share at this point and just kind of any color on some of the discussions and how things have gone?

Speaker 3

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

Operator

Great. Okay. Thank you.

Speaker 1

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

Speaker 7

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 think about some of the milestones or other payments from pharma. And then I just noticed a slight decrease in the sequential growth rate.

Speaker 7

And I noticed that same thing happened in Q4 of last year. Is there a seasonality in the business that we haven't been modeling previously, just in terms of volume growth that maybe I should say I haven't been modeling correctly?

Speaker 8

So I can speak

Speaker 6

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 in another quarter, 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.

Speaker 6

S. And ex U. S. Clinical businesses in Q4, we know that the U. S.

Speaker 6

Business grew at 7%, whereas the ex U. S. Business, 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.

Speaker 6

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.

Speaker 4

And Dave, we mentioned in 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.

Speaker 7

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 start to cycle those drivers. I mean, how should we think about the impact that you had from Epic?

Speaker 7

What inning are you in, in the Epic integration, the DBCL integration or Ordering pattern and kind of conversion of blood. I mean, I know that's 3 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. I'll stop there.

Speaker 6

Sure. Yes. 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.

Speaker 6

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 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 1 by 1 process.

Speaker 6

We anticipate having 15 to 20 as previously 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 be a very meaningful impact, a material impact. As Chad noted earlier, we signed another agreement with Flatiron Health, which will start to have impact on the business in second half of twenty twenty five. The second thing you asked about was DLBCL.

Speaker 6

We saw a really nice growth trajectory in DLBCL align 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 Hodgkin lymphoma more generally. So I do think DLBCL, 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 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 conversations for multiple myeloma in blood.

Speaker 6

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.

Speaker 7

Great. That was a lot of great detail. Thank you.

Speaker 1

Thank you. One moment for our next question. And our next question Comes from the line of Mark Massaro from BTIG. Your question please.

Speaker 9

Hey guys, thanks for taking the time. You've steadily increased the percentage of clonoSeq 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. Is there a certain target that you have even if it's out like say 3 to 5 years?

Speaker 3

Absolutely, we think 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. 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.

Speaker 9

Okay, excellent. I know at JPMorgan, you guys provided the 25% to 30% revenue CAGR for MRD between 2023 2027. So obviously, pretty solid top line growth and then, you've maintained your expectations to hit MRD profitability in the second half of twenty twenty five. 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?

Speaker 9

And maybe if you could speak to input costs or maybe some of the instrumentation or reagents that are used. I'd just be curious to see What type of levers you might have on the COGS side?

Speaker 3

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

Speaker 4

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

Speaker 9

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

Speaker 6

Sure. Mantle cell is a relatively smaller indication, more similar to perhaps ALLs and myeloma in the context of our existing cohort indications. That said, it is an area of unmet need for monitoring and certainly an area 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 MolDX and are active engaged with them now.

Speaker 6

So we expect to have more information this year.

Speaker 9

Excellent. I'll keep my questions there. Thanks guys.

Speaker 3

Thanks,

Speaker 1

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

Speaker 8

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 business?

Speaker 3

Yes. What we've heard is through the International Myeloma Working Group that several members of that committee had heard The FDA was considering, multiple 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 the first couple of quarters of this year.

Speaker 3

But again, it's hard to predict a government body. In terms of acceleration, Obviously, we have deals that have written into the contract that upon approval, the drug if our data is used As a primary endpoint, that we there are payments due. So it would certainly be beneficial to the business.

Speaker 8

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

Speaker 4

Yes, Yigal. I don't think we're going to get that granular. I can talk a little bit about pacing and LEMS' first half of this year. We've been pretty clear that NovaSeq really won't have an impact until 2025. One thing we have said is at scale, The MRD business should easily be north of 70% gross margin.

Speaker 4

That includes both clinical and pharma, but kind of consistent with other with other CLIA Labs, but we're not going to break out contributions from BLIMS versus the Nova transition specifically.

Speaker 8

Got it.

Speaker 4

ASP will also help there by the way.

Operator

Yes. Sorry, go ahead.

Speaker 8

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

Speaker 6

In terms of access to accounts?

Speaker 2

Yes. So Flatiron is engaged with they

Speaker 6

have access to about 40% of the community oncology community oncologists in the U. S. 40. They are also they are currently implemented in 250 accounts, which is a bit of a number that's hard to interpret because It's large some of these are very large accounts. But the business potential for us is tremendous.

Speaker 6

I mean, just The top 15 accounts that have utilized onco EMR have 33,000 relevant patients for our disease indications. So I think I'll leave it at that.

Speaker 3

Yuko, at a high level, think about and why we do this, think about as Epic as Vape 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 their backlog on timing, but We're looking kind of at a Q4 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 1 by 1 on the Epic integration. So 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.

Speaker 3

It's just very simply it's a very simple equation.

Speaker 8

Got it. Thank you so much for that color.

Speaker 3

You bet.

Speaker 1

Thank you. One moment for our next question. And Our next question comes from the line of Andrew Brackmann from William Blair. Your question please.

Speaker 10

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?

Speaker 10

Thanks.

Speaker 3

Yes. I'll just kind of reiterate some of the things I mentioned in my prepared remarks. 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, etcetera. So all those things are working.

Speaker 3

In terms of Medicaid, naturally as we continue to expand into kind of More indications. Medicaid is an overall percentage of our test mix, excuse me, kind of winds up going down in a large percentage of Medicaid kind of also relates to ALL. So overall, our initiatives are working. What we've talked about just in terms of quantifying that is a $200 increase over the next 2 years. And we've already we're already starting to see that work.

Speaker 10

Okay, that's perfect. And then I just want to go back to your comments around sort of gating R and D investment for specific proof points within the immune medicine side of 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? Yes.

Speaker 3

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

Speaker 11

Yes, 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 positive of multiple sclerosis. We're using both in vitro and in vivo MS disease model to ensure that data on that front we expect in the first half of the year. And then in parallel, we're starting to think about what drug modality to use to be able to go after this target.

Speaker 11

In parallel this year, we're also 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 over the next during the next 2 years into the clinic.

Speaker 10

Great. Thank you.

Speaker 1

Thank you. One moment for our next question. And our next question comes from the line of Sung Ji Nam from Scotiabank, your question please.

Speaker 12

Hi, thanks for taking the questions. Maybe if I can probe a little further on the MRD Pharma side, obviously, solid backlog there. But could you maybe talk about the trends you guys are seeing that's specific to Adaptive? Are you seeing any trial cancellations or are these mostly trial delays or kind of lengthening of the studies?

Speaker 6

I think probably one thing that's relevant to know is just the indications that we are in and the trends that we're seeing in the broader 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, made even stronger than 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.

Speaker 6

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 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.

Speaker 12

Got you. 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 is about 60% of the aggressive subtypes of NHL.

Speaker 12

So, is the 60% of NHL kind of the potential adjustable do you think in the future or is it too early to tell? Just kind of curious how as we think about the potential market size?

Speaker 6

Yes. I think it's early to say. We're still developing a lot of data in 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 is technically is Clickable in any lymphoma.

Speaker 6

And it will just be a question of which evidence we determined to invest in

Speaker 3

We have the same data as you do that DLBCL represents about 50% plus, 50% to 60% of all NHL. So that is one area, as we mentioned, that we're going to aggressively focused on. And the other 2 that we're Filing with Medicare on this year are MCL and CTCL.

Speaker 12

Got you. And then one quick one for Tycho, sorry if I missed it, but the $14,000,000 amortization for Genentech this year, is that should we model that rate of lease throughout the year?

Speaker 4

Yes, I mean, I think that's the right way to do it. I mean, yes, it will shift around month to month, but yes, I think just kind of ratably for the year is fine.

Speaker 6

Great. Thank you.

Speaker 1

Welcome. Thank you. Our next question comes from the line of Salveen Richter from Goldman Sachs. Your question please.

Speaker 13

Hey guys, good evening. This is Elizabeth on for Salveen. 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 2nd is on the Epic partnership.

Speaker 13

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.

Speaker 3

Yes. I'll come The first one, Elizabeth, and then I'll kick it over to Susan to provide more color on the Epic integration early day learnings. As far as Flatiron, while I can't go into the specifics of the agreement to be able to protect Flatiron's position in the industry. What I can tell you is your question is, it doesn't entail kind of milestone payments. It's basically a setup fee and an annual fee.

Speaker 3

It's I think the most I can elaborate at this point. But Susan, you want to talk about Epic?

Speaker 6

Sure. Yes, 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 ask 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 having to be manually uploaded and searched for.

Speaker 6

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 coming to us and expressing interest in performing. So I think this will be a tool not only for clinical efficiency but also for

Speaker 1

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

Speaker 5

Perfect. Hey, good afternoon. Thanks so much for taking the questions. I want to follow-up on some of the ASP comments earlier. So you noted that you Back to lift ASPs by $200 over the next 2 years.

Speaker 5

So can you just talk about how should we think about the cadence of that step up over the 24 months will be linear. Any comments there would be helpful.

Speaker 3

Hi, Rachel. Yes, I would at this point model it out as Linear. I think the reality is ASPs 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 over $200 in ASP increases over the next 2 years.

Speaker 5

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

Speaker 3

It's a great question and we don't have it Specifically baked into the guide, but we are optimistic. I would say we're increasingly optimistic Based on the discussions and conversations that we've been having that the enforcement 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 AviMed, 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 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 that insurance companies are starting to comply with this legislation.

Speaker 3

So again, I don't think it's going to be an overnight Success and obviously we're hoping more states enact the biomarker legislations, but you will see kind of over time incremental and no, it's not baked into the guide.

Speaker 2

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

Speaker 1

Thank you.

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Earnings Conference Call
Adaptive Biotechnologies Q4 2023
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