Adaptive Biotechnologies - Q1 2023
May 3, 2023
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies first quarter 2023 conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automatic message advising your hand is raised. To withdraw your question, please press star one one again. I would now like to hand the conference over to one of your speakers for today, Karina Calzadilla, Head of Investor Relations. Please go ahead.
Karina Calzadilla (Head of Investor Relations)
Thank you, Brittany. Good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies first quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the first quarter of 2023. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will be referencing to a slide presentation that has been posted to the investor section in our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements, depending on a number of factors which are set forth in our public filings with the SEC and listed in this presentation.
Non-GAAP financial measures will be discussed during the call, and every reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-founder, and Tycho Peterson, our Chief Financial Officer. Harlan Robins, Adaptive Chief Scientific Officer and Co-founder, Nitin Sood, Head of MRD Business, and Sharon Benzeno, Head of Immune Medicine Business, will be also available for Q&A. I'll turn the call over to Chad Robins. Chad?
Chad Robins (CEO and Co-founder)
Thanks, Karina. Good afternoon, everybody. Thank you for joining us on our first quarter 2023 earnings call. First, I want to thank all our Adaptive employees for their continued dedication and execution. This quarter's results represent a solid start to the year, laying the foundation for us to deliver on our 2023 annual goals. As shown on slide three, revenue for the quarter was $37.6 million, which re-reflects a 26% reduction in Genentech amortization, offset by strong recurring revenue growth from both our immune medicine and MRD businesses. We continue to streamline our organization and improve operating efficiencies. We recently announced the consolidation of the President and Chief Operating Officer roles under Julie Rubinstein to better align operations with our path to profitability. Our research and development efforts in drug discovery continue to progress.
Both programs in cancer cell therapy with Genentech are advancing and are on track to achieve the respective goals set for this year. Our drug discovery team is making great progress towards novel targets in autoimmunity. Let's take a closer look at our MRD business on slide four. Our MRD business is firing on all cylinders. MRD revenue growth for the quarter had strong growth of 20% versus prior year. ClonoSEQ test volume grew 57% with double-digit volume growth in all marketed indications. Multiple myeloma continues to be the biggest growth driver and largest contributor. DLBCL launch is progressing well and now represents 3% of ClonoSEQ orders. Ordering healthcare providers and ordering accounts experienced significant growth of 58% and 56% versus prior year respectively. Blood-based testing, a key component of our growth strategy, increased in all indications and grew 30% versus prior quarter.
Approximately 35% of all MRD tests are in blood, compared to 31% last quarter. This growth in blood testing is mainly driven from our sales force strategy to penetrate community accounts. Community accounts continue to grow quarter-over-quarter and now contribute about 18% of clonoSEQ volume versus 15% in the fourth quarter of last year. In addition, MRD Pharma, a core component of our MRD business, grew 23% excluding regulatory milestones. We continue to grow our MRD partnerships. This quarter, we entered into a new translational pan-portfolio partnership with Takeda for the use of MRD as a clinical endpoint. Not only do we have a healthy sequencing revenue stream from these partnerships, but we also now have $400 million in future eligible milestones based on additional drug approvals from ongoing and future studies.
Zooming into clonoSEQ test volume on slide five. As you can see from the chart, we continue to set record high volumes quarter-over-quarter. This quarter, volume grew 15% sequentially to over 12,000 tests delivered. In the United States, our market of focus, Test delivered grew 16% from last quarter. Our strategy to drive clonoSEQ volume is working, and we continue to drive it ASP expansion with new payers and improved collections. Of note, this quarter, a new clonoSEQ PLA code was approved, which allows us to uniquely identify clonoSEQ in our claim submissions. As noted on slide six, we are on track to achieve key milestones in 2023 for MRD. Our Epic integration is on schedule as we look to bring pilot sites live next quarter with additional integration sites to follow.
We also continue to expect meaningful data readouts in DLBCL and multiple myeloma in blood and therapy discontinuation. The setup for MRD is strong, and we are confident that we will achieve over 50% clonoSEQ test volume growth this year versus 2022. Switching to our immune medicine business on slide seven. We generated more than $16 million in revenue this quarter from two distinct areas, pharma services and drug discovery. Pharma services generates revenue from multiple sources as we provide valuable immune receptor data to our biopharma customers, accelerating their therapeutic programs. We have a healthy portfolio with more than 120 active studies that is set up to deliver sustainable growth of 20%-30% CAGR over the next three to five years. Revenue from drug discovery this year reflects an expected deceleration due to the reduced amortization of the Genentech upfront payment.
As you can see from the slide, there are multiple sources of revenue from pharma services that will contribute to growth. In addition, as we advance our drug discovery efforts, new revenue streams will drive future value. Our drug discovery programs in cancer and autoimmune disorders are on track to achieve the milestones shown on slide eight. We are making progress on our two cancer cell therapy programs with Genentech. For the first shared TCR candidate, we expect the first IND acceptance this year and continue to support Genentech to the clinic. For the personalized program, we are building the regulated infrastructure in our dedicated lab and are executing to optimize our process for clinical readiness. In our internal autoimmune programs, we are advancing our R&D efforts to identify and validate novel targets.
We also are expanding our therapeutic TCR and antibody platforms with the goal of developing therapeutic assets to be able to drug these targets. We look forward to providing you with more updates as we progress. I'll now pass it over to Tycho.
Tycho Peterson (CFO)
Thanks, Chad. Turning to our financial results, starting with slide nine. Total revenue in the first quarter was $37.6 million, with 57% from MRD and 43% from immune medicine, representing a 3% decrease from the same period last year, which was primarily attributable to the expected step down in Genentech amortization and a $3 million MRD regulatory milestone comp. MRD revenue grew to $21.4 million, up 20% from a year ago, with strong growth from both clinical testing and pharma partnerships. clonoSEQ test volume, including international, increased 57% to 12,079 tests delivered from 7,698 tests in the same period last year. Immune medicine revenue was $16.2 million, down 22% from a year ago, driven predominantly by Genentech amortization.
Moving down the P&L, total operating expenses, including cost of revenue, were $94.8 million, representing a 7% decrease from $101.7 million in the same period last year. Notably, R&D, sales and marketing, and G&A all declined year-over-year. Cost of revenue was $18.7 million, driven by higher usage of our production lab to process revenue samples, as well as a transitory increase in overhead due to the ongoing lab consolidation into our headquarters in Seattle. Finally, interest expense from a royalty financing agreement with OrbiMed was $3.5 million, which was almost entirely offset by interest income. Net loss for the quarter was $57.7 million compared to $62.8 million last year. We ended the quarter with approximately $441 million in cash, equivalents, and marketable securities.
Turning to our outlook on slide 10. We are reiterating full year revenue guidance of $205 million-$215 million. At the midpoint, we expect the contribution from our businesses to be approximately 55% from MRD and 45% from immune medicine. We expect revenue to be back half weighted. Within our MRD business, we expect over 50% growth in clonoSEQ test volume and MRD regulatory milestones in the mid to high single-digit millions. As we drive operating efficiencies, we are also reiterating our full year OpEx targets, including cost of revenue to be below 2022 OpEx of $385.5 million.
Cash preservation remains a priority. We expect our burn for the remainder of 2023 to average around $40 million per quarter, which is unchanged from guidance at the beginning of the year. Of note, the Q1 cash burn was higher due to usual bonus payouts in March. Q1 financial results were solid and in line with our expectations. We are on track to deliver full year guidance. Importantly, we have a strong cash position to fuel growth and execute on our long-term goals. We remain committed to driving additional operating leverage and achieving positive EBITDA in 2025 and cash breakeven in 2026. I'll now turn the call back over to Chad.
Chad Robins (CEO and Co-founder)
Thanks, Tycho. As discussed during the call, we had a solid start to the year, and we are focused on three main areas. First, execute on our MRD business to further solidify our leadership position. Second, in immune medicine, advance our partner programs with Genentech and our internal R&D efforts in autoimmunity. Third, manage capital allocation and drive operational efficiencies. With that, I'd like to turn it back over to the operator and open it up for questions.
Operator (participant)
Thank you, Chad. Thank you all. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Okay. Our first question comes from the line of Mark Massaro with BTIG. Mark, your line is now open.
Mark Massaro (Managing Director)
Hey, thank you. Mark Massaro from BTIG. Congrats guys on the quarter. I guess, I didn't hear too much about the integration with Epic other than, you know, you expect to complete it by the end of this year. I would love to just kinda get a sense for, you know, operationally what needs to happen. Are you getting close? What are some of the challenges and opportunities of achieving that by year end?
Chad Robins (CEO and Co-founder)
Sure. Nitin, you wanna take that one?
Nitin Sood (Head of MRD Business)
I think the Epic integration is really progressing nicely. You know, we've defined the user interface in Epic to order clonoSEQ, how the results will look in clonoSEQ. We've, you know, done a lot of testing, end-to-end testing, and it all is progressing very well. We'll go live with a couple of pilot sites to do a proper thorough end-to-end integration testing, and this will be sometime in Q3. We're simultaneously lining up accounts that we bring online with Epic in the second half of the year, and that's also progressing very nicely, and we're seeing a lot of interest from our install base in this integration. I think the real gating factor I see is the IT resources and IT bandwidth available at each of our sites.
I'm fairly confident that, you know, we'll get this completed, and we'll roll it out in the second half of the year. You know, based on the precedents from our industry peers, you know, I'm you know, expecting a small impact in the second half of 2023, but really a big impact in 2024.
Mark Massaro (Managing Director)
Okay, great. It's nice to see DLBCL pick up, you know, to 3% of orders. I think in the past you've talked about how DLBCL is an indication that includes MRD assessment based on ctDNA. You know, related to this, you know, I think we recently saw Quest Diagnostics acquire Haystack Oncology, which I thought was interesting. I would love to hear maybe your latest thoughts on what your view is on solid tumor MRD, if that's an area of interest and, you know, where you might be in terms of thinking about tackling this internally or externally.
Chad Robins (CEO and Co-founder)
Sure. Maybe I'll make a few comments, Mark, and then I'll hand it over to Nitin to discuss some of the technology. I mean, we're always looking for ways to expand our brand and either leverage our brand or leverage our channel. We wanna do that in a way that makes kinda the most sense for us as a business. I should point out that there's, you know, a pretty significant total adjustable market opportunity in front of us just in the hematology space that we need to operate, execute on, and commercialize. That's our main area of focus right now. That being said, you know, we do look at opportunities where...
Like, for example, you know, we've got 70 reps in the field that have, I would say, kind of best in class, exceptional relationships with the hemonc. That's one area that we look to leverage. Secondly, to your question, we also have a brand in MRD, particularly with not only with our clinicians, but with pharmaceutical companies and clinical trials. That's another area that, you know, is under consideration as well. Kinda with respect to the Haystack acquisition, you know, in general, I think it's great to see M&A in the space around MRD. I think it's, you know, incredibly validating and you've got some, you know, extremely large players out there that, you know, I think are increasingly interested in the MRD space.
I think that's great. You know, they're earlier stage, right? You know, one of the main advantages of really the clonoSEQ franchise, there's is that it has several competitive modes around the business, including the fact that, you know, we've got we're regulated by the FDA in many indications. We've got wide payer coverage, and we're deeply penetrated into clinical trials. You know, that being said, with respect to circulating tumor DNA, maybe I'll pass it over to Nitin to give some comments on kinda what we're doing there. Nitin?
Nitin Sood (Head of MRD Business)
Yeah. I mean, I think, you know, the circulating tumor DNA technology that we have, you know, is uniquely focused towards, you know, B cells and so lymphoid malignancies, that therefore, you know, we're uniquely positioned to really excel in that area. You know, we have a very strong, you know, infrastructure in terms of generating clinical data. We have relationships with all the KOLs. You know, we've got over 100 publications in this area. You know, even most recently, we saw GRAIL publish some data in this area, again, their sensitivity was obe in a thousand. We are, you know, one in a million.
You know, they demonstrated data in a setting, you know, pretreatment, whereas our data is, you know, post-treatment when the tumor burden is much lower. Again, our CDx tech-technology is, you know, very suited for lymphoid malignancies, and we are continuing to innovate in that area, and we'll continue to release new products in that area. As Chad said, you know, we're constantly evaluating market areas and product expansion opportunities and, you know, when we have something, we'll, you know, we'll share that with you guys.
Mark Massaro (Managing Director)
Excellent. I will hop back in the queue.
Operator (participant)
All right.
Chad Robins (CEO and Co-founder)
Thank you, Mark.
Operator (participant)
Much for that. Our next question comes from the line of David Westenberg with Piper Sandler. David, give one moment for your line to be open.
David Westenberg (Senior Research Analyst)
Hi, thank you for taking the question. Okay, we're back to a really big number on the sequential order. I kinda wanna just maybe talk about the customer or the patient stickiness here. Maybe let's go back if we can. Can you talk about some of your older cohorts, maybe, you know, 'cause you've been around in the market for even longer than Terra, you know, 18, 19. You have some 18, 19 cohorts. Can you talk about some of the ordering behaviors from some of those cohorts from back then? Can you remind us if you are reimbursed past that fourth test with either CMS or some of the private payers? Just trying to think about how we can think about that waterfall effect in your business.
Chad Robins (CEO and Co-founder)
For sure. Nitin, go ahead.
Nitin Sood (Head of MRD Business)
I mean, I think the only comment I'll make there is that, you know, our Medicare reimbursement is limited to the four tests. We are working on, you know, expanding that to add Medicare coverage for single tests beyond those four tests. That's in the works. You know, as it relates to private payers, you know, it's based on individual tests. When a patient gets tested beyond four tests, we will be covered with our private payers. In terms of, you know, repeat testing, which I think the intent of your question, you know, we're currently averaging one point six tests per patient. You know, this varies by indication. It's much higher in ALL, it's lower in other indications.
Our, you know, expectation is that on average, this will go up to two tests per patient, as we expand our clinical utility, our clinical evidence set, and we continue to educate, you know, our physician population about the use of clonoSEQ across the patient's journey.
David Westenberg (Senior Research Analyst)
Got it. All right, then I'll just ask one more short one. Can you talk about maybe some of the consolidation of the president's role? You know, maybe why wasn't that, you know, separated from the beginning? If we should expect any other kind of positions in the future that might be consolidated. I mean, I think you had no changes to kind of your OpEx and burn since last quarter, so I'm guessing not. You know, just wanted to, you know, ask that, and I'll hop back in queue after that. Thank you.
Chad Robins (CEO and Co-founder)
Yeah. Thanks for the question there, David. First I wanna just get out on the table. There are absolutely no performance issues or disagreements with Mark Adams. He actually did a really nice job in building a top leadership team. It's really that team is in place, and I think we'll thrive under this new structure and under Julie's leadership. David, I think as you know, having covered us for a long time, Julie had done almost every role, executive role within the company and has intimate knowledge and working knowledge of almost every function at Adaptive.
The real, the real kinda reason that we did this is we wanted to align our operations, our R&D and commercial efforts across the company so that we could drive towards profitability and in really executing on all our goals. You know, again, this is just kind of the next iteration of the company and evolution, where we thought there was an opportunity to consolidate these roles under one person.
David Westenberg (Senior Research Analyst)
Got it. Thank you.
Operator (participant)
All right. Thank you so much for that. Everyone, I wanna make a quick note. Please do not ask your question until you hear me say your line is open. We don't want the speakers to miss anything. Our next question comes from the line of Derik de Bruin with Bank of America. One moment, Derik. Your line is now open.
Derik de Bruin (Managing Director)
Great. Thank you. Hey, good afternoon. Hey.
Chad Robins (CEO and Co-founder)
Hey, Derik.
Derik de Bruin (Managing Director)
-had, you had some really solid growth in your pharma services business. I'm just curious, you know, we've heard some other companies talk about, you know, maybe a little bit of slowing reportization of pipelines in the pharma space. Can you sort of talk about what you're seeing there? Any sort of slowdown or changes in terms of how some of your customers are growing or thinking about it? Just basically just sort of like a temperature check on what you're sort of seeing in the pharma services space.
Chad Robins (CEO and Co-founder)
Derik, I'll make some comments and maybe Tycho wants or Sharon wanna pile on here. You know, I think there's first of all, you know, we don't there's nothing material to report in terms of kind of a slowdown from our pharma customers. You know, that being said, I think there's two areas that we're closely watching. One is the IRA, the Inflation Reduction Act, and the second is just in terms of kinda macroeconomic headwinds with kinda, you know, lesser degrees of funding for kinda small and mid-sized kinda biotech companies that would potentially use our services. It's something we're keeping an eye on, but we don't see... and it's also reflected frankly in our guidance range.
There's nothing to report kinda above and beyond that, at least in terms of impact on our business.
Derik de Bruin (Managing Director)
Yeah. I mean, you have relatively small emerging biopharm exposure, would be my guess.
Chad Robins (CEO and Co-founder)
We do. Yeah. We have some. you know, our biopharma exposure really
Derik de Bruin (Managing Director)
Mm-hmm.
Chad Robins (CEO and Co-founder)
Kind of across the board from small and midsize to, you know, almost all large pharma and biotech kinda use us in some capacity, whether for, in MRD trials or for pharma services from our immune medicine business.
Derik de Bruin (Managing Director)
As we're sort of like we're sort of out and finished with the pandemic, and obviously, you know, comps were a little bit weird because of the Omicron last year. How should we think about order pacing now that we're sort of back to more seasonal, traditional sort of things? Can you just sort of help us sort of look at how we should think about order and test volume in the clonoSEQ business as we go for the next couple of quarters?
Chad Robins (CEO and Co-founder)
Mm-hmm. sure. Nitin, you wanna comment on clonoSEQ test volume over the next few quarters?
Nitin Sood (Head of MRD Business)
Yes. I mean, I think, look, you know, all the leading indicators look very favorable. New HCPs and accounts grew greater than 50%. Unique patients tested grew greater than 70%. All the indications, all four indications that we play in grew a double digit quarter-over-quarter. Sales force productivity has increased by 77% from a prior year. Our community business grew by 45% quarter-over-quarter. Blood testing grew by 30% quarter-over-quarter. You know, with expansion into DLBCL, and, you know, we're expanding into another non-Hodgkin's lymphoma indication called mantle cell lymphoma, where we'll be fighting for Medicare coverage next month. The upcoming Epic integration, which is going really well.
The increased reach and effectiveness of our sales team, the low penetration we already have, I think I expect the growth to continue in 2023 above, you know, 50% and, you know, onwards beyond that as well. From my standpoint, I'm very optimistic about the clonoSEQ diagnostic business. Likewise, I feel fairly strongly about our pharma business. We have a very strong pipeline of new deals that we're working through, so I expect that to be, you know, above 20% for the remainder of the year as well.
Derik de Bruin (Managing Director)
Got it. Just to help calibrate-
Tycho Peterson (CFO)
And, and Derek-
Derik de Bruin (Managing Director)
Yeah.
Tycho Peterson (CFO)
Hey, Derik, it's Tycho. I just wanna remind you know, we had guided for the year to be kinda back half weighted. If you think about clonoSEQ, you know, just think about the Epic integration we talked about earlier and the DLBCL ramp, right? Just kind of, you know, getting off and obviously we doubled the sales force a year ago. We're kinda anniversarying that now. Just think about, you know, momentum building in the back half of the year.
Derik de Bruin (Managing Director)
Got it. Thanks for the reminder, Tycho. Hey, can you just you know, can you give us some sense on the, I don't know, either the test volume or the revenue volume split between the different indications, ALL, multiple myeloma, CLL, and NHL? You know, now that you've got... I'm just sort of curious in terms of where we are and where you think you are penetrated in those markets. Just would like to get a sense of the flavor on just for what your revenue mix is from the different indications.
Chad Robins (CEO and Co-founder)
Sure. Nitin, you wanna take that?
Nitin Sood (Head of MRD Business)
Yes. I think we're primarily, you know, driven by multiple myeloma and ALL. That sort of is our two major indications. I would say we are sort of close to 20% penetrated in the ALL market. We're probably 7%-8% penetrated in the multiple myeloma market, and then, you know, sub 5% in CLL and DLBCL. Longer range, you know, sort of in the, you know, by 2027 or so, I expect our overall market penetration to be above 20% across all the indications. You know, a lot of growth will come from continued penetration in multiple myeloma, and DLBCL, where we have the highest patient numbers.
You know, that combined with, you know, steady increase in ASP, you know, will still drive revenue for the foreseeable future.
Derik de Bruin (Managing Director)
Great. Thank you very much.
Operator (participant)
All right. Thank you so much, Derik. Our next question, hold one moment, comes from the line of Tejas Savant with Morgan Stanley. One moment. Your line is now open.
Tejas Savant (Executive Director)
Hi. This is Yuko on for Tejas. Thank you for taking our questions. Following up on a previous question here on regarding Epic Integration. With pilot sites underway, how much of a driver is Epic Integration for community uptake of clonoSEQ?
Chad Robins (CEO and Co-founder)
Nitin?
Nitin Sood (Head of MRD Business)
Yes. I think Epic is primarily in our academic settings. That's where we see most of our Epic installation going forward. We are looking at other EMRs that are dominant in the community setting. Once we learn and, you know, get, you know, operational excellence going with Epic, we look at other EMRs as well. In the interim, you know, our penetration in the community is so small that just our expansion of our sales team with the focus on the community, that's what's driving the growth in community. As I've stated before, you know, we had a very solid performance from our from our community business. You know, a year ago, 8% of our tests came from the community.
In Q1, this was 18% of our tests, I expect for the full year, 20% of our business to come from community. Again, in the next, you know, three to four years, I expect 50% of our order volume to come from the community.
Speaker 13
Great. Thank you so much for that color. Also you mentioned additional data presentation during your prepared remarks to be presented this year. Should we anticipate any of these or other data points to be presented at ASCO?
Tycho Peterson (CFO)
We're looking at ASH, which is kind of the. In terms of our conferences. Sorry. At the American Society of Hematology meeting at the end of the year is where kind of more of the data presentations will be presented.
Mm-hmm.
Speaker 13
Okay, great. Thank you.
Operator (participant)
All right.
Tycho Peterson (CFO)
Thank you.
Operator (participant)
All right. Thank you so much. Our next question comes from the line of Tom Stevens with Cowen and Company. One moment.
Tom Stevens (VP of Equity Research)
Congrats on the quarter. Just a couple on the gross margin and the consolidation. I guess how long do you expect that consolidation to take? How much does it cost in dollar terms, and how much do you expect it to save in 2024? I've got a follow-up to that.
Tycho Peterson (CFO)
Yeah, we haven't. I mean, a couple things to think about. The big impact on gross margins this quarter was, you know, Genentech amortization and MRD milestones, right? Those are very high margin, you know, 100% in the case of the MRD milestones. You know, as those revenues were down, that weighed on gross margins. You know, I did mention, we're moving our lab into our headquarters in Seattle. You know, That's an ongoing process. You know, I mean, a couple more months. I don't wanna put a firm timeline on it. It's happening. We, you know, we haven't quantified any savings from that. We'll kind of come out and reevaluate our OpEx targets every quarter and update you know, as we have more information.
Tom Stevens (VP of Equity Research)
Great.
Tycho Peterson (CFO)
Sorry, can I add one more thing, Tom?
Tom Stevens (VP of Equity Research)
Yeah.
Tycho Peterson (CFO)
We're doing a lot of work on costs right now. I mean, this is a big initiative internally, really kind of looking at our overall margins. you know, it is something that, you know, we will be communicating more on and hopefully, you know, providing some guidance around as we go forward. We historically haven't really, you know, talked a lot about gross margins, but it is a big focus internally.
Tom Stevens (VP of Equity Research)
Great. No, that's very helpful. Then just to follow up on multiple myeloma blood. It sounds like if you're presenting that at ASH end of this year, we shouldn't expect any impact on your kind of clonoSEQ volumes from blood multiple myeloma until maybe mid 2024?
Tycho Peterson (CFO)
Actually, Tom, you know, every quarter we're getting more tests, multiple myeloma kind of done in blood. We continue to kinda sell the merits of blood-based testing. It's. Obviously, the continued data readouts will help with clinical utility and comparability studies, but the reality is that, you know, and part of our growth trajectory is based on kind of the increase in blood-based testing across kind of multiple indications, including multiple myeloma.
Tom Stevens (VP of Equity Research)
Got it. Then just one last one, more in the weeds. Your milestone pipeline for MRD looks about $50 million bigger. I guess, like, does that change any of your pacing expectations? Kind of where do you expect the pacing of that $400 million to kind of be in the out years, especially with the Takeda deal? Sorry.
Tycho Peterson (CFO)
ow, you did hear that we reiterated our guidance for this year, mid-single digit, you know, millions in milestones. We're obviously not commenting on 2024, you know, at this point, but what we talked about is that, you know, we've got line of sight to around half those, $400 million in 74 active trials. Next year will be a bigger year for milestones, for sure, just given what we know about, you know, trial readouts. And when we officially guide, you know, you'll hear more about it then. Keep in mind, you know, all the milestones at this point are also on secondary endpoints.
You know, should the FDA move forward and endorse MRD as a primary endpoint, that would be upside, you know, relative to what we've previously talked about.
Tom Stevens (VP of Equity Research)
Great. That's all I have for tonight. Thank you, guys.
Chad Robins (CEO and Co-founder)
Thanks, Tom.
Operator (participant)
All right. Thank you so much. Our next question comes from the line of Andrew Brackmann with William Blair. Your line is now open.
Speaker 13
Hey, everyone, this is Dustin on the line for Andrew. This is just a more broader strategic question. You know, it's been some time since you've reorganized the business into the Immune Medicine and MRD segments. Just wondering how that reorganization has helped you guys in terms of commercialization and capital allocation.
Tycho Peterson (CFO)
Yeah, it's a really good question. It's helped quite a bit, particularly in the area of focus, right? We now have two focused, dedicated teams with very clear objectives as to what they need to deliver, kind of, not only this year, but in terms of the long-range strategic plan of the company. We've, you know.
Chad Robins (CEO and Co-founder)
If you look at kind of our MRD objectives, which are clearly laid out, we know exactly what we need to do. Similarly in the immune medicine business, both in our partner program and in our R&D programs for drug discovery, we have very clearly defined kind of milestones and kind of go, no go decisions. So from, you know, a perspective, you know, of capital allocations, we can be very clear as to what we're investing in and what the growth trajectory looks like in each one of those businesses.
Speaker 13
Great. Thanks for that. One more maybe on your long-term guidance you guys laid out earlier this year. In terms of the range, you know, the 20%-30%, just wondering what could bring you to the high end of that range? What could be sources of upside there? Looking at the lower end of the range of 20%, what could bring you guys down there? Additionally, once the first quarter, we can expect some sort of adjusted EBITDA profitability, if you have any visibility there. Thank you.
Tycho Peterson (CFO)
Sure. I mean, some of the swing factors, you know, in the outlook are, you know, around, you know, MRD, obviously clinical volume growth, you know, to the extent there's upside there that could be a factor. You know, we talked about MRD milestones earlier and you know how we've been, you know, fairly thoughtful about kind of risk adjusting those. We put a 30%-50% probability of success on those milestones to the extent there's better odds there that would be upside. Immune medicine obviously, you know, additional pharma deals would be a potential driver beyond what we've modeled.
You know, then anything with Genentech that, you know, is upside relative to, you know, either timing or incremental, you know, programs that we haven't announced or signed. You know, those would be the main things. Anything, Chad or Sharon, you would add or Nitin?
Chad Robins (CEO and Co-founder)
I think that captures it well, Tycho.
Tycho Peterson (CFO)
Yeah. It's all organic. Obviously, if we did, you know, something you talked about solid tumor earlier, I mean, if we moved down another path, that would be incremental too. You know, EBITDA, we're not gonna get granular on the quarter, right? We kind of laid out the. As we get closer and obviously we've guided for 2025, but we'll talk about it more. I don't wanna get that granular at this point still to yourself.
Speaker 13
Okay, great. Thanks, Tycho. That's it from us.
Operator (participant)
All right. Thank you so much for that. Our next question will be coming from the line of Salveen Richter with Goldman Sachs. Your line is now open.
Speaker 12
Hey, guys. Good evening, and thanks for taking the question. This is Elizabeth on for Salveen Richter. Wanted to ask on the drug discovery efforts. It sounds like this year is really a year for building the infrastructure and, you know, building up the engine to drive the drug discovery vertical. Wanted to know what you hope to learn this year as you optimize for the personalized product and any kind of concrete timelines you can share there on potential INDs, and then what you're also hoping to learn on the autoimmune drug discovery front. Thank you.
Sharon Benzeno (Head of Immune Medicine Business)
Thanks, Elizabeth. As Chad mentioned, in terms of the IND, there's the one IND acceptance for the first cell therapy program that is included in our 2023 guidance. No additional timing on additional INDs are ones that we're in a position to certainly highlight or discuss, but certainly we'll provide updates as appropriate. Related to the fully personalized approach, absolutely, we are scaling our regulated infrastructure in South San Francisco with our dedicated lab to enable a fully personalized approach, especially as we have line of sight with our partner Genentech for clinical readiness, and we'll provide updates as that advances.
In addition to Genentech, our internal pipeline, as we've indicated, is focused to leverage our existing capabilities in autoimmunity. Specifically, we've highlighted multiple sclerosis as an area of focus, as well as IBD. There, we are very focused in terms of a proof point to get to at least one novel target in autoimmunity, that where we generate sufficient data to warrant additional investments, with the goal of expanding the pipeline and entering into the clinic.
Speaker 12
Got it. When do you think we'll have some more clarity on that internal pipeline and, kind of concrete guidance around, you know, milestones for that program?
Sharon Benzeno (Head of Immune Medicine Business)
Yeah. Right now, as we said, we're heads down in terms of R&D to get to that novel target. We're certainly excited by the progress we're making. We're not in a position right now to elaborate, but certainly as we get more information, the goal really is to validate that target and then assess based on compelling data, whether it warrants further investments. We'll certainly update as these progress throughout the year.
Speaker 12
Great. Thanks so much.
Operator (participant)
All right. Thank you so much for that. Our next question comes from the line of Dan Leonard with, hold on, with Credit Suisse. One moment. Your line is now open.
Dan Leonard (Research Analyst)
Great. Thank you. I have a question on gross margin. The 50% gross margin figure in the quarter, is that the right baseline now to think about the business absent milestone payments?
Tycho Peterson (CFO)
I mean, look, as I said before, the two, you know, big drags were Genentech and, you know, the lack of MRD milestones, right? In any given quarter, if we have more MRD milestones, which are a 100% margin, you know, that will lift. It will continue to be lumpy. You know, the other kind of, you know, factors were, you know, higher costs of running in our production lab. We had a little bit of scrap that we had to deal with too. Yeah, look, I mean, the milestones would be the big swing factor quarter to quarter. Just keep that in mind as you're thinking about it.
Chad Robins (CEO and Co-founder)
We have talked about kind of margins at scale being in the 70, you know, plus % range, that, you know, we have, as Tycho mentioned, a very kind of rigorous internal program to look at how we are kind of focused on our margins. That is, again, also one of the reasons is something that Julie is driving in coordination with Tycho.
Dan Leonard (Research Analyst)
Appreciate that. Thank you. As my follow-up, can you speak to how the pharma services business is performing within immune medicine and what is the outlook? I think Nitin commented on 20% plus growth for pharma services, but I think that was just specific for MRD.
Sharon Benzeno (Head of Immune Medicine Business)
Yeah, happy to elaborate. As we've mentioned last year in 2022, our pharma services business in Immune Medicine substantially grew by 67% versus 2021. We aim to continue this trajectory with double-digit % growth. The 20%-30% CAGR over the next three to five years does apply to our pharma Immune Medicine business in terms of our forecast. The growth this year, as you saw, the contribution in Q1 2023 was of $7 million, almost half of the $16 million for Immune Medicine. We're excited by the various growth levers and sources of revenue that we're generating from our Immune Medicine business and aim to grow that through this year and the years beyond.
Dan Leonard (Research Analyst)
Okay. Thank you.
Operator (participant)
All right. Thank you so much for that. All right. At this time, there are no more questions, and this call will now be concluded. Thank you for your participation in today's conference. This does conclude the program, and you may now disconnect.