Adaptive Biotechnologies - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 revenue was $52.4M (+25% y/y) with MRD revenue $43.7M (+34% y/y); Immune Medicine revenue was $8.7M (-6% y/y). Adjusted EBITDA loss improved to $12.7M from $28.2M y/y, and net loss narrowed to $29.8M from $47.5M y/y.
• Management raised FY25 MRD revenue guidance to $180–$190M, lowered total OpEx to $335–$345M, and reduced cash burn to $50–$60M; sequencing gross margin reached 62% (+17pp y/y), supporting margin trajectory.
• clonoSEQ test volume hit a record 23,117 (+36% y/y), with blood-based testing at 44% of U.S. MRD tests and expanded Medicare coverage for MCL recurrence monitoring (CLFS $2,007/test) acting as catalysts for volume and ASP uplift.
• Versus S&P Global consensus, ADPT delivered a revenue beat ($52.4M vs $42.7M*) and an EPS beat (-$0.20 vs -$0.31*), driven by clinical volume momentum and MRD milestones; guidance implies continued sequential growth and potential upside from milestones and EMR integrations.
• Near-term stock reaction catalysts: raised guidance, strong clinical volumes, expanded Medicare coverage in MCL, and visibility on EMR/Flatiron integration and NovaSeq X margin benefits in 2H25.

What Went Well and What Went Wrong

What Went Well

• “We had a strong start to 2025 with 34% MRD revenue growth,” with clonoSEQ volumes at 23,117 (+36% y/y), highlighting scalable MRD execution and pricing discipline.
• Sequencing gross margin improved to 62% (+17pp y/y), reflecting lower overhead, stable direct labor, and pricing gains; MRD Adjusted EBITDA loss improved to -$4.1M from -$17.3M y/y.
• Expanded Medicare coverage for clonoSEQ in MCL recurrence monitoring at $2,007/test and payer contracting wins (Aetna, Humana, Anthem, Horizon, BCBS plans) support ASP uplift toward ~$1,300 in FY25.

What Went Wrong

• Immune Medicine revenue declined 6% y/y to $8.7M, reflecting lower Genentech amortization despite growth in pharma/academic services; segment Adjusted EBITDA loss remained at -$5.4M.
• Interest expense ($2.9M) from the revenue interest agreement offset interest income ($2.7M), and total net loss was still sizable at -$29.8M (EPS -$0.20) despite improvements.
• Management maintained caution on timing of MRD milestones and operational savings from EMR integrations, highlighting dependencies on FDA dynamics and account-side IT resources (limiting near-term operating leverage recognition).

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Adaptive Biotechnologies First Quarter 2025 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 this session, you need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Karina Calzadilla, Head of Investor Relations. Please go ahead.

Karina Calzadilla (Head of Investor Relations)

Thank you, Anant Thaker, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies First Quarter 2025 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the first quarter of 2025. 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 security laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements depending on a number of factors which are set forth in our public filings with the SEC and listed in this presentation.

In addition, non-GAAP financial measures will be discussed during the call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and co-founder, and Kyle Piskel, our Chief Financial Officer. Additional members from management will be available for a Q&A. With that, I'll turn the call over to Chad. Chad.

Chad Robins (CEO and Co-Founder)

Thanks, Karina. Good afternoon, and thank you for joining us on our first quarter earnings call. As highlighted on slide three, we are off to an excellent start this year, demonstrating strong execution across both top and bottom line results. In MRD, revenue increased 34% from a year ago. Significant growth was observed in clinical volumes, ASP, and pharma sequencing. This quarter, we also received our first Medicare recurrence monitoring coverage in MCL, a key part of our strategy to grow the lifetime value of each clonoSEQ Medicare patient. In immune medicine, we're making progress on our preclinical antibody program and autoimmunity. Sequencing growth margin improved by 17 percentage points year-over-year to 62%. At the same time, operating expenses decreased by 9%, underscoring our disciplined cost management while driving strong, sustainable growth.

As a result, cash burn for the quarter was $23 million, a 38% improvement compared to the same period last year. Given the strength of our performance and sustained momentum, we are raising our full-year guidance to reflect, one, a higher MRD revenue range, two, lower operating expense range, and three, a lower annual cash burn. Kyle will provide more details during his remarks. Of note, our full-year outlook has minimal exposure to tariffs, trading policy updates, and NIH funding pressures. Importantly, I want to highlight our solid cash position of $233 million. We believe our cash on hand provides ample runway to achieve our strategic objectives without the need to raise additional capital in the current market environment. Let's now take a closer look at the MRD business on slide five. clonoSEQ clinical revenue in the first quarter grew 55% versus prior year.

Tests delivered reached a new record high of over 23,000 in the quarter, representing a 36% increase versus prior year and a 10% increase sequentially. Growth was once again observed in all reimbursed indications. Multiple myeloma continues to be the largest contributor of U.S. clonoSEQ volume at 42%, followed by ALL at 33%, CLL at 10%, DLBCL at 7%, and MCL at 5%. Looking at other key growth metrics in the quarter, it's encouraging to see the positive trends that align with the successful execution of our strategy. Blood-based testing contributed 44% of MRD tests in the U.S. versus 39% a year ago. This increase was primarily driven by strong growth in DLBCL and MCL. Tests in the community grew 42% versus prior year and 14% sequentially.

NHL contribution jumped to 12% from 10% a year ago, driven by continued ramp in MCL and the launch of our enhanced assay in DLBCL. The number of ordering healthcare providers grew 31% from the prior year and is now over 3,400. Our pace of EMR integrations is accelerating. We now have 27 live integrations, including five of our top 10 accounts. We expect to add at least five more accounts in the next month. We are seeing a notable lift in individual account growth rates post-integration, and growth in integrated accounts is outpacing growth in non-integrated accounts. In addition, we're making solid progress on our initiatives to increase clonoSEQ ASP. In Q1, ASP was north of $1,220 per test, representing a 14% year-over-year increase.

Importantly, we closed and/or renegotiated six key agreements with major national payers, including Aetna, Humana, Anthem, Horizon, and two of the Blue Cross Blue Shield programs. Alongside these payer wins, we have expanded our reimbursement operations team and continue to optimize revenue cycle management. Given this progress, we are confident in achieving an average ASP of $1,300 per test for fiscal year 2025, setting us up for continued future ASP growth. Looking at MRD Pharma on slide six, our MRD Pharma business had a strong start to the year with sequencing revenue growth of 11% versus prior year. This quarter, we also recognized $4.5 million in regulatory milestones. We continue to see significant momentum following the ODAC recommendation in multiple myeloma last year.

As you can see from the chart, over 60% of our portfolio today is in multiple myeloma, including 22 new studies which closed in the last 12 months. The majority of these studies are using MRD as a primary or secondary endpoint, but they tend to be larger phase II and III studies, often with large milestones attached. We are also seeing a halo effect from this decision in other disease states like CLL, where treatment advances are necessitating more sensitive MRD assessment in clinical trials. Additionally, we see growth opportunities for the pharma business in DLBCL as multiple companies are preparing to advance MRD-directed therapy. To wrap up on MRD, we achieved strong results for the quarter in both our clinical and pharma businesses. As shown on slide seven, the stage is set to achieve our full-year strategic goals.

We are on track to end the year with over 45% of clonoSEQ testing done in blood. We are on track with EMR integrations, including onco.EMR launch with Flatiron in the second half. We are on track to begin phase I testing with NeoGenomics in an initial set of accounts in the second half of the year. We are on track to go live with NovaSeqX in the second half of this year. We continue to have key data readouts spanning multiple indications. Importantly, we are on track to be adjusted EBITDA positive in the second half of this year. Now, let's turn to immune medicine on slide nine. Our immune medicine business focuses on two differentiated immune-based therapeutic strategies. One is in cancer with our partner, Genentech. The second is in autoimmunity based on our highly targeted precision immunology approach.

Our focus this year is on three main goals. First, it's to generate the size and quality of data to successfully develop a digital TCR antigen prediction model that supports our cancer cell therapy program with Genentech. As we successfully scale our data, we're also making good progress in training and improving the performance of our AI and ML models. We're aiming to replace our TCR discovery cellular assays with a digital model that can rapidly and accurately predict TCR antigen binding. This has the potential to meaningfully reduce both time and cost of selecting the best TCRs to include in a cancer cell therapy, among other future potential high-value therapeutic applications. Our second goal is to build a robust preclinical data package for our lead T cell depletion program in autoimmunity. We're in the process of testing and characterizing a subset of promising antibody candidates in our lead indication.

The third goal, as we execute on these two focused therapeutic strategies, we are managing to a target immune medicine cash burn between $25 million and $30 million. We continue to strategically gate our IM R&D investments and grow our pharma business revenue to partially fund this spend. Now, I'm going to pass it over to Kyle to walk through the financial results and our updated full-year guidance. Kyle.

Kyle Piskel (CFO)

Thanks, Chad. Starting on slide 10 with results for the first quarter. Total revenue was $52.4 million, representing 25% growth from the same period last year. 83% of revenue came from MRD and 17% from immune medicine. MRD revenue grew 34% versus prior year to $43.7 million, with clinical and pharma contributions of 65% and 35%, respectively. clonoSEQ test volume, including international, increased 36% to 23,117 tests delivered versus last year, and ASP in the U.S. grew approximately 14%. MRD pharma revenue grew 7% versus prior year to $15.2 million, inclusive of $4.5 million in milestones. Immune medicine revenue was $8.7 million, down 6% from a year ago, driven by an anticipated 23% decrease in Genentech amortization, partially offset by a 12% increase in IM, pharma, and academic services. Moving down the P&L, sequencing gross margin, which excludes milestones and Genentech amortization, was 62% for the quarter.

This represents a significant improvement of 17 percentage points versus prior year, as we leverage lower overhead costs and stable direct labor supporting increased volumes while improving pricing across both our clinical and pharma revenues. Total operating spend for the quarter, inclusive of cost of revenue, was $82 million, representing a 9% decrease from last year. This decrease was mainly driven by lower R&D spend from both MRD and immune medicine businesses. As you can see from the segment reporting table at the bottom of the slide, MRD adjusted EBITDA is now at a loss of $4.1 million versus a loss of $17.3 million a year ago. This improvement of 76% is driven by both higher revenue and lower operating spend. Immune medicine adjusted EBITDA loss was also improved 21% versus Q1 of last year due to reductions in operating spend.

Total company adjusted EBITDA was a loss of $12.7 million in the first quarter compared to $28.2 million in the prior year. Interest expense from our royalty financing agreement with OrbiMed was $2.9 million, which was slightly higher than interest income. Net loss for the quarter was $29.8 million. Now, let's turn to our full-year 2025 updated guidance on slide 11. We are raising our full-year MRD revenue guidance to a range of $180-$190 million, up from our previous range of $175-$185 million. This increase is driven by stronger-than-expected clinical volume performance in the first quarter and higher MRD milestone payments anticipated for the year. Given the strong clonoSEQ test volumes in the quarter and the momentum we are seeing, we now expect approximately 30% growth in 2025 volumes versus 2024. We anticipate sequential growth in the remainder of the quarters.

We also expect revenue from MRD milestones to be between $8 million and $9 million, up from our previous guidance of $6 million to $7 million. With respect to revenue trends throughout the year, we now expect MRD revenue to be approximately $45 million, $55 million weighted between the first and second half, respectively. We are also lowering our full-year total company operating spend guidance, including cost of revenue to a range of $335 million-$345 million, down from the previous range of $340 million-$350 million. We continue to expect approximately 69% of this spend to be driven by the MRD business and 23% by the immune medicine business, with the remainder attributed to unallocated corporate costs. Lastly, we are also lowering our full-year total company cash burn guidance to a range of $50 million-$60 million, down from the prior range of $60 million-$70 million.

This improvement is primarily driven by higher-than-expected MRD revenue and reduced unallocated corporate burn. We now expect approximately 24% of this year's cash burn to come from the MRD business. We still anticipate burn from the immune medicine business to be between $25 million and $30 million, with the remainder attributed to unallocated corporate costs. We remain focused on disciplined execution to drive sustainable growth while managing our resources responsibly. I look forward to providing you with further financial updates throughout the year. With that, I'll hand it back over to Chad.

Chad Robins (CEO and Co-Founder)

Thanks, Kyle. Our strong first-quarter results underscore the focus, agility, and execution of our team. We're operating from a position of strength and have high confidence in our ability to deliver on our raised full-year guidance. As we look ahead, we remain committed to delivering on our promises and creating lasting value for both patients and our shareholders. I'd like now to turn the call back over to the operator and open it up for questions.

Operator (participant)

Thank you. At this time, we'll 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 I compile the Q&A roster. Our first question comes from Matt Sykes from Goldman Sachs. Please go ahead.

Matt Sykes (VP and Senior Equity Research Analyst)

Hey, thanks for taking our questions. You got Will on for Matt here. Congrats on the quarter, and I appreciate the color on the 30% volume growth with sequential improvement over the course of the year. Just want to dig a little deeper there. Are there any specific indications you're seeing growth in, and how are you seeing contribution from each of the indications trending over the course of this year?

Chad Robins (CEO and Co-Founder)

Yeah, thanks, Waylon. I'm going to hand that over to Susan.

Susan Bobulsky (CCO)

Thanks for the question, Will. Yeah, we're seeing sequential growth across all indications. We had a particularly strong quarter for our lymphoma indications, DLBCL and mantle cell lymphoma. You'll recall that we launched the mantle cell indication just in Q4. We're seeing a nice conversion of the promotional effort over the last two quarters. In DLBCL, we launched an enhanced version of our assay and also saw the availability of our assay in New York State under CLEP approval become live in Q1. A number of factors contributed there. In terms of contribution across the indications, over the last, let's say, year, quarter by quarter, the contribution has remained relatively stable, where we're seeing the uptick in DLBCL and MCL, which now contribute a total of 12%, as Chad noted, versus 10% a year ago, mostly taking from other indications.

We've made, as you know, a concerted effort to move our business further toward our Medicare-covered indications. So that's actually a great shift that we've been able to see.

Matt Sykes (VP and Senior Equity Research Analyst)

That's super helpful. Just as a follow-up, you touched on the EMR integration on the call. I know last quarter we talked about like 30%+ improvements in the smaller customers and waiting for updates on some of the larger ones. Are we ready to give updates on the larger ones or quantify the uptick you're seeing there?

Susan Bobulsky (CCO)

I do have a few more updates that I can share. We have started to analyze the data across both accounts that have been live for at least one year, and then also now have five of our top 10 largest accounts integrated, several of which just went live in Q1, but I can share some data. First, let's start with accounts that have been live for at least a year. These are generally smaller accounts, but there are a couple of larger ones in there as well. Six of those seven accounts exceeded 75% year-over-year growth over the past year since going live. In total, the volume in that group of accounts more than doubled over the past year.

Among the newer sites that went live, let's say, went live in the past quarter, which included three of our largest accounts, we saw an average quarter-over-quarter growth of 27%, and that exceeded the 18% we saw in those same sites a quarter immediately preceding integration. We are continuing to see an acceleration. I think, particularly in those large accounts, those growth rates are quite—I am quite pleased with them.

Matt Sykes (VP and Senior Equity Research Analyst)

Really impressive results there. Thank you for the color.

Chad Robins (CEO and Co-Founder)

You bet.

Operator (participant)

Thank you. Our next question comes from Mark Massaro from BTIG. Please go ahead.

Mark Massaro (Managing Director and BTIG Life Science and Diagnostic Tools Analyst)

Hey, guys. Thank you for taking the questions. I wanted to start with the strong performance on the core clonoSEQ volume number. It looks like it was up, I think, 2,000 tests sequentially. Other labs in the space have talked about weather. I think we're seeing impacts of roughly 100 to 150 basis points across other reference labs. I'm just curious, how did you drive the growth? Where did it come from? I know you talked about a larger contribution from clonoSEQ blood. Maybe could you spell out if you had a weather impact in Q1?

Susan Bobulsky (CCO)

Sure. I can take that. Thanks, Mark. We did not see any notable weather impacts this particular quarter. The big growth drivers, one that I noted was non-Hodgkin's lymphoma indications with DLBCL and MCL. We did see an increase in the total contribution of blood, but a lot of that was driven by DLBCL and MCL, which are both entirely blood-based indications. Additionally, the acceleration of our EMR integrations. We added seven accounts since the end of last year, and several of those, three of those were among our top 10. The acceleration we are seeing in utilization in those accounts certainly contributed. I am optimistic that as we continue to increase the pace of EMR integrations, we will continue to see good contribution from those sites.

Chad Robins (CEO and Co-Founder)

Yeah. I'll just kind of add to that, Mark. As we kind of talked about, it's not any one thing. It's a combination of these strategic factors that I kind of checked off through my prepared remarks. It's all those things that Susan mentioned that together are coming together, and we're executing on the strategy of blood-based testing, increase in community accounts, EMR integrations, etc. Obviously, with the launch of the new indications on top of that, there's starting to be a really nice uptake from the clinical community.

Mark Massaro (Managing Director and BTIG Life Science and Diagnostic Tools Analyst)

Sounds good.

Thanks.

Yeah, yeah. That makes perfect sense. Oh, sorry, Chad.

Chad Robins (CEO and Co-Founder)

No, I was just saying we had started off and said we'd 25%+ growth with the emphasis on the plus. Now, I think we're quite confident in our 30% growth kind of modified range.

Mark Massaro (Managing Director and BTIG Life Science and Diagnostic Tools Analyst)

Okay. Yep. Perfect. I wanted to ask about the $4.5 million milestone payment in Q1. You are now a little over halfway towards your revised goal. I'm just curious, is there any change to the funnel? My impression is that maybe the funnel is growing following the big catalyst you had last year with the ODAC. I just wanted to get a sense for how you think about the timing of recognizing these throughout the year.

Kyle Piskel (CFO)

Thanks, Mark. This is Kyle. As it relates to the funnel, I think what's happening is more and more milestones are becoming available to us. Certainly, we're adding more and realizing more from an offsetting factor, but we are having more come earlier. The realization we experienced in Q1 with a couple of milestones coming through, I think, just provides us more clarity and confidence in our 2025 outlook and with potential room for upside even further from that. We want to kind of be prudent with all the stuff that's going on with the FDA and just hold the guide a little cautious from that perspective. All that being said, I think we're seeing more and more trials read out, and all these things are a positive for our business.

Mark Massaro (Managing Director and BTIG Life Science and Diagnostic Tools Analyst)

Okay. Great. Last one for me. Chad, you rattled off a number of large health plans. It is nice to see that positive momentum building there. Can you give us a sense for to what extent are you contracting or being disciplined with the higher Medicare rate that you have, perhaps as a baseline? I am just curious how that pricing and contracting discussions are going as it relates to pricing.

Chad Robins (CEO and Co-Founder)

Yeah. No, it's a great question, Mark. We inject a significant amount of discipline in our pricing, meaning we will not accept a contracted rate unless it's at or very close to the Medicare rate. We keep our ASPs up.

Mark Massaro (Managing Director and BTIG Life Science and Diagnostic Tools Analyst)

Okay. Great. Thanks, guys.

Chad Robins (CEO and Co-Founder)

You bet.

Operator (participant)

Thank you. Our next question comes from David Westenberg from Piper Sandler. Please go ahead.

David Westenberg (Senior Research Analyst and Managing Director)

Hi. Thanks for taking my question. I wanted to ask, on your so many different multiple myeloma trials, I'm guessing that a lot of times with drugs, you might be seeing tighter testing intervals. Is there kind of a way to show better outcomes through tighter testing intervals? I'm just maybe thinking about that as multiple myeloma and all the clinical trials you're in. Maybe some of the other indications as well could benefit from tighter intervals.

Susan Bobulsky (CCO)

Yeah. It's an interesting question, David. I mean, I think what you mean by tighter, of course, is more frequent testing, if I'm correct.

David Westenberg (Senior Research Analyst and Managing Director)

Yes.

Susan Bobulsky (CCO)

There is clearly a balance here. In general, because it increases the cost of the study, we are seeing a greater interest in increased frequency of testing. In some indications in particular, the kinetics of disease can be indicative of the patient's performance over time. Additionally, because the FDA has myeloma, they've specified a certain range within which a primary endpoint can be defined. It's generally within the 9-15 months of the start of therapy. In those studies, we do see people utilizing multiple time points to be able to give themselves some optionality. Additionally, I think over time, we'll see that in the leukemias and DLBCL, which are increasingly blood-based indications. The frequency of testing is certainly a conversation topic in many of these trial designs.

David Westenberg (Senior Research Analyst and Managing Director)

Got it. No, very helpful. I just wanted to ask about technology or addressing market adjacencies. Don't get me wrong. I mean, you just recently got into DLBCL, and that's a very large market. You definitely have a large market as itself. Is there any technology or any kind of ways to address other maybe blood malignancies or maybe even improvements in terms of the technology in terms of getting to greater sensitivity? I mean, I'm guessing 10 to the minus 8 is probably really difficult to do, but maybe you can improve the confidence interval or the—yeah.

Susan Bobulsky (CCO)

Yeah. I mean, I think the way I can answer that is to say that we are absolutely at all times looking at ways that we can continue to enhance our technology, improving the sensitivity. To some extent, the sensitivity of the assay is simply limited by the amount of input material, right? We're also balancing that with what's practical in the clinic or practical for a clinical trial. We are actively looking at a number of strategies that could allow us to continue to extend the sensitivity in practical settings, as well as ways that we might enhance the technology or even new technological approaches we could bring to solve some of the problems that continue to exist in the space.

For example, the very strong desire in the clinic for an entirely blood-based approach to MRD monitoring in multiple myeloma, which is something we can support, but that there may still be ways to improve upon.

David Westenberg (Senior Research Analyst and Managing Director)

Got it. No, thank you very much for taking the question and congrats on the quarter.

Susan Bobulsky (CCO)

Thank you.

Chad Robins (CEO and Co-Founder)

Thanks, David.

Operator (participant)

Thank you. Our next question comes from Tejas Savant from Morgan Stanley. Please go ahead.

Hello. This is Yuko on the call for Tejas. Thank you for taking my questions. Just regarding the Epic integration, in addition to the volume lift from the EMR integrated accounts, are you also realizing associated cost savings, productivity gains as a result? If so, what could it mean in the context of your goal to have 50% of your ordering volume coming from EMR integrations by year-end? Is that factored into your updated OpEx guide as well?

Susan Bobulsky (CCO)

Yes. Thanks for the question, Yuko. It's an interesting one because, of course, most of the volume that we have going through integration has really only been going through integration for the past one to two quarters at most. I think that where you're headed is fair. The idea that there are potentially operational efficiencies to be gained in the medium to long term as more and more of our volume goes through these integrations. I can tell you, just as an anecdote, that the largest account, our number one largest account, integrated in October. They have told us that under their measurement, they have achieved a 90% decrease in callbacks from our staff to address order discrepancies since integration. You can imagine that's also not just saving them time, which is fantastic, also saving us time on that particular account.

If we can achieve even half that improvement in callbacks at other accounts at a scale, you can imagine that can help us either redirect our staff time or save staff time entirely. We have not incorporated any operational savings into our guide in 2025 at this time, and we'll be continuing to monitor that. There are a number of ways, by the way, beyond just reducing callbacks on orders that we can leverage EMR to reduce total operational time. Those gains will be probably achieved over the next couple of years.

Chad Robins (CEO and Co-Founder)

One other area of potential upside is looking at revenue cycle management and being able to leverage our EMR integrations to kind of reduce time to cash.

Got it. That's super helpful. A second unrelated question. With a number of headlines around cost cutting at pharma, is it possible to see more back-end loaded or milestone-based agreements with pharma versus pay-as-you-go type of contracts? Have you seen any shifts in types of MRD agreements with pharma over the last six months or so?

Actually, I've mentioned this at a couple of investor conferences. We're actually trying to, over time, when contracts come up for renewal, do the opposite of that, which is to move more to a recurring revenue model business, to kind of front-load the, I'll say, the fee-for-service or sequencing component of that and move away from some of the kind of lumpier, hard-to-predict-from-a-time-perspective kind of milestones. It really depends on the focus of pharma companies and the indications that they're doing. No, we have not seen that and don't anticipate being impacted by it.

Got it. Thank you so much.

You bet.

Operator (participant)

Thank you. Our next question comes from Rachel Vensdahl from J.P. Morgan. Please go ahead.

Sebastian Sandler (Equity Research Analyst)

Hey, this is Sebastian Sandler on for Rachel. Thanks for taking the question. I'd like to turn back to the strong sequential growth in clonoSEQ volumes. I think it was one of the best step-ups in terms of absolute tests since 4Q 2023, looking at the slides, around 2,000. Just looking ahead to the rest of the year, I'm wondering if this around 2,000 test step-up is appropriate. I'm curious if there's any further upside to the acceleration based on the number of drivers you laid out in the call.

Susan Bobulsky (CCO)

Sure. Thanks for the question, Sebastian. I mean, I am very pleased to see the volume growth in Q1. The step-up only strengthens my confidence in our potential for the remainder of the year. As you know, when we started the year, we talked about there being an upside. I think some of that materialized in Q1. With this updated guidance, we still see room for upside, and we do still anticipate sequential growth quarter-over-quarter, although I won't speculate on whether the magnitude of the step-up will look the same every single quarter. I think the reason for us being prudent on that is simply that we have a number of strategic initiatives that we are pursuing this year and that will go live in the second half. These are just things that we haven't done before.

We are kind of erring on the side of underpromise and overdeliver right now versus speculating too much about how much upside, how fast that upside can be realized. EMR is a big driver, particularly in the second half. We have to see how the Flatiron launch goes. Those are in accounts that are new or emerging for us. We are going to wait and see how quickly we can leverage that to help us with adoption in those community accounts. The Epic integrations, we have a long slate of those planned, but it is not fully in our control when they get done since we need to rely on account-side IT resources. We will be eager to provide further updates, and we feel very confident. We do not see any material headwinds at this point, but it is still early in the year.

Sebastian Sandler (Equity Research Analyst)

Understood. Thank you for the color. Turning to the community setting, you called out, I think, 40%+ growth there. I'm curious if this was driven mostly by adding new accounts or deeper penetration into existing accounts. I'm also curious on the outlook in the community setting for the rest of the year. Thank you.

Susan Bobulsky (CCO)

Yeah. Both. We have a number of community accounts where we now have some significant volume. We have now an account in our top 10 that is a community account, which, by the way, was one of the ones that just went live recently with an integration, in fact, our first-ever non-Epic point-to-point integration. Although that has not had time to drive volume yet, it just happened in April. I am bullish about the opportunity there. We do have accounts where we have significant penetration and where it is really about continuing to drive that depth. We also have accounts that have not ordered or are just getting started. Both contributed in Q1 to the continued growth. I am really pleased with the work that our community-focused field team is doing.

I'm excited about the potential of not only our Flatiron integration to help us lift the community business in the later part of the year, but also the work we're doing with NeoGenomics, which, albeit, we will only launch in a selected group of phase one accounts in the second half of this year. In 2026 and beyond, that'll be an important driver for our community footprint and our community growth pace.

Sebastian Sandler (Equity Research Analyst)

Great. Thank you so much.

Operator (participant)

Thank you. Our next question comes from Tom Stevens from TD Cowen. Please go ahead.

Tom Stevens (VP)

Hey, guys. Thanks for taking my question. Congratulations on a really strong operating quarter. My first one is just on the contribution of kind of mantle cell into this year and also more broadly, just the level of new patient ads, that is, the number of new clinical seat IDs in this quarter versus 4Q. I was hoping you could comment on, A, the number of MCLs you expect in guidance this year, and B, the number of kind of new patient ads, as it were.

Susan Bobulsky (CCO)

Yeah. I think what I can say, Tom, is that in Q1, we were very pleased with the growth. We saw a 28% quarter-over-quarter growth, and the contribution of MCL was 5%, which is up from about 3.5% a year ago. That indication, as you know, is a smaller indication, but I think one with a significant unmet need that is well-suited to the value proposition of clonoSEQ. Certainly, we're encouraged by the recurrence monitoring coverage that we achieved earlier in Q1, which, while it won't change our promotional strategy, we've been promoting the importance of serial monitoring of patients off therapy since launch. It certainly strengthens our resolve to make sure we drive testing in that space because we can now get paid for a larger number of these tests, which I think are clinically very, very valuable to patients.

In terms of MCL growth over time, we haven't commented specifically on the contribution of any one indication, but I do think that it's possible to have higher single-digit contribution over the course of the next year or so. That is an indication, again, that we believe we can penetrate quickly because of the treatment paradigm there being so conducive to the use of MRD.

Tom Stevens (VP)

Just on clinical seat ID, I'm not sure I got that in your response.

Susan Bobulsky (CCO)

Right. Sorry. More generally, the contribution of clinical seat ID. I mean, we are starting to see an increased contribution of repeat patients. This is beyond MCL. Of course, I'm talking about the business overall. At this point, I think about a third, maybe a little less, 30% of our tests are ID tests. And then another 20% are first MRDs, and about half of the tests are repeat MRDs. That's kind of how the business breaks out right now.

Tom Stevens (VP)

Cool. Just one more follow-up on just kind of how you're thinking about growth margins for the year. 62% sequencing is obviously very impressive. I know you have lots of spinning plates with EMR initiatives into the back half, but just wondering what the kind of fee-for-service contribution to ASPs were in the quarter and just to make sure that the NovaSeqX transition is still on track for Q3 and maybe why not raise the cash burn or, excuse me, reduce the cash burn guidance more than the beat in Q1.

Kyle Piskel (CFO)

Yeah. Thanks for the question, Tom. As it relates to progress on gross margin, first quarter was great. We're seeing our cost structure is improving in the lab, and the volume is certainly helping that. NovaSeqX is still on track for the second half of the year, and we would reiterate the 5-8 percentage point improvement from that in the first 12 months post-launch. Everything's kind of coming along with gross margins, so I don't have any concerns there and expect to see it continue to grow, especially as we get more and more pricing favorability from both our clinical and pharma businesses.

Chad Robins (CEO and Co-Founder)

Yeah. If you recall, Tom, we talked about 70%+ gross margins at scale, and we're a little bit ahead of the pace based on really strong quarter.

Kyle Piskel (CFO)

Oh, and on your question about cash burn, I think, yes, opportunity there to beat the number we put in our guide. Again, it's early, the exact timing of NovaSeqX launch, all those types of things, but certainly an opportunity for some additional upside and reducing our burn further given the strong performance in Q1.

Tom Stevens (VP)

Right. So no incremental reinvestment in the sales force or anything like that we should be aware of?

Kyle Piskel (CFO)

Nothing currently planned. We did make some investments in our revenue cycle management, our reimbursement operations team, and we believe those are paying off accretively. No major expansions from there.

Tom Stevens (VP)

Awesome. Thank you, guys.

Chad Robins (CEO and Co-Founder)

Thanks, Tom.

Operator (participant)

Thank you. Our next question comes from Sung Ji Nam from Scotiabank. Please go ahead.

Corey Resaunbum (Associate of Healthcare Equity Research)

Hey, this is Corey Rosenbaum. I'm for Sung Ji. Thanks for taking my questions and congrats on the quarter. First, on DLBCL, do you expect the upgraded assay with the seven-fold increase in sensitivity to meaningfully change the trajectory of adoption in the indication? Could you talk about the potential use case expansions with the significant improvement in sensitivity?

Susan Bobulsky (CCO)

Sure. Thanks for the question, Corey. First off, I think the primary opportunity to leverage the enhanced assay to drive adoption, I think, is in the pharma setting. Whereas we've faced somewhat increased competition in recent years, I think there is a strong desire to have a very sensitive assay, particularly in the front-line end-of-therapy setting, where a number of companies are going after study designs in which patients essentially receive additional treatment of varying classes based on the fact that they are MRD positive, even though they've achieved conventional complete response by PET-CT. Detecting that disease at those levels where imaging isn't revealing anything there requires that particular degree of sensitivity compared to other use cases. In the pharma setting, that's where the enhanced assay has really been an important part of our messaging and our data generation.

Of course, in the clinic, this is important broadly as well. We are increasing our focus on that end-of-therapy use case as, frankly, a synergy with what's going on in clinical trials. We anticipate that over time, these clinical trials will read out. They'll be successful. There'll be opportunities for patients to be treated with additional therapy when they don't achieve MRD negativity by the end of a standard round of, let's say, R-CHOP. Even now, there are opportunities for patients to enroll in clinical trials. It's to patients' benefit for us to be able to provide the most sensitive assay possible in the clinical setting as well.

Corey Resaunbum (Associate of Healthcare Equity Research)

Great. Thank you for that insight. I appreciate the pharma commentary throughout the call. Can you discuss the current split between later-stage clinical trials versus earlier-stage trials for the active trials underway with the MRD pharma partners?

Kyle Piskel (CFO)

Yeah.

Susan Bobulsky (CCO)

Oh, sorry. The majority of our studies are in later-stage trials for multiple myeloma, which is, as you know, sort of 60+% of our business in the most well-developed indication. In some of our earlier-stage indications, for example, in lymphomas, where we have a smaller portion of our business, the mix tends more towards earlier-phase studies. In general, the use of MRD is really evolving toward registrational uses, whether primary endpoint or secondary endpoint status, and increasingly toward the utilization of MRD as a means to direct therapy, stratify patients. That, by nature, is helping the business evolve toward a later-phase, more heavily weighted mix.

Corey Resaunbum (Associate of Healthcare Equity Research)

Appreciate it. Thank you.

Operator (participant)

Thank you. 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. Our next question comes from Andrew Brackman from William Blair. Please go ahead.

Maggie Boeye (Senior Equity Research Associate)

Hey, everyone. This is Maggie Bowie on for Andrew. Thanks for taking our questions. Maybe just to start, it's nice to see the reduction in the OpEx guide for the full year. On the MRD side, can you talk about any areas in particular you are seeing leverage from? Just what other areas do you think that you could see leverage from building out from here? Looking further out over the next few years, where do you plan to prioritize your investments then? Thank you.

Kyle Piskel (CFO)

Yeah. Thanks for the question. As it relates to leverage, I think we're seeing a ton of leverage across the business, first and foremost in the lab. Again, increasing volume, some of the assay consolidation initiatives we put in place in last year, and we're seeing the fruits of that labor pay off. Secondarily, we're seeing a ton of leverage through our volumes increasing in our field force as well. All of those things are driving improvement. While we're making investments in our reimbursement operations, at least early days from those investments seem to be paying off and gaining leverage, but we'll continue to kind of monitor that. I think all those things are pointing to a healthy profile for this business longer term.

In terms of prioritizing our investments, I think some of this has been discussed previously in terms of what we do with our assay going forward, but we'll provide more color into that as things progress.

Maggie Boeye (Senior Equity Research Associate)

Sure.

Susan Bobulsky (CCO)

Great. Oh, sure. I can just add perhaps that a couple of things that we've talked about throughout this call will potentially be areas where we'll be able to, where we want to continue to invest and may ramp up investment over time. Revenue cycle management is the one that Kyle alluded to. EMR integration and related sort of technology investments that can help us increase the stickiness of our business, increase our access to data that will support our ability to operate effectively. There are some potential investments we're evaluating there. Data generation will remain a priority for the foreseeable future in addition to some earlier-stage R&D investments that we're assessing. Lastly, you might wonder, I didn't mention commercial field force. We don't have any near-term plans.

We've looked at the investment we've made, and I think we're very comfortable with covering 90% of the relevant patient population. We have reasonably sized balanced territories and reasonable numbers of HCP and account targets per rep. We are pretty happy there, but we will evaluate whether there are additional or new deployment strategies that we might want to implement over time in response to the evolution of the market dynamics.

Maggie Boeye (Senior Equity Research Associate)

Got it. Thank you. That was super helpful. Maybe just one on the NeoGenomics partnership. Can you just update us on the progress you're making there and talk about what work is being done to ensure readiness for the early pilot launch in the second half of this year? Just how you're thinking about how that will inform your full launch down the line? Thank you.

Susan Bobulsky (CCO)

Sure. I'm really pleased with how that partnership has been progressing and very grateful to be working with great partners on the Neo side. The work we've been doing up till this point was to select the phase one accounts that we wanted to target based on a variety of criteria that will allow us to gain insight to ensure that we optimize the broader national launch at the beginning of next year. We've been finalizing the TRS design, test requisition form design. We've been designing or creating the field direction and designing accompanying training. We've been determining how samples will actually flow between the companies, how orders and reimbursement data will flow between the companies. We've been firming up how we will manage handoffs between various members of our cross-functional teams that face our customers.

All that work will inform the second half phase one launch and will directly benefit the longer-term national launch.

Maggie Boeye (Senior Equity Research Associate)

Great. Thanks so much.

Operator (participant)

Thank you. I am showing no further questions at this time. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.