Adaptive Biotechnologies - Q2 2023

Transcript

Operator (participant)

today. Thank you for standing by. Welcome to the Adaptive Biotechnologies second 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 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 speaker today, Karina Calzadilla, Head of Investor Relations.

Karina Calzadilla (Head of Investor Relations)

Thank you, Jacinda. Good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' second quarter 2023 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the second 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's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statement, depending on a number of factors, which are set forth in our public 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 Tycho Pedersen, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, 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 second quarter 2023 earnings call. As always, I want to thank all of our Adaptive employees for their continued dedication and execution. We're halfway through the year with solid six months results and key milestones achieved. As shown in slide 3, revenue for the quarter was $48.9 million, representing 12% growth versus prior year. This growth reflects strong performance from clonoSEQ clinical testing and the achievement of our first milestone in drug discovery, which more than offset an anticipated reduction in our Genentech amortization. Our R&D programs in oncology and autoimmune disorders continue to progress. Both programs in cancer with Genentech are advancing, we're very pleased to see the IND acceptance for our first candidate in cell therapy.

In addition, given our efforts to streamline our organization and improve operating efficiencies, we achieved gross margin improvement of 8 percentage points related to sequencing alone versus prior quarter. We are laser-focused on achieving operating leverage and ensuring our path to profitability with current cash on hand. Earlier today, we announced that Nitin Sood, Head of our MRD business, is leaving Adaptive to take a new position at a multinational public company. Susan Bobulsky, who has led the clinical business for the past 5 years, will assume additional responsibilities and report directly to me. I'd like to thank Nitin for his leadership and the important contributions he's made in laying a solid foundation for our MRD business, and we wish him success in his new endeavor. Let's now take a closer look at MRD business on slide 4.

Total MRD for the quarter, including clinical testing and pharma, grew 22% versus prior year. On the left side of this slide, you can see strong clonoSEQ clinical volume growth with all metrics trending in the right direction. Tests delivered grew 52% year-over-year, with double-digit volume growth in all marketed indications. multiple myeloma continues to be the largest contributor and the main growth driver. Ordering healthcare providers and ordering accounts grew 44% and 37% versus prior year, respectively. Blood-based testing increased in all indications and grew 16% sequentially. Now, approximately 37% of all MRD tests are in blood. Community accounts, a key factor to accelerate penetration in blood, continued its growth trajectory quarter-over-quarter and now contributes 21% of clonoSEQ volume versus 11% a year ago.

As shown on the right side of the slide, MRD Pharma grew 14%, excluding regulatory milestones. The slight slowdown in growth this quarter reflects macro factors impacting the broader biopharma industry as trials are getting extended and portfolios reprioritized. That said, strength in bookings reflect healthy demand for the business going forward. Zooming into clonoSEQ test volume on slide 5, we continue to set record high volumes quarter-over-quarter. This quarter, volume grew 13% sequentially to over 13,660 tests delivered. Our strategy to drive clonoSEQ volume is working, and we reaffirm our commitment to end the year with over 50% volume growth versus 2022. ASPs were impacted in the quarter due to growth in out-of-policy indications and higher Medicaid contribution....

However, we have a targeted ASP plan focused on closing remaining payer contracts and policy gaps, as well as increasing resources for claim management to improve collections. We are confident these initiatives will enable re-acceleration of ASP growth for the next several years. Related to ongoing initiatives to expand clonoSEQ utilization, Epic integration is progressing well, and we are excited to bring our first pilot sites live this month, with additional integration sites to follow. This marks a milestone for our partnership with Epic and demonstrates our commitment to investing in the clonoSEQ customer experience. We also continue to expand meaningful data readouts at the ASH Annual Meeting, particularly highlighting blood-based testing in multiple myeloma. As shown on slide 6, the final analysis of the MASTER study was presented during the EHA Congress in June.

This study shows that for patients who discontinued therapy after 2 consecutive negative clonoSEQ tests, over 85% of them in the standard or high-risk category did not progress after a 3-year follow-up data. These data have been very well-received by physicians and are driving adoption of clonoSEQ for making critical therapy decisions for patients. In summary, the setup for MRD is strong in both clinical testing and pharma, and we look forward to continuing to fuel its growth. Switching to our Immune Medicine business on slide 7, we generated $23 million in revenue this quarter from drug discovery and pharma services, with drug discovery contributing more than 75% of the revenue. Our IM Pharma Services business was impacted this quarter by macro factors affecting the broader Biopharma industry, including strategic and or budget reprioritization.

In addition, year-over-year comparisons vary as the RUO pharma business is lumpy throughout the year. This was an important quarter for drug discovery. We recognized the first IND development milestone from our cell therapy partnership with Genentech. This milestone represents a new revenue stream to help offset the decrease in the Genentech amortization this quarter. Let's take a closer look at our cell therapy program with Genentech on slide 8. Genentech secured the FDA IND acceptance for the first neoantigen-directed T-cell therapy product candidate. Importantly, this IND acceptance reaffirms the value of our TCR discovery platform and our ability to identify and characterize clinical-grade therapeutic T-cell receptors, which is a cornerstone of our drug discovery capabilities. We are thrilled by this acceptance and look forward to supporting Genentech as it gears up for the first in-human trial with this potentially life-saving therapy for patients with solid tumors.

In addition, the personalized program is also maturing. We are on track to standardize our end-to-end workflows and are making good progress in building the required regulated infrastructure in our dedicated South San Francisco laboratory. Our focus with Genentech is to build the product development requirements this year that lay the foundation for clinical readiness. As you can see in slide nine, in addition to our cancer cell therapy partnership with Genentech, we are executing to deliver on our key R&D proof points in autoimmunity. This includes focusing resources on high-value R&D programs to discover novel targets, starting in multiple sclerosis. We aim to identify at least one novel disease-specific target by year-end. We're excited by the progress we're making, and we look forward to providing an update as we advance these programs during the second half of this year. I'll now pass it over to Tycho.

Tycho Pedersen (CFO)

Thanks, Chad. Turning to our financials on slide 10, total revenue in the second quarter was $48.9 million, with 53% from MRD and 47% from Immune Medicine, representing a 12% increase from a year ago, which is primarily attributable to growth from the clonoSEQ clinical business and the Genentech IND milestone. MRD revenue grew to $25.9 million, up 21% from a year ago, with growth from both clinical testing and pharma partnerships, partially offset by a lack of MRD regulatory milestones. clonoSEQ test volume, including international, increased 52% to 13,664 tests delivered from 8,998 tests in the same period last year.

Immune Medicine revenue was $23 million, up 3% from a year ago, driven by recognition of the IND milestone, which more than offset the decline in Genentech amortization and pharma services. Moving down the P&L on slide 11, total gross margin for the quarter was 63%, representing a 13 percentage point increase versus last quarter and a 6-point decline versus a year ago. The sequential increase was mainly attributed to the IND milestone, as well as a 4% decrease in cost of revenue. Other OpEx, including R&D, sales and marketing, and G&A, declined 5% in total versus a year ago, mainly due to a 13% decline in R&D. In total, OpEx, including cost of revenues, remained stable year-over-year and sequentially, while revenue grew 12% and 30%, respectively, during the same periods.

We look forward to continuing to optimize our processes to further enhance margins through a number of efforts, including streamlining the organization, disciplined R&D investments, completion of the lab move with updated lab information management systems. In addition, we are evaluating switching from NextSeq to NovaSeq X, which we expect to contribute to significant savings going forward. Finally, interest expense from a royalty financing agreement with OrbiMed was $3.6 million, which was offset by interest income. Net loss for the quarter was $47.7 million, compared to $52.1 million last year. We ended the quarter with approximately $417 million in cash equivalents and marketable securities, which, as Chad noted in his comments, will bridge us to profitability without the need for additional capital.

Turning to our outlook on Slide 11, we are reiterating full-year guidance of $205 million-$215 million in revenues. At the midpoint, we continue to expect the contribution from our businesses to be approximately 55% from MRD and 45% from Immune Medicine. Within our MRD business, we expect over 50% growth in clonoSEQ test volumes, as well as MRD regulatory milestones in the back half of the year. We expect second half revenues to be more heavily weighted toward the fourth quarter, mainly attributed to drug discovery deals that we expect to close by year-end. As we continue to drive operating efficiencies, we are also reiterating our full-year OpEx targets, including cost of revenue, to be below 2022 OpEx of $385 million.

Cash preservation remains a priority, and we now expect our burn for the remainder of 2023 to average $35 million per quarter versus the $40 million previously estimated. Q2 financial results were solid, and 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 our call, our MRD and Immune Medicine businesses are performing well, and we are looking at ways to maximize the potential value of each business to best serve our patients and our shareholders. In our MRD business, we are executing to increase clonoSEQ penetration and solidify our market-leading position. In our Immune Medicine business, we continue to advance our partner programs with Genentech and our internal R&D efforts in autoimmunity. With that, I'd like to turn the call back over to the operator and open up for questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. As a reminder, to ask a question, please 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. Our first question comes from Rachel Vatnsdal of JPMorgan Chase. Please go ahead.

Rachel Vatnsdal (Senior Equity Research Analyst)

Hey. Hi, good afternoon. Thanks for taking the questions here. First up, with Nitin's announced departure, can you just walk us through the management transition plan for MRD, and if you expect to have any strategic changes in that business going forward? As a follow-up, you flagged some of the temporary delays around clinical trials and reprioritization of portfolios at Pharma. Could you walk us through how long do you think that those delays and reprioritization could really weigh on the MRD business?

Chad Robins (CEO and Co-founder)

Yeah, sure. Thanks for your questions, Rachel. First, with respect to Nitin, I want to thank Nitin, who is on the call. I'll turn it over to him in a minute, to make some comments, but I want to thank him for all his contributions to the business. There's going to be a seamless transition that we are more than prepared for. We have an incredibly strong bench. Susan Bobulskyi is going to lead the clinical business and report directly to me. She's been actually leading the clinical business with direct oversight of the sales team for the last several years and is really a fantastic leader that's been with the company for, for 10 years. The business is in really good straight shape. The strong foundation is there. We're firing, firing on all cylinders.

Closing volumes are growing at a very fast pace. We're committed to, to over 50% grout volume growth this year. As mentioned during the call, all metrics are, you know, pointing in the right direction, and we're in, we're in very good shape and, and, and expect a very seamless transition. Nitin, you want to make any comments?

Nitin Sood (Head of MRD business)

Yeah. Thanks, Chad. you know, this decision has been a difficult one, you know, as Adaptive has been a truly rewarding place for me to work at. The MRD business is on a solid foundation, our latest quarterly results demonstrate that. You know, we have a market-leading position inHeme cancer MRD with the best performing products, strong clinical evidence, broad reimbursement, and we are the product of choice in pharma. Susan is a fantastic leader, has been a key player in building the business from the ground up.

We have a dedicated and, and committed team that's deeply passionate about improving the lives ofHeme cancer patients, and I'm honored to play my part in such a solid and impactful business, and I'm very confident it'll do extremely well in the future and continue on the growth trajectory that we've demonstrated over the last few quarters. It was not an easy choice, but again, I'm, I'm really delighted that Susan is stepping up and, and the business is on a very strong, strong footing. Chad, back to you.

Rachel Vatnsdal (Senior Equity Research Analyst)

Maybe just a comment there on clinical trials reprioritization.

Nitin Sood (Head of MRD business)

Chad, do you want me to answer that, or do you want to take, take that first?

Chad Robins (CEO and Co-founder)

Maybe they dropped.

Nitin Sood (Head of MRD business)

Oh, it looks like they may have dropped. Yeah, you know, we've, we've been closely monitoring, the business and, you know, we don't have a sort of a firm timeline. We'll give you guys an update every quarter.

... you know, a lot of our business in the MRD Pharma space comes from multiple myeloma. We're in pretty much every trial in multiple myeloma. Not only there's some reprioritization of the portfolio going in multiple myeloma, but a lot of these trials are competing for the same patient pool. As a result, there's been, you know, some delays in enrollment. We keep a close eye on it, and as and when we hear updates, we'll update you.

Rachel Vatnsdal (Senior Equity Research Analyst)

Great. Well, best of luck then. Maybe if I could just squeeze in one more on margins. Gross margin came in at 63% during the quarter, a nice improvement sequentially versus 1Q. Could you just walk us through the components of the increase there? Really, how should we think about gross margins evolving for the rest of the year and even into 2024? Remind us, really, what are those margin drivers? Thank you.

Nitin Sood (Head of MRD business)

I think we lost the room that has Tycho, Chad, and, and Sharon in it. Can we come back to that question? This is Harlan, I, I think I will get in trouble for answering the financial question, so but well, let's, let's, let's, wait for Tycho to come back on, and we'll return to that question.

Rachel Vatnsdal (Senior Equity Research Analyst)

Yes.

Karina Calzadilla (Head of Investor Relations)

Can you hear us, Harlan?

Chad Robins (CEO and Co-founder)

Karina, are you back on?

Karina Calzadilla (Head of Investor Relations)

Yes, we're back on. Hold on, I'm gonna call again.

Nitin Sood (Head of MRD business)

Karina, did you hear the question around gross margin?

Karina Calzadilla (Head of Investor Relations)

Yes, we did. Tycho is right here. Hold on.

Tycho Pedersen (CFO)

Yeah, so, as it relates to gross margins, you know, versus the prior quarter, milestones within our business, we have, you know, in both the MRD and Immune Medicine business, they come in at 100%. Conversely, in the second quarter, we obviously had the IND with Genentech. That had a significant positive impact. I did call out in the prepared comments, lower cost of revenues, so that drove about an 8-point improvement in sequencing margins. We're continuing to streamline the organization there and drive efficiencies in the lab. We are in the midst of a lab move. On the back of that, we're doing a LIMS implementation. We've talked about evaluating NovaSeq.

We have a number of drivers embedded for continued margin improvement around the sequencing business. As it relates to the year-over-year dynamic, there was a step down in Genentech amortization, and no MRD milestones, so you know, that was a bit of a headwind this quarter. Cost of revenue was higher due to overhead spending in the lab. Again, we're moving our, our lab into the headquarters right now. We're in the midst of that, so that'll lead to lower cost of revenue on the back end, but that did weigh on it a little bit.

Importantly, you know, I would just once again flag the 8% sequential improvement in sequencing margins, and the fact that, you know, we do have a number of additional steps we're evaluating, including a potential shift to NovaSeq.

Rachel Vatnsdal (Senior Equity Research Analyst)

Perfect. Thanks for all the color.

Tycho Pedersen (CFO)

Yep.

Operator (participant)

Thank you. Please hold for our next question. Our next question comes from Dan Brennan of TD Cowen.

Dan Brennan (Managing Director)

Thanks for thanks for taking the questions, guys and Karina. You talked about clonoSEQ ASPs. Could you just get a little more color there? Like, what was the expectation? You mentioned a couple of the headwinds and actions you're taking to get the ASP going in the right direction. Just walk us through a little bit the impact this quarter and what we should expect going forward.

Chad Robins (CEO and Co-founder)

Yeah, sure, Dan. The quarter ASP was impacted by 3 different factors. One is growth in indications that remain out of policy, so looking at DLBCL and MCL as an example. The second was testing for Medicaid patients increased to 12% of our product mix. Third, kind of prior authorization hurdles with certain payers. I should just say that we have an ASP acceleration plan in place that's focused on, you know, a couple of different items. You know, the first is closing the remaining payer contracts and policy gaps, and the second is increasing our resources for claim management and prior authorizations to improve our collections. As we tackle some of the ASP leakage, we do expect to reverse the trend in the second half versus the first half of this year.

We are committed to an acceleration onward and are confident in reaching the $1,600 ASP kind of price point by 2027, with a kind of solid increase, you know, year over year to get there.

Dan Brennan (Managing Director)

Got it. No, thanks, Chad. Thanks for that. Then maybe just one back to Rachel's question on biopharma. Just kind of broadly, I know you don't give a lot of subcomponent details about guidance, but like, where are we in the evolution of some of the biopharma, kind of, hopefully more temporary pressures on spending and maybe availability of patients? Like, how, how do we think about the trajectory, like Q3, does growth pick up on your, both on the MRD side and then in, you know, the ImmunoSeq R&D side? Do you think, you know, this type of growth persists for the rest of the year?

Tycho Pedersen (CFO)

Yeah. You know, we did talk about it being, you know, a, a, a back-end loaded year, more skewed toward the fourth quarter. You know, keep in mind, last year, we had about 55% of revenues in total in the fourth quarter. It'll be a, a bit higher this year. There's two other moving dynamics. I'll answer your pharma question in a minute, but we are expecting MRD to grow in the third quarter at a higher rate than we saw in the first half. Keep in mind, we had a big quarter of Genentech amortization and Immune Medicine in Q3 last year. It was $20 million.

There's a little bit of a tough comp issue, and then we've got both, you know, growth in pharma services and new drug discovery deals that are, you know, in discussion that are expected to come in by the, the fourth quarter. You know, as it relates to pharma services specifically, you know, we've got a very diversified portfolio. We're involved in 120 active trials, 60 companies. It's a mix of mid-cap, you know, and large pharma on different stages of development. I'm not sure if you heard my comment earlier because I know the line cut in and out, but we are, you know, committing to the 20% CAGR for that business over the next 5 years, so we're very confident in the long-term outlook. It's also coming off a tough comp.

That business, you know, had significant growth last year. You know, we are acknowledging that we, you know, do see some reprioritization of pipelines, but overall, given the diversified portfolio, we're, you know, comfortable that that pharma services business can continue to grow, you know, north of 20% over the next 5 years.

Dan Brennan (Managing Director)

Awesome. All right, thanks, Tycho. Thank you. I'll get back in the queue.

Operator (participant)

Thank you. Please hold for our next question. Our next question comes from David Westenberg of Piper Sandler.

David Westenberg (Senior Research Analyst and Managing Director)

Hi, thank you for taking the question. I just want to dive in a little bit more on, in terms of the ASPs here, because, you know, you, you did have pretty good momentum going in that business. It caught me a little bit off guard here. Can you talk about, how those uncovered indications tend to grow, you know, faster? I mean, was there a lot of marketing? Was there just kind of an under penetration and, and maybe you're over or more penetrated in kind of the higher growth indications?

Chad Robins (CEO and Co-founder)

Well, look, first, let's take, Hi, David. Let's take DLBCL.

David Westenberg (Senior Research Analyst and Managing Director)

Hi.

Chad Robins (CEO and Co-founder)

DLBCL grew 28%, you know, quarter-over-quarter, you know, albeit from, somewhat lower base. It is increases in new indication, but it's, it's a variety of different factors. One is an industry-related factor, that Medicare Advantage from private payers, you know, has been a challenge for the industry in, in collections, and we've got a very targeted plan to work on collecting, you know, at the Medicare rate for Medicare Advantage plans, is, is another area. You know, it's kind of as you grow indications and new indications that aren't covered yet, you tend to-- that tends to be gonna, a while a drag on ASPs, it's also, you know, bodes well for the future as we close those policy and, and, and payer gaps.

You know, net, net, we've, we've got a very targeted ASP acceleration plan in place. We expect to reverse that. It's actually already starting to reverse, you know, in the third quarter. Expected to reverse it not only second half of the year, but going forward to be able to achieve kind of that, that top line $1,600 by 2027.

David Westenberg (Senior Research Analyst and Managing Director)

Perfect. Okay, then, is there any headwind from maybe getting tests ran outside of the first four covered indication in Medicare? Are you seeing Medicare patients order that? Can that be a potential headwind in the future? Then just to clarify, I believe most of your private payer coverage, it's just based on a test-by-test basis. It's not the same way as that, that Medicare. I'm gonna squeeze one more in. You do seem to be implying, like, you know, on a sequence, we should be returning to sequential improvement in ASPs, as, you know, we see, you know, maybe quarter-on-quarter sequential improvement or year-on-year sequential improvement. I mean, that, that is tracking, you know, in when we see, I don't know, maybe next year, Q1-ish.

Sorry, I'm kind of rambling there, so I'll stop.

Chad Robins (CEO and Co-founder)

It's like Rodney Dangerfield in Back to School. I think I'm tracking you, David. A couple things. One is, our test-by-test basis for private payers, the answer is yes, that's confirmed. It's not on an episode of care basis like it is on Medicare. The third question was do, with regards to ASP acceleration, we do have a targeted plan for ASP acceleration, we do expect ASPs to accelerate in the second half of this year. The third, if you look at kind of our different indications, I will just say that, you know, multiple myeloma continues to be the 1 biggest growth driver.

It is under, you know, you know, coverage policy, but we are expanding indications for CLL, and diffuse large BC- B-cell lymphoma, in other indications with private payers as well. If you combine all those factors, you know, that's what's gonna lead to, ASP acceleration, along with. Again, I can't reiterate enough that we're putting additional resources into kind of workflow and collections, and, and getting prior authorizations where necessary.

David Westenberg (Senior Research Analyst and Managing Director)

Sorry, I'm squeezing in a third, so you answered pretty quick.

Chad Robins (CEO and Co-founder)

Yeah, go ahead.

David Westenberg (Senior Research Analyst and Managing Director)

-Really quick on the, the biotech funding. Are you seeing that in Immune Medicine or, or MRD or both? Hopefully you can just answer that quickly. Sorry, sorry, everybody, for that third question.

Chad Robins (CEO and Co-founder)

We're seeing that a little bit in both, as budget reprioritization. However, you know, both have strong pipelines in place, and, and market-leading positions. But we do see some impact for different reasons. In the case, of, of budget reprioritization in, in the MRD pharma business, some of it also has to do with kind of multiple myeloma competition for patients in clinical trials as well.

David Westenberg (Senior Research Analyst and Managing Director)

Thank you.

Operator (participant)

Thank you. We will move on to our next question. Please hold.

Our next question comes from Mark Massaro of BTIG.

Mark Massaro (Managing Director)

Hey, guys. Thanks for taking the questions. It's tough to follow, Roddy Dangerfield on a call. I wanted to say, Nitin, it was good working with you, and best of luck going forward. Susan, I look forward to working with you some more. You know.

Tycho Pedersen (CFO)

Thank you.

Mark Massaro (Managing Director)

... We've got some investor questions. Yeah, great. We got some investor questions, a little bit, a little more on the ASP side. You know, Tycho, I heard you maintain the clonoSEQ volume guidance for 50% plus, which is great to see. I think you guys had previously talked about wanting to grow clonoSEQ ASPs up in the mid-single digit range, although today you guys called out some of the, you know, 3 pressures that you called out. I'm just curious if, if that mid-single digit growth in ASPs is still on target, or do you think that might drift into 2024 as you kinda make progress on some of those initiatives you called out?

Tycho Pedersen (CFO)

Yeah, I mean, we're, we're definitely expecting an improvement in the back half of the year versus the first half. You know, we had, we had noise in both the first and, and, second quarter here, you know, in particular around Medicare Advantage. Medicaid overall, by the way, is 12% of our test mix, so, you know, there. Chad talked about growth and indications out of policy. But yeah, I'd, I'd say stay tuned. I mean, I, I, I don't know that we necessarily want to update. We're going to update on the third quarter in terms of how we're thinking about ASPs for, for the full year, but we do expect the back half certainly to be better than the first half. Again, we've taken a lot of steps over the last few months to tackle the ASP leakage.

It's an industry-wide problem, by the way. I mean Bard and Natera, our competitors, are dealing a lot of the with a lot of this noise too.

Mark Massaro (Managing Director)

Yeah, I know.

Tycho Pedersen (CFO)

We are, you know, we are still expecting to get to $1,600, you know, over time. Whether it takes a quarter or two to kind of work through the rest of this noise, TBD, but, you know, we're very comfortable in the long-term outlook for ASPs overall.

Mark Massaro (Managing Director)

Yep. add, CareDX to that list as well, of labs dealing with these pressures. Okay. I guess, can you guys call out what the milestone payment was in the quarter? I think it's somewhere in the $4 million-$7 million range. Is that the right ballpark?

Tycho Pedersen (CFO)

There, there was a Genentech IND acceptance, right? That was $7.8. You know, it's a $10 million milestone, but we amortize the rest of it. Yeah, there was nothing for MRD.

Mark Massaro (Managing Director)

Yep. Okay, perfect. Just last one, just to kind of clarify. Obviously, I, I don't think there's any change to reimbursement rate for clonoSEQ, nothing like that. I, I think this is largely just a function of higher Medicaid mix, some prior off, mix of DLBCL. I guess one of, one of the things I think investors would love clarity on is, you know, how quickly do you think you guys can make progress on the prior off side? You know, do you think Medicaid is transitory, or do you think that will remain around 12% of mix? Like, where are you guys again on DLBCL commercial payer?

I know it's super early, but, you know, are you guys making any progress there, or, or do you think it's gonna be more of a, you know, further out?

Chad Robins (CEO and Co-founder)

Just to address that, in terms of Medicaid, you know, we're looking at converting some of the high ordering accounts that have made a high volume of Medicaid patients to roster billing accounts to, you know, close some of that gap. You know, with respect to kind of prior authorizations, we've already, you know, started implementing and putting that kind of workflow in place to get prior authorization. This isn't a, you know, several quarters out. This is happening now. Third, in terms of Medicare Advantage and private payers covering at the Medicare rates, we've already started to make progress on that front as well.

Your last question, respect, with respect to coverage and DLBCL and frankly, other indications, you know, we've, we've done a good job on CLL. We're now at about 200 million lives under, under contract. DLBCL, we have additional data readouts coming in ASH, which we think should be a catalyst for private payer contracts into 2024. The current rate is we have about 75 million covered lives under, and we look to increase that significantly in 2024.

Mark Massaro (Managing Director)

Awesome. That's really helpful. Thanks, guys.

Tycho Pedersen (CFO)

Sure, Mark.

Operator (participant)

Thank you. Please hold for our next question. Our next question comes from Salveen Richter of Goldman Sachs.

Elizabeth Garcia (Equity Research Associate)

Hey, everyone. Good evening, and thanks for taking our question. This is Elizabeth on for Salvine. Wanted to ask about the impact of the Epic integration on MRD going forward through the end of this year and into next, and what you would expect in terms of the cadence of growth impact from that, as it seems like it could be a significant driver. Then, just on the Genentech collaboration, when we could expect an update on the personalized products. Thank you.

Chad Robins (CEO and Co-founder)

Yeah, sure. Thanks, Elizabeth. First, yeah, we're thrilled that we're starting the first Epic integrations this month with a couple different customers. These first successful Epic launches, I think, demonstrate-

... the, what is incredibly hard work to integrate into the Epic site, and so we're, we're, we're ready to go. We have received substantial interest from additional sites that are eager to gain access to clonoSEQ testing and integrate with their EMR system. Rollout is really gated by the availability of the IT resources at each different center. It is a, kind of really a hand-to-hand, you know, combat with each site. The reality is there's a ton of interest, and we'll, we'll be kind of rolling them on, month by month, quarter by quarter, until we have, you know, what we, what we deem as, you know, full penetration or as, as much as possible within Epic. Just a couple numbers here for you.

I think as of June, there are 161 sites in the U.S. that had adopted Epic Aura Network, which is their precision medicine add-on that's required for clonoSEQ integration. It's also required for, you know, all the other diagnostics tests that have partnered with Epic, such as FMI, Exact, et cetera. It'll take us a few years to get through that number of integrations. In the meantime, the list of sites that kind of adopt Aura will also continue to grow. We expect that, you know, We expect that this will grow over time, and we also have talked about really the contributions in terms of volume, you know, being really coming in 2024, although we will see kind of some impact in the back half of this year.

Karina Calzadilla (Head of Investor Relations)

IND clearance, and as was mentioned, we do have other TCRs that are being advanced as well as ultimately our fully personalized product program.

Elizabeth Garcia (Equity Research Associate)

Great. Thank you for that. Then regarding the evolving landscape and move towards the use of MRD status as a regulatory endpoint in clinical trials, could you provide an update on where that stands today and how you see the more recent conversion of Blincyto to full approval influence that view?

Chad Robins (CEO and Co-founder)

Yeah, hey, Tycho. We continue to put pressure along with our pharma partners on the agency for the use of MRD as an endpoint, particularly as moving from surrogate to secondary to primary endpoint. You know, we do believe that we are making progress, and the data that continues to be generated points in the direction that this should be converted to an endpoint in clinical trials soon. It's really hard to be prescriptive about giving a, you know, a timeframe as to when the FDA is going to act on it, but, you know, metrics are pointing in the right direction. The second question again?

Elizabeth Garcia (Equity Research Associate)

just wondering if, if the, the recent approval, full, full approval of Blincyto, that had an accelerated approval a few years ago, if that, influences the view on, on the, primary endpoints, or have you seen any more traction following that?

Chad Robins (CEO and Co-founder)

Yeah, I mean, Blinc and, and ALL, you know, I think it does vary by indication. We're, you know, we're, you know, primarily, we're primarily now focused on multiple myeloma. I think that's, to us, the biggest catalyst if you look at where our, our milestones are. I think that, you know, clearly, clearly it's helpful to have kind of full approvals that use MRD in their trials across indications. There's a CLL study with Genentech as well that includes MRD. Yeah, a lot of, lot of different pressures from multiple directions in multiple indications are pointing towards the incorporation and, you know, of MRD as an endpoint by the agency.

Elizabeth Garcia (Equity Research Associate)

Great. Thank you.

Tycho Pedersen (CFO)

I'll just add, Tycho, you know, you've heard us talk in the past, we've got line of sight to about $400 million in eligible milestones. Or sorry, line of sight to about $170 million of that. If FDA does move forward and endorse MRD as a primary endpoint, that's kind of upside relative to what we've previously talked about in terms of the path to profitability. That's not baked in the guidance at this point.

Elizabeth Garcia (Equity Research Associate)

Great. A helpful color. Thank you.

Operator (participant)

Thank you. Please hold for our next question. Our next question comes from Dan Leonard of Credit Suisse.

Dan Leonard (Managing Director and Equity Research Analyst)

Hi, good afternoon. You talked-

Chad Robins (CEO and Co-founder)

Hey.

Dan Leonard (Managing Director and Equity Research Analyst)

about Epic. Yeah, hi. I'm wondering if you could update us on your effort to integrate clonoSEQ with community EMRs?

Chad Robins (CEO and Co-founder)

Yeah. We, yeah, you know, obviously, Epic isn't the EMR of choice in the community. We are evaluating the EMR systems to figure out just colloquially, where we're gonna get the biggest bang for our buck, as we look to essentially make the test easier to order and integrate into systems. It's certainly on the radar, and under evaluation.

Dan Leonard (Managing Director and Equity Research Analyst)

Understood. Then my follow-up, can you speak to your expectation for more drug discovery deals in the fourth quarter and how confident you are, given the macro factors and, and reprioritization that you flagged?

Chad Robins (CEO and Co-founder)

Yeah, sure. Yeah, I'll, I'll start with that and then, and then maybe pass it off to the team for additional color. You know, first, it should be noted that the deals that we have for drug discovery in the fourth quarter, are based on the existing data that we've already developed and the platforms that we've developed in TCR discovery and antibody discovery, and the discussions are well underway. They're in progress. They've been advancing, you know, otherwise they wouldn't be, incorporated into our, into our, annual numbers here. Secondly, we have a series of, essentially target discovery, initiatives underway that are, are really exciting and I think will lead to future, development deals, as well.

We can either choose to partner on those programs or develop, you know, those, those targets in-house, combining with our platform capabilities. Tycho, did you want to add anything on that?

Tycho Pedersen (CFO)

Okay.

Chad Robins (CEO and Co-founder)

Okay, great.

Dan Leonard (Managing Director and Equity Research Analyst)

Perfect. Thank you. Thank you.

Chad Robins (CEO and Co-founder)

Sure, yeah.

Operator (participant)

Please hold for our next question. Our next question comes from Derik de Bruin of Bank of America.

Derik de Bruin (Managing Director)

Hey, thanks for fitting me in. Just, you know, impressive that you're gonna do 50% volume growth this year in clonoSEQ. Right now, looking at the Visible Alpha consensus, the street's looking for about 40% growth in 2024, year-over-year growth. Is that a reasonable number to think, just given some of the ERP integrations and some things are going on, I mean, are you comfortable with growing at that level?

Chad Robins (CEO and Co-founder)

Derek, you know, we haven't put out guidance yet for 2024. However, I can say we are committed to, you know, significant double-digit growth. We think there's a strong trajectory in clonoSEQ volumes that will continue well into the future. If, if I had to go off cover, it, it's, it's, it's not unreasonable, but we'll get back to you with, you know, more specifics as we, as we come out with our guidance.

Derik de Bruin (Managing Director)

Got it. Can you talk a little about just upcoming milestones or catalysts for your autoimmune program? How should we sort of think about that, since autoimmunity being a lot more interesting in AI than some of the other stuff?

Karina Calzadilla (Head of Investor Relations)

Absolutely. Hi, it's Sharon. In our focus in R&D and autoimmunity, as we've indicated, our goal this year is to discover at least 1 novel target and 1 indication, including our focus specifically is in multiple sclerosis and IBD. We're making great progress and are quite excited. Some of the ramifications here is that, you know, we're looking at targets that are implicated in a large patient population. The data we're generating to accelerate target identification is absolutely leveraging some of our existing machine learning and AI capabilities, including, of course, with our partner, Microsoft. We're extremely bullish around novel target discovery and really the discovery engine that we're building the foundations up around MS and other autoimmune indications to come.

Derik de Bruin (Managing Director)

Thank you.

Speaker 12

Thank you. I am showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.