Adaptive Biotechnologies Corporation beats earnings expectations. Reported EPS is $-0.3, expectations were $-0.32. Adaptive Biotechnologies Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by and welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] As a reminder today’s program is being recorded. And now I’d like to introduce your host for today’s program, Karina Calzadilla, Head of Investor Relations. Please go ahead.
Karina Calzadilla: Thank you, Jonathan, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies fourth quarter and full year ‘23 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of ‘23. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and we’ll be referencing to a slide presentation that has been posted to the Investors section on our corporate website. During the call, management will be making projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the Company.
These statements reflect management’s current perspective of the business as of today. Actual results may differ materially from today’s forward-looking statements, depending on a number of factors, which are set forth in our public 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 Peterson, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, I will turn the call over to Chad Robins. Chad?
Chad Robins: Thanks, Karina. Good afternoon, everyone, and thank you for joining us on our fourth quarter and full year earnings call. As you can see on Slide 3, 2023 was a year of transformation for Adaptive. Key milestones were cheeky for both MRD and immune medicine. We executed OpEx reduction initiatives to drive efficiencies and reduce burn and we initiated a strategic review process to maximize the value that MRD and immune medicine can deliver to patients and shareholders. We ended the year with $170 million in revenue, including 60% from MRD and 40% from immune medicine. The MRD business grew 27% versus prior year excluding milestones as we experienced outstanding growth from clonoSEQ’s volumes. This growth from MRD was offset by a decline in immune medicine mainly due to the reduction in the upfront amortization of Genentech.
As a reminder, last quarter, we updated total company guidance to exclude revenue from immune medicine. We made this decision based on a strategic shift and immune medicine to focus exclusively on targeted drug discovery. Importantly, we ended the year with a strong cash position of approximately $346 million, which enables us to execute on the strategic priorities of both businesses. In MRD, drive clonoSEQ’s penetration and revenue growth with the goal of reaching profitable profitability by the end of 2025. In immune medicine, advance our targeted drug discovery efforts in cancer and autoimmunity. This includes supporting the partnership with Genentech, validating a therapeutic candidate multiple sclerosis and scaling target discovery and other autoimmune disorders.
Before I go into the details of each business, I'll provide an update on the strategic review. In the third quarter of 2023, we retained Goldman Sachs to advise on a strategic review to maximize value to our shareholders. The MRD and immune medicine businesses had different value drivers, investment needs and talent requirements. We are evaluating various alternatives to unlock the full potential of each business and we're on track to communicate the final outcome at the end of this quarter. Let's now take a closer look at our MRD business starting with Clinical Testing on Slide 6. clonoSEQ’s clinical Revenue the fourth quarter grew 56% versus prior year and 25% prior quarter with growth coming from both volume and ASP. Volumes continue to grow quarter-over-quarter with 15,680 tests delivered in Q4, representing a 49% increase versus prior year and a 4% increase sequentially.
As a reminder, fourth quarter is typically impacted by fewer business days. We are off to a great start this year with record high clonoSEQ quarters year-to-date. Growth came from all marketed indications and multi myeloma continues to be the largest contributor. In addition, the actions we put in place to improve collections and expand coverage are working. ASPs in the fourth quarter grew double-digits sequentially. We continue to be laser focused on driving ASP growth by reducing out of policy and non-contracted claims and further optimizing revenue cycle management. As such, we anticipate an increase of approximately $200 in ASP per test over the next two years. It is encouraging to see positive trends on clonoSEQ key indicators as shown on Slide 7.
Blood-based testing increased and all indications contributing 39% of clonoSEQ test, we expect this percentage to grow as we generate more clinical data in blood and commercialization in non-Hodgkins lymphoma. Blood-based testing is also a key driver of the quarter-over-quarter growth we are seeing in the community, which now contributes really one in four clonoSEQ test. Recent data presented at ASH showed evidence that clonoSEQ MRD from blood predicts progressive free survival early in the treatment cycle multi myeloma patients. Also ordering healthcare providers and ordering accounts grew 33% and 29% versus prior year respectively. EMR integration is a key element of our growth strategy and central to our efforts to further enhance our customer experience.
We completed epic integrations with our first five accounts and expect it to complete 15 to 20 more this year, include several of our largest accounts. Last week, we signed an important new integration partnership with Flatiron Health, a leading provider of EHR software and services for community oncology. We look forward to executing this partnership and expect to make clonoSEQ available to practices via the molecular profiling integration and Flatiron’s OncoEMR system in 2025. Looking at MRD Pharma on Slide 8. Full year revenue was essentially flat versus prior year due to broader macroeconomic factors impacting the biopharma industry, which resulted in lower sample volume across our portfolio prospective trials. That said, we saw some recovery in the fourth quarter, which experienced 23% growth sequentially.
Despite these transitory headwinds, we ended the year with a healthy backlog of about $185 million and we signed two important pan portfolio collaboration with Takeda and BeiGene. 2023 was a great year for clonoSEQ and we are well positioned to cement our leadership as the gold standard in MRD team for clinicians, patients, pharma partners and payers. Looking ahead, as shown on Slide 9 and 10 our priorities for MRD are clear. First, further increase penetration by growing blood-based testing expanding into new indications like MCL and CTCL adding new use cases through data generation and enhancing the customer experience through EMR integrations. Second, improving margins through ASP increases and operating leverage with the primary goal of reaching positive adjusted EBITDA in the second half of 2025 and cash flow breakeven in 2026.
A doctor presenting a new diagnostic test to a patient in an exam room.
Turning to immune medicine on Slide 12. In 2023, our Immune Medicine business achieved two key milestones, one, FDA IND acceptance was secured for the first T-cell therapy product candidate under our partnership with Genentech. And two, we discovered a novel druggable target in multiple sclerosis, which sheds light on potentially new T-cell biology that may be causative trigger to this devastating disease. These immune medicine milestones further sharpened our focus in target and drug discovery, specifically in high value opportunities in cancer and autoimmunity. As shown on Slide 13, in cancer, we continue to support Genentech in the development of two categories of TCR based cell therapy products. On the first share product we are engaged with Genentech’s development team as it gears up for its first in human trial.
For the fully personalized program, we completed building our regulated process workflow and this year, we're initiating end-to-end testing for future clinical readiness. The valuable immune receptor data that we have been generating for over a decade is a treasure trove of information that together with our partner Microsoft, we used to develop and train AI ML models to help accelerate our target and drug discovery efforts. In autoimmunity, our focus is to further validate the MS Target in known disease models. In parallel, we're deploying our antibody platform to identify a therapeutic candidate that specifically binds to this self-antigen and blocks of potential causative event in MS. In addition, we’re applying the exact same approach that we use in MS to discover novel targets and additional prioritized autoimmune indications including Type 1 diabetes and rheumatoid arthritis.
As you can see on Slide 14, in 2024, we will gate our R&D investments based on key proof points that drive future value for both our partnered and wholly-owned drug discovery pipeline. I'll now pass it over to Tycho.
Tycho Peterson: Thanks, Chad. Starting on Slide 15 with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was $45.8 million with 67% from MRD and 33% from Immune Medicine. MRD revenue grew to $30.8 million, up 9% from a year ago. clonoSEQ clinical performance was the main driver, partially offset by a reduction in revenue from pharma services and regulatory milestones. Excluding regulatory milestones, MRD revenue grew 18% from a year ago. clonoSEQ test volume increased by 49% 15,680 tests delivered from 10,526 tests in the same period last year. Immune medicine revenue was $15 million, down 45% a year ago driven as expected by lower Genentech amortization, which decreased 53% year-over-year. Full year 2023 revenue was $170.3 million, representing an 8% decrease year-over-year.
MRD Revenue was $102.7 million, up 18% from a year ago, driven by 27% increase from MRD service revenue, partially offset by a lack of regulatory milestones. Immune medicine revenue was 67.5 million, down 31% from the prior year. As Chad mentioned, starting with the 3Q ‘23 earnings call, we opted to exclude Immune Medicine from revenue guidance given the shift in focus to target and drug discovery. Moving down to P&L, on the right-hand side of the slide, total gross margin for the quarter was 57%, representing an eight point increase versus the third quarter and a 13 point decline versus a year ago. The sequential increase was largely due to efficiencies from the lab moves. Versus the prior year, the decline was driven by lower amortization of the Genentech upfront and a lack of milestones which have a 100% margin contribution.
R&D, sales and marketing, and G&A operating expenses declined 8% in total versus a year ago as we continue to place a strong emphasis on driving leverage. Net loss for the quarter was $69.5 million, compared to $40.2 million last year. For the full year, operating expenses, excluding the $25.4 million one-time impairment charge in the fourth quarter, which was related to our legacy lab and headquarter space over $371.9 million, compared to $385.5 million in 2022 to representing 4% increase. This reflects our ongoing efforts to drive operating efficiencies, partially offset by higher cost of revenue. Full year net loss was $225.3 million, compared to $200.4 million in 2022 while adjusted EBITDA was a loss of a $116.4 million, compared to a loss of $121.6 million in 2022.
We ended the year with approximately $346 million in cash equivalents and marketable securities. Now turning to 2024 guidance on Slide 16. As mentioned in our last earnings call, revenue guidance will be provided only for the MRD business since immune Medicine resembles a more traditional drug discovery biotech model and we want to ensure that we do not trade off short-term revenues for long-term value. We expect full year revenue for MRD to be between $130 million and $140 million. At the midpoint, we anticipate a 65% and 35% contribution from clinical and pharma services respectively. Guidance includes conservative MRD Pharmacy Services growth as we continue to monitor broader impaction about Pharma industry. It also includes MRD milestones in the low-single-digit millions, which could have upside depending on clinical trial outcomes.
With respect to trends throughout the year, we expect MRD revenue to be 45% to 55% weighted between the first and second half respectively. Of note, given that our Immune Medicine efforts are focused on target and drug discovery, revenue from our IM Pharma collaborations will be used to offset R&D investments. Finally, our collaboration with Genentech continues to advance and we expect to recognize roughly $14 million in amortization of the upfront this year. Moving down the P&L, we expect operating expenses including cost of revenue to be between $360 million and $370 million for the year. This deceleration in the spending reflects our ongoing efforts to optimize resources and drive operating efficiencies, while supporting healthy top-line growth.
We continue to be thoughtful about our cash position, excluding potential one-time costs from the strategic review, we expect to burn average $35 million per quarter representing an annual reduction of 10% versus 2023. With that, I'll hand it back over to Chad.
Chad Robins: Thanks, Tycho. We're off to a running start. I'm confident in our ability to continue to grow our clonoSEQ MRD business and to demonstrate our target and drug discovery capabilities in Immune Medicine. I look forward to communicating with you on the outcome of the strategic review, which will enable us to drive success and maximize value for all stakeholders. With that, I'll turn it back over to the operator and open it up for questions.
