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Edited Transcript of ADPT.OQ earnings conference call or presentation 12-Nov-19 9:30pm GMT

Q3 2019 Adaptive Biotechnologies Corp Earnings Call

SEATTLE Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Adaptive Biotechnologies Corp earnings conference call or presentation Tuesday, November 12, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carrie Mendivil

* Chad M. Cohen

Adaptive Biotechnologies Corporation - CFO & Director

* Chad M. Robins

Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman

* Harlan S. Robins

Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer

* Julie Rubinstein

Adaptive Biotechnologies Corporation - President & Director

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Conference Call Participants

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* Adam Joseph Wieschhaus

Cowen and Company, LLC, Research Division - Associate

* Amanda Louise Murphy

BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst

* Brian David Weinstein

William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst

* David Michael Westenberg

Guggenheim Securities, LLC, Research Division - Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and welcome to Adaptive Biotechnologies' Third Quarter 2019 Financial Results. (Operator Instructions)

I'd now like to turn the conference over to your host, Ms. Carrie Mendivil.

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Carrie Mendivil, [2]

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Thank you. Earlier today, Adaptive Biotechnologies released financial results for the quarter ended September 30, 2019. If you have not received this news release or if you'd like to be added to the company's distribution list, please send an e-mail to investors@adaptivebiotech.com.

Before we begin, I'd like to remind you that management will make statements during this call that are forward-looking statements within the meaning of federal securities laws. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated. Additional information regarding these risks and uncertainties appears in the section titled forward-looking statements in the press release Adaptive issued today. For a more complete list and description, please see the Risk Factors section on the company's prospectus declared effective on June 26, 2019, and the other filings the company makes from time to time with the Securities and Exchange Commission.

Adaptive disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise, except as required by law.

In addition, non-GAAP financial measures will be discussed during this call. Please visit the aforementioned press release for a reconciliation to the most directly comparable GAAP measure. This conference call contains time-sensitive information and is accurate only as of the live broadcast, November 12, 2019.

With that, I'd like to turn the call over to Chad Robins, Adaptive's Cofounder and Chief Executive Officer. Chad?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [3]

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Thanks, Carrie. And thank you, everyone, for joining us this afternoon. I'm very pleased to welcome you to Adaptive's earnings call to review our results for the third quarter of 2019. Joining me today is Julie Rubinstein, our President; and Chad Cohen, our Chief Financial Officer. In addition, Harlan Robins, Adaptive Chief Scientific Officer and Cofounder, will be available for question and answer.

At Adaptive, our mission is to translate the genetics of the adaptive immune system into clinical products to transform how diseases are diagnosed and treated. Our approach represents one of the largest clinical applications of genomics and one of the largest global addressable markets in health care because the adaptive immune system, both detects and treats most diseases in exactly the same way. Adaptive's immune medicine platform reads and translates the genetics of the adaptive immune system enabling product applications across life science research, clinical diagnostics and drug discovery.

Over the past 10 years, we have been primarily focused on building our immune medicine platform, database and infrastructure to accelerate our product development engine. With this foundation in place, we are now accelerating our efforts to scale our business to aggressively pursue the large pipeline opportunity in front of us. We finished the third quarter of 2019 with revenue of $26.1 million, up 52% over the prior year period.

On our earnings call -- on our prior earnings call, we laid out key milestones in each business area, and I will walk you through our significant progress. First, related to life science research. We are on track for the completion of an upgraded RUO kit from immunoSEQ at the end of this year with a launch plan for the first quarter of 2020. This kit will enable more researchers across disease states to access our immuno sequencing solutions in their labs.

Turning next to clinical diagnostics. ClonoSEQ is our first clinical diagnostic product derived from our platform. The assay is the only FDA-cleared test for the detection and monitoring of minimal residual disease in ALL and multi myeloma from bone marrow. We are on track for our first label expansion with submission to the FDA by the end of 2019 for clonoSEQ to be used to monitor patients with CLL from blood samples.

There are more than 600,000 patients in the United States who are newly diagnosed or living with the types of blood cancers that can be monitored by clonoSEQ, representing a $1.2 billion U.S. opportunity of the total $4.5 billion global market. We are still in the very early stages of clonoSEQ clinical adoption and estimate that market penetration is in the low single digits. This presents a massive opportunity to build and grow this market.

As a reminder, we are currently in the account activation and workflow setup stage and have just begun generating demand for clonoSEQ in our first 2 indications. We will capture increasing market share over time in 3 ways. First, we will expand disease by disease. Second, we will enable noninvasive testing in the blood. And third, we will do study after study demonstrating clinical utility in each disease across multiple time points in the patient care continuum.

Like the migration from analog to digital photography, clonoSEQ is massively changing the resolution with which we can see and count cancer cells. We believe there will only be a matter of time until clonoSEQ standard of care.

Shifting to our diagnostic product in development immunoSEQ Dx. We are excited to announce that we have achieved an important milestone. We confirmed our first clinical signal, proving that we can read and translate how the adaptive immune system diagnosis disease. At the center of this discovery is our vast immunomics database, which we have used to train machine learning models to develop diagnostic signals. We have demonstrated this in lyme disease and are making progress in other disease states.

This is all part of our vision to enable the early and accurate diagnosis of many diseases at the same time by reading the genetics of the adaptive immune system. In collaboration with Microsoft, we are categorizing population-wide immune responses to many possible diseases, a massive but tractable data problem. We already engaged in early discussion with the applicable regulatory bodies to scope out a potential path towards commercialization for immunoSEQ Dx.

Finally, in partnership with Genentech for our drug discovery pipeline, we're also advancing our therapeutic-grade TCRs for cellular therapy and oncology, and we continue to expect an IND filing for the product, targeting shared antigens in late 2020. To execute on our vision, we are strategically scaling our organization to move into this next phase of growth.

Looking ahead to the next 5 to 10 years, we are focused on harvesting the data from our platform to develop patient-specific, immune-driven clinical products to recognize the open-ended growth story in front of us. Our people and culture team or packed is singularly focused on recruiting and retaining top talent to accelerate our progress against these ambitious goals. We have a mission-driven culture at Adaptive that drives commitment to each other and to our patients to achieve things that have never been done before.

As we continue to invest heavily across our platform, we are committed to retaining these core values that we believe are critical to our long-term success. I will now turn it over to Julie, who'll walk you through more information on our immune-driven research and clinical products after which Chad C will provide greater details on our financials. Julie?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President & Director [4]

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Thanks, Chad. Starting first with life sciences research. We are continuing to make important progress across our research business as our partners expand their usage of our immuno sequencing products and services. In particular, the biopharma community is increasingly using immunoSEQ for immune repertoire profiling and clonoSEQ for MRD monitoring in clinical trials. Since the beginning of 2019, our assays have been selected by an additional 40 biopharma companies for a total of 165 partners to-date. As Chad mentioned, by the end of this year, we are launching an upgraded RUO kit for immunoSeq that will work quantitatively with any sample type, including stored tissue samples. As the use of immuno sequencing expands across disease states, we are growing our sales and marketing team and seeking partners for global distribution.

As the industry continues to assess the inclusion of MRD as a potential surrogate or primary endpoint in clinical trials for blood cancers, it is increasingly important to have a standardized and highly accurate option for MRD testing in registrational trials. Of note, in Q3, we announced a global agreement with Amgen for the use of our clonoSEQ assay to assess MRD across multiple drug development programs in their portfolio. This partnership exemplifies the growing role MRD testing plays in demonstrating drug efficacy in clinical trials. Under the terms of this type of agreement, we will receive annual development fees in addition to potential sequencing payments and regulatory milestones.

Turning next to clinical diagnostics. Starting with clonoSEQ, clinical test volumes during the third quarter increased 36% to 2,551 tests compared to the third quarter of 2018. ClonoSEQ is currently used by more than 400 hemogs in over 130 institutions.

Clinical test volumes are growing in line with our expectations, just 9 months following CMS coverage. Progress to-ate has been achieved by a small 14-person field force.

As Chad mentioned, we have triggered an expansion in commercial resources in response to accelerated coverage to achieve broader market adoption over the next 18 months. We aim to more than double our field team by January 2020 to support the growing demand for clonoSEQ across the U.S. and the need to expedite the account activation and workflow integration processes. We are also ramping up our marketing efforts so that more patients are aware of the importance of knowing their MRD status. We are educating the clinical community about the importance of obtaining a baseline sample for every patient. This will enable us to perform regular longitudinal MRG monitoring over the lifetime of each patient. Today, clinicians are already using the test to confirm response to therapy, determine disease burden before and/or after transplant, confirm complete remission by traditional methods and guide maintenance therapy.

To expand the use cases for clonoSEQ, we are continually generating data through biopharma partner trials, investigator-sponsored protocols and a patient registry to curate real-world evidence.

With regards to life cycle management, we are on track for our first label expansion with submission to the FDA by the end of 2019 for clonoSEQ to be used to monitor patients with CLL from blood samples. Work is also underway to expand our current label from bone marrow to blood in multiple myeloma and ALL and to extend utility to patients with NHL, also from blood samples. Moving into blood will be highly preferred by patients and significantly less costly to the health care system.

We are exploring product line extensions that may allow for greater access and utilization of our diagnostic products. To that end, we announced a partnership with Illumina to enable the development of in-vitro diagnostic test kits for local labs. We are committed to ensuring that patients have access to the best tools available to monitor their disease and while it is still early days, we are confident that clonoSEQ will become the standardized MRD monitoring tool that clinicians will use to manage their patients.

Turning now to our clinical diagnostic pipeline product immunoSEQ Dx. This product is intended to diagnose disease based on the T cell response to disease-specific antigens, which we are calling a TCR signature. Each disease will have a different TCR signature, which we will identify and continuously improve by leveraging our immune medicine platform and Microsoft's machine learning expertise. To launch this product in 2021, we set out to confirm at least one clinical signal by the end of 2019 to take into clinical validation in 2020. This signal confirmation has been achieved in the acute lyme disease thing from 2 independent retrospective, 200-plus patient cohorts. In both of these studies, we compare to standard of care, which is 2-tiered serologic testing. Our data shows a reduction in both false positive and false negative rates compared to standard of care. In each patient cohort, we identify T cell receptors that are overrepresented in patients with acute lyme disease, whose cases have been clinically confirmed.

We intend to continually improve the diagnostic sensitivity of our test by identifying more lyme-specific receptors over the next year as we collect additional patient cohorts and run our registrational clinical validation study. There are approximately 300,000 newly diagnosed patients with lyme disease each year in the United States and over 3.5 million tests run. We believe that detecting lyme disease based on the expansion of lyme-specific TCRs in the blood can significantly increase the accuracy of detection of this disease. This signal in lyme derisks the science behind immunoSEQ Dx.

We also continue to progress in other disease states that we have discussed, such as Celiac disease. In October, we opened a research study for 1,000 volunteers who believe they may have Celiac disease, and we plan to sponsor several other such studies in additional disease states in the near future. We are now expanding our commercial team for immunoSEQ Dx and working with the FDA to define our validation protocols necessary to bring this product to market.

Turning now to drug discovery. Our partnership with Genentech to use our TCR discovery and screening process to develop cellular therapies in oncology is progressing well. As previously discussed, we are focusing on the development of shared cellular therapy products using our version of off-the-shelf TCRs against prioritized shared antigens. In Q3, we contributed significant resources to the generation of data packages on TCRs against many antigenic targets. From these data packages, Genentech is prioritizing TCRs for cell therapy, product development with the goal of the first IND filing in 2020.

We are also continuing to make progress with Genentech on the development of a personalized cellular therapy product, where we plan to identify, in real time, the TCRs that are specific to each patient's tumor.

In sum, we are beginning to gain traction on all fronts as we execute against our commercial products and advance our clinical pipeline. We are confident in our ability to leverage our immune medicine platform to bring high-margin patient-specific immune-driven products to market.

With that, I will now turn the call over to Chad C for more details on our financials. Chad?

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [5]

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Thanks, Julie. Turning to our third quarter 2019 financial results. Total revenue in the third quarter was $26.1 million, represented an increase of 52% from $17.2 million in the same period last year. Our revenue mix for the third quarter consisted of 45% of our revenues coming from our sequencing category and 55% coming from our development category.

During the period, we recognized $2 million in revenue related to a milestone payment from a biopharma partner, which I will discuss in a moment. By comparison, we recognized $6 million in milestone revenue for the same period last year.

Sequencing revenue in the third quarter was $11.7 million and grew 38% from the same period in 2018. This increase was primarily driven by growth and revenue generated from our biopharma and academic customers and really the sequencing volume as well as growth in revenue generated from our clinical customers. It's important to note that we recognize revenue in our sequencing revenue category when sequencing results or clinical test results are delivered to our research and clinical customers.

Research sequencing volume, which includes sequences reported to both our biopharma and academic customers increased by 25% to 10,618 sequences from 8,466 sequences in the third quarter of 2018.

Separately, clinical volume increased by 36% to 2,551 clinical tests from 1,879 clinical tests in the third quarter of 2018. The development revenue grew to $14.4 million in the third quarter, up 65% from the same period last year. The increase was primarily due to amortization of the $300 million upfront received in February from our Genentech partnership, partially offset by a decrease in regulatory milestones recognized in the third quarter 2019 as compared to the third quarter of 2018.

Cumulatively, we have recognized approximately $26 million from the upfront payment in 2019, while approximately $274 million of the original $300 million upfront is still categorized as deferred revenue. As previously mentioned, we received a $2 million milestone payment from a biopharma partner, with whom we had collaborated with on the use of clonoSEQ to expand their drug label.

We are excited to have been part of helping our partners achieve this milestone. And as of quarter end, under our customer contracts, Adaptive may receive up to $129 million in MRD-related milestones over time as certain regulatory approvals are obtained. It is important to note, though, that the timing, extent and certainty of achieving MRD-related milestones is hard to predict and not within our control. However, these milestones do signify the growing importance and the use of NGS MRD technology and specifically clonoSEQ in the monitoring of patients in clinical trials and the importance of determining the efficacy of drugs in the regulatory approval process.

Shifting now from our revenue to our operating costs. Total operating expenses for the third quarter of 2019 were $44.1 million, representing a 68% increase from $26.3 million in the same quarter last year. Working down our operating expenses, cost of revenue was $5.6 million during the third quarter 2019 compared to $5.4 million for the third quarter last year, representing a 4% increase.

Research and development expenses for the third quarter of 2019 were $20.5 million compared to $9.8 million in the third quarter of 2018, representing an increase of approximately 110%. The increase was primarily attributable to additional cost of materials and allocated production laboratory expenses relating to supporting our TCR drug discovery efforts, TCR antigen map development and clonoSEQ efforts as well as an increase in personnel costs.

Sales and marketing expenses for the third quarter of 2019 were $9.1 million compared to $6 million in the third quarter of 2018 represented an increase of approximately 51%. The increase was primarily due to additional personnel costs to support our expanding business.

General and administrative expenses for the third quarter of 2019 were $8.5 million as compared to $4.7 million in the third quarter of 2018, representing an increase of approximately 79%. The increase is primarily driven by increase in head count and costs associated with being a public company.

Both net loss and net loss attributable to common shareholders for the period was $14 million or $0.11 per basic and diluted share compared to $8.3 million or $0.66 per basic and diluted share in the third quarter of 2018. Our earnings per share are based on approximately 124.3 million and 12.6 million weighted average shares outstanding for the third quarter of 2019 and 2018, respectively.

Adjusted EBITDA for the third quarter of 2019 was a loss of $12.7 million compared to a loss of $5.1 million in the same period of the prior year. We ended the third quarter of 2019 with approximately $709 million in cash, cash equivalents and marketable securities and we had no debt.

Moving on to our outlook for 2019, we are raising our 2019 revenue outlook and now expect full year revenue to be in the range of $82 million to $83 million, representing growth of 48% at the midpoint of the range over 2018. This compares to our previous expectation of $78 million to $81 million for the full year 2019. The increase in our guidance range contemplates the receipt of the $2 million milestone payment that was not included in our prior revenue expectations as well as an acceleration of development activities related to our Genentech partnership to the third quarter and a temporary decrease in our academic business expected for the fourth quarter as many investigators are choosing to wait for the new version of our assay to come online around year-end. As we turn the corner to 2020, we are incredibly excited about the future, and we look forward to providing our outlook for 2020 when we report financial results for the fourth quarter of 2019.

With that, I will turn it back to the operator to open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Tycho Peterson of JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Another good quarter, especially on the development services side. Is this the new baseline going forward? And is that really just the work progressing faster than expected?

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [3]

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Thanks, Tycho, for the question. Just reiterating the comments that we just made. There was a big push to deliver a number of data packages. In the third quarter. So that resulted in an uptick of the resources consumed as part of that partnership. We don't expect that level of investment to be at the same area in the fourth quarter, and therefore, likely will tick up again in 2020. But in the fourth quarter, it'll be -- those development revenues associated with the partnership will likely level off.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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And then thinking a little bit about pipeline. I guess starting with the label expansion for CLL for clonoSEQ and blood by year-end. Can you just talk to how you think about that process? How much risk there is? And then as we think about expanding multiple myeloma and ALL from bone marrow to blood, how do we think about the time lines for those as well? I know you'll talk about it in the future, but wondering if...

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [5]

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Sure. Thanks, Tycho. So for CLL, we're confident in our data, and we're confident that we'll be submitting by the end of this year. So obviously, there is always risk when you submit to the FDA in terms of the time frame as to which we receive approval. Technically, they have a 6-month time frame in which to grant those marketing approval for the CLL label expansion. But we are confident in our data.

As for All, and you talked about ALL in the blood. We're also progressing nicely. We haven't yet talked about our time frame for submission on that yet. But we are progressing very nicely on the data, and we expect to have a filing in 2020.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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And then on the Microsoft antigen map, you mentioned early discussions with regulators. Can you just talk to the nature and tenor of those discussions? And how far behind are the other signals like Celiac and Ovarian? As you mentioned, you're still working on them, so...

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Harlan S. Robins, Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer [7]

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Tycho, yes, so we're actually progressing fairly nicely on Celiac. And we're feeling quite good about the results. It's a little bit behind where we are with lyme, where we got the confirmation in 2 independent studies, which allowed us to feel confident in announcing it.

As far as other signals go, we're moving on a lot of different fronts, which we'll be bringing up in the future. And then in terms of FDA, we've had multiple meetings now with the FDA, and we're -- this is going to be a bit of a process because this is new to them and new to us, and they're showing significant interest in working with us and have been, I think, are going to be a great partner for us going forward.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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Okay. And then last one. Any impact from the New York approval back to clonoSEQ here that you got in August in terms of volumes this quarter? Or will it take a little while for that to ramp up?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [9]

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That will take a while to -- a little while to ramp up, but we should see that start to ramp in 2020. As a matter of fact, I was just in New York last week, visiting the New York institutions and a lot of them are in that kind of first stages of account setup and workflow and HCP -- and then the next phase will be HCP training. But we should see the volume start to ramp up from the New York institutions in 2020, but it hasn't yet been reflected in this quarter.

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Operator [10]

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Your next question comes from the line of Derik De Bruin of Bank of America.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [11]

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Could you [spray] out...

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [12]

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Can someone confirm was that us or Derik?

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [13]

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Can you hear me now?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [14]

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Yes, we can hear you now.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [15]

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Okay, sorry. Must have hit a dead zone there. Can you confirm specific what the MRD clonoSEQ revenues were for the quarter?

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [16]

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So Derik, we haven't provided any discrete numbers in terms of our clonoSEQ revenues, but we're -- consistent with what we said in the prior quarter, those revenues represent just under 10% of our total revenues.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [17]

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Got it. And I guess, can you talk a little bit about how you're sort of thinking about the ramp in that product? I mean I realize you're doing the onboarding and bringing on people now. But just sort of talk about some of the work you're doing in terms of sales and marketing. How long you think before you'll start to see significant acceleration in that product?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [18]

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Yes, sure, Derik. We're -- really where we're expected to be 9 months into our commercialization efforts with having a 14-person field team in place. As we mentioned, we've been, to-date, largely focused on account contracting, workflow integration and HCP training, and we're just starting to turn our attention to demand generation for the first 2 indications in ALL and multiple myeloma, and we do expect to see some acceleration in growth even as early as the Q4 of this year.

Additionally, so we're doubling our sales force. We're expanding our medical team in response to the accelerated coverage we got with the 165 million lives. And I think, together with the expansion of CLL into the blood, we're poised for 2020. But as we talked about coming out in the IPO, we expected this to be an 18-month time frame and the real inflection to be hitting in 2021, where we see clonoSEQ taking a meaningful portion of our total revenue trajectory. But we are significantly, in addition to the sales force, ramping up our efforts, not only in medical, but also in marketing to the patient population as well in terms of knowing their MRD status.

And the final point is, I mean, it's really a 2-part component. One is to get an IG sample for every patient and then to this land and expand strategy, where we find a time point for each patient's -- the use case for each patient, and then for each clinician to then monitor more and more for each patient once they find kind of their initial time point.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [19]

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Great. That's really helpful. And then just one final question. So I appreciate the update on the lyme disease, just some size of the market there? And also, just curious, how many signals or what do you deem is enough signal to move forward? I mean it's sort of a question of at what point you sort of think you're saturating the number of antigens that are out there? So it's really a question of like, when do you think you've got enough signal? And sort of a question of, like, are there going to be antigens? Or are there going to be false negatives out there that you're going to miss because you're not screening enough T cells?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President & Director [20]

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Great. I'll answer first the question about commercialization, and then I'll pass to Harlan, who can answer some questions about sort of size of the signal that we feel we need to have. So as you know, we just received our first signal. And I think right now, we're most excited that this significantly derisks the science. That's triggered our motion now to put our commercial team in place for this immunoSEQ Dx product. I would say we're currently assessing the commercial landscape for lyme as well as other diseases, including those that we've discussed in the past. And so as more signals get confirmed over the coming months, we'll solidify our commercial path forward.

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Harlan S. Robins, Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer [21]

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So the signal that's needed for us to move forward is really driven by the present diagnostic and whether or not we can improve clinical care by having a superiority in some dimension. And that we're -- and of course that we're confident that our signal is truly what we think it is, meaning that we've confirmed it in multiple data sets and feel confident that it is what it is.

However -- and the total number of T cell receptors in the in the whole population that are specific for any given disease-specific set of antigens is in the -- well into the millions, tens of millions, some very, very large number. And the number that we've found to-date in any given disease that have generated our diagnostic is in the hundreds to thousands. So the point is, we're only seeing a small fraction of immune response, and that's already sufficient to considerably better than standard of care and certainly in lyme disease. And so the point is, is that with our partners, Microsoft, we have a machine learning algorithms that we're also discussing with the FDA so that we're able to have a self-learning diagnostics so we can discover more and more of those T cell receptors so that we go and continually improve our diagnostics.

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Operator [22]

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Next question comes from the line of Doug Schenkel of Cowen & Company. .

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [23]

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This is Adam Wieschhaus on for Doug. You mentioned that clonoSEQ is at 165 million covered lives, which I believe is consistent with last quarter. Could you provide an update on what percent of payer contract has been implemented at this point? And I think on the last quarter's call, you said it would take 1 to 3 quarters probably to have all those payer contracts implemented. So is that still the thinking? Or put differently, has this been going as planned?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [24]

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So yes, it's been going as planned, and we're in negotiations to convert those medical policies into contracts now. We expect the first -- some of the first to hit towards the first half of 2020. But the discussions are progressing as planned.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [25]

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Okay. Great. And maybe a question for Julie on the lyme disease. I may have missed it, but did you reveal the details of the planned clinical validation study in terms of its size? Or how long it will take in order to hit the planned launch in 2021?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President & Director [26]

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Sure. We are discussing that in our conversations with the FDA to determine the actual protocol, but we do believe it can be enrolled and fully completed in 2020. And -- yes.

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Adam Joseph Wieschhaus, Cowen and Company, LLC, Research Division - Associate [27]

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Okay. Great. And then maybe one last one for me is, how does your sensitivity in picking up MRD and blood for the CLL indication compare to competitors, which I believe are only indicated for bone marrow?

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Harlan S. Robins, Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer [28]

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Yes. So we have a -- let's see. So it's highly disease-dependent. The sensitivity of our assay is really related to the denominator, which is how many total cells we're looking at. So realistically, the sensitivity of our assay is identical in bone marrow and blood, but the actual disease burden is slightly different in bone marrow and blood.

For CLL, they're actually fairly similar. So our sensitivity in blood is better than a less sensitive technology as in bone marrow, which is really -- which is why we think we'll be able to shift the whole field to blood. So that's, by the way, one in a million cells is what we're -- FDA approved for.

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Operator [29]

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Next question comes from the line of Brian Weinstein of William Blair.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [30]

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Recognizing that you guys are making a lot of investments in sales force and expansion of menu on clonoSEQ, can you talk a little bit about how you expect the typical time line to play out from sort of introduction to an account to convincing an account to be thinking about MRD testing with clonoSEQ to then having them be kind of fully up to speed? So as we hear about more accounts coming up, what is that kind of general time frame for them to sort of ramp? How are you thinking about that?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President & Director [31]

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Brian, thanks for the question. So this year, it, on average, takes about 9 months to sign on an account, and that includes all of the contracting, account activation and HCP training. We anticipate tightening that up now as we progress. And as we brought in the field force as well.

And then within an account, we -- the average time it takes for an ordering clinician to get to their fifth patient is somewhere between 2 to 3 months. So that gives you some sense of timing. We're learning a lot more as we penetrate further into the market, and we expect those time lines to tighten as we expand.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [32]

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Great. And then can you talk a little bit about the institutions where you're getting the most traction, academic, large IDNs community. Just where is this being received most favorably today? And where do you need to do the most work?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President & Director [33]

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Sure. So we've targeted a couple of hundred of the Tier 1 institutions, we did quite a large and detailed landscape of all the institutions in the United States. And that's really where our main focus has been, and we're penetrating quite well in those Tier 1 mainly academic or larger institutions. In 2020, we anticipate continuing to focus in those Tier 1 institutions, but also beginning to penetrate the Tier 2 as we move closer towards the community.

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Brian David Weinstein, William Blair & Company L.L.C., Research Division - Partner & Healthcare Analyst [34]

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Great. And last one for me. And I recognize you'll give formal guidance in the beginning part of next year. But just as we're thinking about 2020, are there certain considerations that we should be thinking about that I hate to use the word puts and takes, but are there certain things that we should be considering as we build out our models a little bit more finally for next year?

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [35]

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Yes. So we'll give the formal guidance on the next quarter's call. I would just say that 2020 will be still a pretty heavy investment year for us as we think about the broader opportunity, the applicability of immunoSEQ Dx across many disease types as we continue to further our development relationship with Genentech and continue to press into the market with our clonoSEQ clinical product, which is likely going to involve a significantly heavier lift from a sales and marketing perspective.

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Operator [36]

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Next question comes from the line of David Westenberg of Guggenheim Securities.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [37]

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So has hemogs not being able to send out much of an issue. Kind of asked another way, do you anticipate the adoption of the IVD kit or the launch of the IVD kit to really increase traction in clonoSEQ?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [38]

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David, I would say there are certain institutions that don't do send-out tests. But I would also say that many institutions that originally said, "Hey, we don't do send-out tests." As MRD monitoring and, in particular, NGS MRD monitoring with clonoSEQ becomes more and more known, that is -- we're already seeing that start to change. So as we get more and more covered lives under medical policy and under contract. The kind of the barriers are being removed for clinicians to be able to send out tests.

The other thing that we're working on is getting on test menu and working on kind of workflow and integration. And as we have better and better examples and have an easier path to workflow and integration having done this now for the past 9 months, we can go in with essentially kind of a menu of here are the several ways that we can kind of work with you to send out a test and here's what's working in different institutions. So...

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [39]

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Right. And then just kind of continuation of Tycho's question about the conversations with the FDA in terms of immunoSEQ Dx. Are there -- have they brought up maybe any sort of like comparative technologies or pathways? For example, maybe diagnostic imaging with like maybe facial recognition software. It's not necessarily facial recognition. But that would kind of work on an iterative process that could go on. Just any kind of help to maybe think about the way FDA has looked at other kinds of projects that have a similar kind of concept of learning as you go kind of methology?

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Harlan S. Robins, Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer [40]

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So the FDA wrote a really nice white paper that describes their policy position on this. It's not -- I shouldn't say that, it not really their policy position, but it's a white paper that was both looking for input and trying to establish their policy on this. They have one -- I think they have one approval to-date that they're moving -- that they've already moved forward on. So -- but there are -- the white paper should be quite informative. It's really well written and really lays out how they're thinking about the -- how to use machine learning to have self-improving diagnostics.

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David Michael Westenberg, Guggenheim Securities, LLC, Research Division - Analyst [41]

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Great. And if I could squeeze in just one last question for Chad. Gross margins went up quite significantly. I mean basically sequencing revenue itself went up by about $3 million year-over-year, you had cost of goods sold went up by about $300,000. Is there something that's contributing to the increase in COGS? Is it may be potentially clonoSEQ? And as we go forward with clonoSEQ more payer adoption, should we expect maybe an increase in COGS there?

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [42]

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Some of that relates to just overall scaling that we're doing in the lab. So over time, we'll continue to engineer our tests to bring down those COGS. But others are specific really to the quarter in which we saw a mix towards our less-costly immunoSEQ tests as part of that sequencing component of our revenues in the current quarter. But hopefully, the goal is to drive down those costs over time. And I think that's what you're seeing when you look at comparatively our sequencing. The cost of our sequencing revenues year-over-year for the third quarter.

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Operator [43]

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Next question comes from the line of Amanda Murphy of BTIG.

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Amanda Louise Murphy, BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst [44]

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I have some follow-up questions. I guess first on the conversation that surrounds shift to blood. There's been some data, I think, recently, some of the abstracts and whatnot that have looked at use of clonoSEQ in trials, and I realize this is now sort of a real-world setting per se, but there is just kind of a give and take between sensitivity and sampling, meaning getting enough cells in the sample to get the 10 to the minus 6 sensitivity. So I just was curious how to think about that moving forward especially as you get into more of a clinical setting and getting the consistency of kind of the blood sampling draw stringency, if you will?

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Harlan S. Robins, Adaptive Biotechnologies Corporation - Co-Founder & Chief Scientific Officer [45]

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Yes. So good question. So we have been consistently improving our extraction capabilities so that we can optimize removing the DNA that we need in the -- at the concentration that we need to be able to consistently get at that deeper level. Actually acquiring enough sample to get to one in a million is pretty standard, there's some -- a standard bone marrow pull or a standard blood draw should have enough cells to get there on a highly consistent basis. So we see this as a temporary, but I think if not completely solved, we're almost completely solved at this point.

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Amanda Louise Murphy, BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst [46]

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Got it. And then just 2 quick modeling ones. So you talked about some academic weakness, I think, in Q4, but -- and then also, obviously, I don't know I think from a seasonality perspective, I would think, clinically, you may have a stronger Q4 just with the kind of -- there's a typical running through sort of deductibles. So when you think -- I guess when we're thinking about modeling clonoSEQ, immunoSeq and then should ASP dynamics? I'm just trying to figure out how to think about those trends into Q4 volume and ASP, I guess, more clonoSEQ. And I realize academic is sort of split between multiple different products.

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Chad M. Cohen, Adaptive Biotechnologies Corporation - CFO & Director [47]

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Yes. So let me address that sort of at a high level. One is, we'll continue to see growth in clonoSEQ revenue going into the fourth quarter and corresponding volume growth, so those are our expectations.

Second is, we'll continue to see growth in our biopharma sequencing revenue as well, specifically. We've seen historically over the past many years, a lot of seasonality, a peak seasonality in the fourth quarter as our biopharma partners sort of spend through their allocated budgets as well. So that will come into play again this year, at least those are our expectations.

And so I think the academic softness related to just the wait and see approach in terms of adopting our new assays and new kits that should come online more in the first quarter and through the rest of 2020, and we're seeing just a slight pullback in the fourth quarter relative to that academic business. And I think hopefully, that answers your question.

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Amanda Louise Murphy, BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst [48]

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Yes, yes, yes. Okay. And then just another quick one on the milestone side. So you talked a little bit about some level of pull-forward with Genentech. But I guess just in front of the IND, I'm not sure if you're willing or able to disclose, how those milestones might play out through the IND? So I'm assuming there'll be IND-related milestones, but is there anything else in front of that, that we should think about? Or any way to quantify what that might look like into the IND filing itself in '20, I think you said like 2020, right, for the [out the IND]?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [49]

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Yes. Amanda, we -- as we said, we plan to file an IND by the end of 2020. We can't disclose yet what targets the IND is for and nor do we have -- really, this is under Genentech's control in terms of the time line going forward, but there's a series of commercial and -- regulatory and commercial milestones associated both with the shared product and the private product that are -- with the Genentech deal. And those milestones will fall in accordance with the -- with those products, both on commercial and regulatory milestones. And again, we don't yet have timing on those.

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Amanda Louise Murphy, BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst [50]

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That -- so we still might see some, I guess, between now and the IND in other words?

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [51]

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Say that again, I didn't hear you.

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Amanda Louise Murphy, BTIG, LLC, Research Division - MD & Senior Biotechnology Equity Analyst [52]

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I'm sorry, I just said, so it's not like there's going to be a sort of a dearth of payments between now and an IND filing, you'll still kind of...

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [53]

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No. No. The first -- yes. No, no.

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Operator [54]

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I am showing no further questions at this time. I would like to turn it back to your CEO, Chad Robins, for any further comments.

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Chad M. Robins, Adaptive Biotechnologies Corporation - Co-Founder, CEO & Chairman [55]

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Thank you, everyone. Have a great evening. Appreciate it.

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Operator [56]

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Ladies and gentlemen, this concludes today's conference. Thank you for participating, and have a wonderful day. You may all disconnect.