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Edited Transcript of ADPT.OQ earnings conference call or presentation 13-Aug-19 8:30pm GMT

Q2 2019 Adaptive Biotechnologies Corp Earnings Call

SEATTLE Sep 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Adaptive Biotechnologies Corp earnings conference call or presentation Tuesday, August 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carrie Mendivil

Adaptive Biotechnologies Corporation - IR, Gilmartin Group LLC

* Chad Robins

Adaptive Biotechnologies Corporation - Co-Founder and CEO

* Julie Rubinstein

Adaptive Biotechnologies Corporation - President

* Chad Cohen

Adaptive Biotechnologies Corporation - CFO

* Harlan Robins

Adaptive Biotechnologies Corporation - Co-Founder and Chief Scientific Officer

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Conference Call Participants

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* Patrick Donnelly

Goldman Sachs - Analyst

* Tycho Peterson

JPMorgan - Analyst

* Derik De Bruin

BofA Merrill Lynch - Analyst

* Doug Schenkel

Cowen and Company - Analyst

* Brian Weinstein

William Blair & Company - Analyst

* David Westenberg

Guggenheim Securities LLC - Analyst

* Amanda Murphy

BTIG - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Adaptive Biotechnologies' second-quarter financial results call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Carrie Mendivil with investor relations. Ma'am, you may begin.

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Carrie Mendivil, Adaptive Biotechnologies Corporation - IR, Gilmartin Group LLC [2]

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

Before we begin, I would 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 entitled 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 final prospectus filed on June 27, 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 the reconciliation to the most directly comparable GAAP measure. This conference call contains time-sensitive information and is accurate only as of the live broadcast, August 13, 2019.

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

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Chad Robins, Adaptive Biotechnologies Corporation - Co-Founder and CEO [3]

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Thanks, Carrie, and thank you, everyone, for joining us this afternoon. I am very pleased to welcome you to Adaptive's first earnings call as a public company to review our results for the second quarter of 2019.

Joining me today is Julie Rubinstein, our President; and Chad Cohen, our Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Cofounder, will be available for Q&A.

As many of you know, we completed our initial public offering in July, raising approximately $321 million in net proceeds after deducting underwriting discounts and commissions. Before we get started, I'd like to express my sincere thanks to a strong team we have assembled at Adaptive. Our progress is truly a testament to their collective dedication and passion.

I would also like to thank our long-standing investors for their continued support, and welcome our new investors. We look forward to developing meaningful long-term relationships as we grow the Company.

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 next-generation sequencing because the adaptive immune system has a role to play in almost every disease.

Additionally, the adaptive immune system both detects and treats most diseases, including cancer, autoimmune disorders, and infectious diseases in exactly the same way. It does this through specialized cells of the adaptive immune system, T cells and B cells, that each have receptors on their cell surface called TCRs or BCRs that act as scanners. When there is a match between the immune cell receptor and a disease-specific signal or antigen, the immune response begins.

The same immune cell that detects disease springs into action to respond to the disease, acting as both an ultra-specific diagnostic to identify the disease and a natural therapeutic to clear the disease. Adaptive is harnessing these natural properties of the adaptive immune system to transform the diagnosis and treatment of disease.

While it is extremely difficult to accurately decipher this massive genetic code, this is exactly what we set out to do almost a decade ago. We have built a platform to read and translate the genetic information held within our adaptive immune systems to develop diagnostics and therapeutics that are personalized and patient-specific.

Validated by hundreds of patents, partners, and publications, our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient's immune system and understand precisely how it detects and treats disease in that patient. We capture these insights in our dynamic clinical immunomics database, now with over 30 billion receptors, and use them to develop and commercialize diagnostics and therapeutics tailored to each individual patient. Our platform has near-term product applications across three business areas: life science research, clinical diagnostics, and drug discovery.

The breadth of product potential makes immune-driven medicine one of the largest global addressable markets in healthcare. We estimate the potential market opportunity for our current pipeline of products to be greater than $48 billion, including research products, clinical diagnostics, and cellular therapies. We believe this market will grow over time as clinicians increasingly appreciate the importance of immune medicine to the diagnosis and treatment of disease and as our pipeline of products and services continues to expand.

We have already launched two commercial products: one in life science research called immunoSEQ for sequencing immune receptors; and one in clinical diagnostics called clonoSEQ for monitoring minimal residual disease, or MRD, in select blood cancers. We have invested purposefully in the commercial infrastructure for our first two products, which we will leverage to develop and launch our expansive pipeline.

Our robust clinical pipeline spans both diagnostic and therapeutic products, all stemming from the same platform, which could lead to a very strong margin profile at scale. Specifically, our diagnostic pipeline leverages our partnership with Microsoft, executed at the end of 2017, to use machine learning to accelerate our ability to connect receptors and antigens at scale to enable our shared vision of creating a blood test called immunoSEQ Dx for the early and accurate detection of many diseases all at the same time.

Our drug discovery pipeline is enabled by our partnership with Genentech, making our foray into cellular therapy in cancer. With an upfront payment of $300 million, we entered into a global collaboration to develop patient-specific neoantigen-directed T cell therapies. Genentech has also committed up to $1.8 billion in regulatory and commercial milestones and significant royalties.

In each of our business areas, we are focused on key catalysts that we will measure ourselves against as we accelerate our product development engine. First, in life sciences research, as the pioneers in immuno-sequencing, we intend for immunoSEQ to be the gold standard for immuno-sequencing for academic and biopharma researchers. As part of our effort to enable widespread adoption, we will launch a state-of-the-art research-use-only kit by year-end.

Second, in clinical diagnostics, our goal for both clonoSEQ and immunoSEQ Dx is for our suite of clinical diagnostics to be the recognized global leader in next-generation sequencing immuno diagnostics. To build this market leadership for clonoSEQ, we are pursuing FDA approval to expand our label to include a third indication: chronic lymphocytic leukemia or CLL in blood by year-end 2019.

We are also expanding our field force and medical team, and we are continuing to sign up more private payers in addition to the four national payers we announced in June. To initiate our market development for immunoSEQ Dx, we are on track to begin at least one clinical validation study in 2020 in at least one of the prioritized disease settings.

Lastly, in drug discovery, our goal is to be recognized as the best-in-class TCR discovery platform in the industry. To enable this goal, we are working closely with Genentech so they can file the first IND in 2020 for a cellular therapy against one or more cancer mutations that are shared between patients. We are also on track towards the development of a prototype for a cellular product that is personalized against each patient's specific neoantigens.

From a financial perspective, we are making significant progress across our business. We finished the second quarter of 2019 with revenue of $22.1 million, up 91% over the prior-year period. While our financial performance is important, I will continue to remind you that our performance will vary quarter to quarter; and data-driven milestones and catalysts will inflect value, reflecting the optionality provided by our immune medicine platform.

Julie Rubinstein will walk you through more information on our immune-driven research and clinical products, after which Chad Cohen will provide greater details on our financials. Julie?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [4]

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Thank you. As Chad mentioned, we developed our immune medicine platform to decode and translate the information held within our adaptive immune systems with the scale, precision, and speed necessary to develop clinical products. We are leveraging this platform across three key areas: life sciences research, clinical diagnostics, and drug discovery.

Starting first with life sciences research, this is at the core of everything we do at Adaptive. Our research product is called immunoSEQ and it is the key component of our platform that enables us to sequence immune receptors at high throughput. Its primary purpose is to generate data to inform the development of future clinical products. That said, immunoSEQ is also a revenue-generating product with a billion-dollar market opportunity.

Since its launch in 2010, immunoSEQ has been used by over 2,000 academic researchers and 125 biopharma companies in over 480 clinical trials to empower the discovery of new prognostic and diagnostic biomarkers in cancer and other immune-mediated diseases.

We are also on track to launch a new RUO kit later this year, which will enable even more quantitative results for any sample type that a researcher is using in their lab. We also plan to further increase utilization of immunoSEQ among our biopharma partners by moving into later-stage clinical trials and expanding beyond oncology.

Turning next to clinical diagnostics, our first clinical diagnostic product, clonoSEQ, is for monitoring MRD in most blood cancers. MRD refers to the amount of cancer cells remaining in a patient on and/or after treatment. We are focused on select blood cancers called lymphoid malignancies, in which the cancer cell is a mature T or B cell.

ClonoSEQ leverages our proprietary immuno-sequencing platform to identify and quantify specific DNA sequences found in malignant cells, allowing clinicians to assess and monitor MRD during and after treatment. The assay provides standardized, accurate, and sensitive measurement of MRD that allows clinicians to predict patient outcomes, assess response to therapy over time, monitor patients during remission, and detect potential relapse.

There are an estimated 4.6 million patients globally who are newly diagnosed or living with these blood cancers. As patients are living longer than ever before due to new therapies, clinicians need a better tool to monitor disease burden and treatment response on a regular basis. We believe clonoSEQ is uniquely positioned to measure MRD in all patients with lymphoid malignancies, translating to a $4.5 billion market opportunity.

In 2018, clonoSEQ was granted de novo designation and marketing authorization by the FDA for the detection and monitoring of MRD in patients with multiple myeloma and B-cell acute lymphoblastic leukemia using DNA from bone marrow samples. ClonoSEQ is the first and only FDA-authorized in vitro diagnostic assay for MRD testing. It is also the first clinical diagnostic powered by immuno-sequencing to receive FDA clearance.

In late July, the State of New York Clinical Laboratory Evaluation Program or CLEP approved clonoSEQ for the detection and monitoring of MRD. CLEP approval makes clonoSEQ testing accessible to patients in New York who have been diagnosed with B-cell cancers, a subset of lymphoid malignancies that includes ALL, multiple myeloma, CLL, and non-Hodgkin's lymphoma or NHL.

In January of this year, we received CMS coverage for longitudinal monitoring in multiple myeloma and ALL. Following Medicare coverage, private insurer access has rapidly increased over the first half of 2019. To date, we secured contractual agreements or positive medical policies with several of the largest national private health insurers as well as significant regional coverage, bringing the total private payer coverage in the United States to more than 165 million covered lives.

On a national basis, the current medical policies for Aetna, Anthem Blue Cross and Blue Shield, and Cigna, along with UnitedHealthcare's updated medical policy effective September 1, are closely aligned with the clonoSEQ FDA cleared indications for use with patients with ALL or multiple myeloma. Additionally, several regional payers, such as Kaiser, have new or existing medical policies also deeming the use of next-generation sequencing for detecting MRD as medically necessary.

While we are encouraged about securing coverage with these private payers in just six months, we expect it to take a quarter or two for these policies and contracts to be implemented and to see a corresponding increase in how we recognize related clonoSEQ testing revenue.

Following our FDA clearance and progress with CMS and private payer coverage, we are now focused on executing against a well-defined path towards market leadership for clonoSEQ. To accelerate this commercial opportunity for the ALL and multiple myeloma markets, we are expanding our commercial and medical teams, investing in medical education, and accelerating patient advocacy to ramp clinical adoption.

With regards to lifecycle management, we are gearing up for our first label expansion with submission on track 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 and to extend utility to patients with NHL, also from blood samples.

We continue to engage KOLs and our biopharma partners to strategically incorporate clonoSEQ in different research and clinical settings to support coverage, label expansion, and clinical adoption. While it is still early days, we are confident that clonoSEQ has the potential to become a standardized MRD monitoring tool for clinicians to manage their patients.

Turning now to our clinical diagnostics pipeline, we are actively developing our second clinical diagnostic product, immunoSEQ Dx. Our vision is to enable the early and accurate diagnosis of many diseases at the same time by reading the genetics of the adaptive immune system.

To do this, we are mapping millions of T cell receptors to thousands of clinically relevant disease-specific antigens to create a TCR antigen map, leveraging our collaboration with Microsoft. We envision a future where this map will enable a doctor to get a clearer picture of what a patient's immune system is seeing from a single blood test.

Developing diagnostics from the TCR antigen map has significant advantages. Typically, development of molecular diagnostics for early detection requires massively expensive and lengthy prospective studies because the samples required have to be collected and stored in a very specific way.

Our technology can use DNA from samples collected on almost any protocol or stored in any way, including FFPE. This allows us to more rapidly and cost-effectively validate early detection tests in multiple diseases simultaneously. Our production lab, dedicated to generating data to build the TCR antigen map, came online in June. We are continuing to ramp volume and we expect the lab to be at full capacity by the end of this year.

The potential economic model for immunoSEQ Dx of becoming one test with many results is very compelling. As mentioned, signal validation for multiple diseases at the same time can be done quickly and cost-effectively using retrospective samples and our existing TCR sequences in our clinical immunomics database.

Each signal is then developed further by running clinical validation studies within our existing lab infrastructure and our core immunoSEQ technology. When multiple tests are ordered at the same time, the marginal cost for each additional test result is negligible.

Our path to commercialization starts with an initial focus on diseases for which there is a high unmet medical need and the antigens are well understood. To begin with, we are focused on ovarian cancer in high-risk women as a test case for oncology, celiac disease as an example for autoimmune disorders, and Lyme disease as a starting point for infectious diseases.

We already have two early clinical signals for both celiac and Lyme disease. We expect to confirm at least one of these clinical signals and initiate a clinical validation study by the end of 2019 with a path toward submission to FDA for our first indication in 2020.

Turning now to drug discovery, the same technology that we use to connect TCRs to antigens to make the TCR antigen map is also used to discover TCRs for therapeutic use. Over the last few years, we have built a robust discovery and screening technology called TruTCR to identify TCRs that map to cancer-related antigens and then funnel them down to the ones that enable strong binding, target killing, and may have minimal off-target effects. To date, we have characterized more than 1,200 TCRs against 600 clinically relevant cancer antigens.

As Chad mentioned, earlier this year we announced that Genentech selected our TCR discovery and screening process as their foray into cellular therapy in oncology. First, we are advancing the development of shared cellular therapy products using off-the-shelf TCRs against prioritized target cancer antigens that are shared between patients.

We are currently completing data packages for the first set of TCRs against shared -- targeted shared antigens, which will be evaluated by Genentech in the third quarter. One or more of these TCRs will be selected by Genentech for inclusion in the first shared product IND filing, planned for submission in 2020.

In addition to these shared cellular therapy products, we are also working in parallel to develop a personalized cellular therapy where we plan to identify in real-time the TCRs that are specific to each patient's tumor. The goal is to design and manufacture a unique therapy for each patient that targets that patient's unique and individual cancer mutations. We are on track for the product prototype and we are currently working together with Genentech to enable a one-month vein-to-vein time for this personalized prototype to be tested in the clinic.

In summary, we are making important progress with our commercialized products. And we have a robust clinical pipeline spanning both diagnostic and therapeutic products, all stemming from the same platform, which we believe will lead to a very strong margin profile at scale.

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

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [5]

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Thanks, Julie. We classify our revenue into two distinct revenue categories: sequencing and development. Our sequencing revenue category primarily includes our research fee-for-service offering and our FDA-cleared clinical clonoSEQ services. We aggregate these two revenue streams together, as they are both tied to and will grow with increasing volume and price.

Our development revenue category includes those revenues we generate from our various biopharma partnerships who seek access to our platform to grow their business. These revenues are not driven by volume or pricing, but other terms such as fees and upfront payments to access our platform and codevelopment services as well as receipt of milestone payments.

To date, our revenues have been primarily driven by selling our immuno-sequencing research services to biopharma and academic partners. And though the opportunity for clinical testing with clonoSEQ is massive, it has not been a significant revenue contributor, as it was just recently covered under Medicare and several private payers.

It is important to note that our growth rates and mix of sequencing versus development revenues will vary from quarter to quarter until we start to significantly penetrate the clinical community with clonoSEQ. And will also vary based on the timing of bringing in new development partners.

With that background in mind, I will now turn to our results for the second quarter. Total revenue in the second quarter was $22.1 million, representing an increase of 91% from $11.6 million in the same period last year. Our revenue mix for the second quarter consisted of 54% of our revenues coming from our sequencing category and 46% coming from our development category.

Sequencing revenue was $11.9 million and grew 43% from the same period in 2018. This increase was primarily driven by organic growth and revenue generated from our biopharma research customers. It is 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. Therefore, we disclose these volumes to assist with tracking our long-term progress in this category.

Research sequencing volume, which includes sequences reported to both our biopharma and academic customers, increased by 22% to 9,084 sequences from 7,457 sequences in the second quarter of 2018. Separately, clinical testing volume increased by 50% to 2,388 clinical tests from 1,587 clinical tests in the second quarter of 2018.

Development revenue grew to $10.3 million in the second quarter, up 213% from the same period last year. This increase was primarily due to amortization of the $300 million upfront payment received in February from our Genentech partnership. Approximately $285 million of the original $300 million upfront payment is still categorized as deferred revenue.

Shifting now from our revenue to our operating costs. Total operating expenses for the second quarter of 2019 were $38.2 million, representing an approximate 54% increase from $24.9 million in the same quarter last year.

Working down our operating expenses, cost of revenue was $5.7 million during the second quarter of 2019 compared to $5 million for the second quarter last year, representing a 14% increase. The increase was primarily driven by overall growth in our lab expansion activities and increasing sample volume throughput.

Research and development expenses for the second quarter of 2019 were $16.5 million compared to $9.5 million in the second quarter of 2018, representing an increase of 75%. The increase was attributable to additional cost of materials and allocated production laboratory expenses to support our TCR discovery efforts and immunoSEQ Dx as well as an increase in personnel costs.

Sales and marketing expenses for the second quarter of 2019 were $8.9 million compared to $5.3 million in the second quarter of 2018, representing an increase of 67%. The increase was primarily due to increase in investments and additional personnel costs and related support to drive both corporate marketing and initial clonoSEQ sales initiatives.

General and administrative expenses for the second quarter 2019 were $6.7 million as compared to $4.6 million in the second quarter of 2018, representing an increase of 44%. The increase was driven by an increase in headcount and services to support overall growth in the Company and public company preparedness.

Net loss for the period was $15.7 million compared to a net loss of $12.5 million in the second quarter of 2018. Net loss attributable to common shareholders for this period was $16.4 million or $1.23 per basic and diluted share compared to a net loss attributable to common shareholders of $12.5 million or $1.01 per basic and diluted share in the second quarter of 2018. Our earnings per share are based on approximately 13.3 million and 12.4 million weighted average shares outstanding for the second quarter of 2019 and 2018, respectively.

Adjusted EBITDA for the second quarter of 2019 was a loss of $10.9 million compared to a loss of $9.4 million in the same period last year. We ended the second quarter of 2019 with $423 million in cash, cash equivalents, and marketable securities and we had no debt.

Subsequent to the end of the quarter, on July 1, 2019, we completed our initial public offering, raising net proceeds of approximately $321 million after underwriting discounts and commissions. Following this financing, we are rapidly scaling our organization to support our ambitious goals.

Last week, we announced plans to lease a new corporate headquarters, which will triple our footprint in Seattle. The 100,000-square-foot lease expands our lab capacity, R&D footprint, and office space and will be ready for occupancy in 2021.

Moving on to our outlook for 2019, we expect full-year 2019 revenues to be in the range of $78 million to $81 million. This range incorporates our best view of the business as of today and includes our assessment of the risks and opportunities available to us throughout the year. We will provide an update on 2019 revenues on the next call.

In sum, we continue to invest heavily in our platform today, both in our science operations and commercial capabilities, to provide for future optionality across the business. 2019 will continue to be a significant investment year for Adaptive as we plan to increase our efforts in product development and sales infrastructure to aggressively attack the larger opportunity that our platform has created.

With that, we will now open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Patrick Donnelly, Goldman Sachs.

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Patrick Donnelly, Goldman Sachs - Analyst [2]

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Great. Thanks, guys. Maybe just one on clonoSEQ. Julie, I know you mentioned the transition to blood a couple times. Can you just talk about the timing for the transition there, the regulatory process for this? I have been getting a few questions on that during the process, so would be curious to hear your perspective on how that rolls out and what you guys need to do to make that transition.

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Chad Robins, Adaptive Biotechnologies Corporation - Co-Founder and CEO [3]

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Harlan, you want to take that?

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Harlan Robins, Adaptive Biotechnologies Corporation - Co-Founder and Chief Scientific Officer [4]

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Sure. So we have engaged with a set of pre-subs to the FDA and have agreed, to the extent the FDA agrees, on our plans for the analytical validation. And we have our set of clinical validations actually being completed as we speak as well.

So we are on path to submit by the end of the year for CLL in blood. And the analytical validation will cover as many lymphoid malignancies as we can. So ALL and multiple myeloma will be included as well as non-Hodgkin's lymphoma in our analytical validation.

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Patrick Donnelly, Goldman Sachs - Analyst [5]

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Okay. So they will all be under the same umbrella for that one?

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Harlan Robins, Adaptive Biotechnologies Corporation - Co-Founder and Chief Scientific Officer [6]

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Yes.

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Patrick Donnelly, Goldman Sachs - Analyst [7]

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Okay.

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Harlan Robins, Adaptive Biotechnologies Corporation - Co-Founder and Chief Scientific Officer [8]

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For the analytical validation. The clinical validations are separate.

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Patrick Donnelly, Goldman Sachs - Analyst [9]

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Right. And then maybe just on the adoption of clonoSEQ, you guys have gotten great traction on the commercial side. Can you maybe just talk through your focus internally between commercial coverage and then also driving the commercial adoption out there?

I know -- I think it was Julie that mentioned you guys are expanding the sales force there to drive the test volumes up. Can you maybe just talk about the internal focus again between continuing the commercial adoption -- the commercial coverage versus the test volume side?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [10]

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Absolutely. So just to sort of set context, as you know, patients with these blood cancers are living longer due to more effective therapies. And so this need for better tests to monitor their response to treatment is more important than ever.

So we have been committed to ensuring that these patients have access. And to really do this, we have to start with investing in market development activities to educate clinicians about the benefits of monitoring MRD for their patients.

So to date, most of the focus, as you said, has been on key account activation, establishing order workflow, and building coverage to ensure this access for patients. And we are just now really positioned to expand our focus on driving clinical usage.

So some of the areas that we are focused on now are, as Harlan mentioned, label expansion. And just to sort of recap there, we are on track for submission of full -- of the full submission for CLL by the end of this year. And some of the pre-work that will be required for submissions later on for clinical validation in our existing ALL and multiple myeloma indications in blood, followed with NHL in blood as well.

We are also focused very much on medical education, data publications and presentations, coverage expansion, and beginning more heavy engagement with patient groups. We think all of these activities will really work together to see continued growth in our clinical volumes and corresponding growth, obviously, in our clonoSEQ revenues over time.

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Patrick Donnelly, Goldman Sachs - Analyst [11]

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Okay, great. And then maybe just a quick housekeeping one for Chad on the guidance. I know it is always hard quarter to quarter with you guys, but can you just talk through maybe the back-half cadence, 3Q and 4Q, if you want to provide any visibility there? Appreciate it.

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [12]

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Yes, sure. So I think the back half in terms of the mix of revenues between sequencing and development is going to look a lot like Q2 in a lot of ways. From a sequencing perspective, there is some variability from quarter to quarter. That is why we are only providing sort of full year on the research side. We will continue to see continued growth in clonoSEQ volumes and revenues.

And then in terms of our development revenue, most of that revenue is coming from the amortization, as I pointed out, of our Genentech upfront. And is really dependent on the level of efforts we deploy there against that opportunity set. And we have ramped up those efforts pretty significantly in the second quarter and you will continue to see sort of somewhat of a stable sort of rev rec cadence, I would say, in Q3 and Q4 there.

So similar-ish mix from Q2, I would say. And looking at, given just the visibility we have right now, of $78 million to $81 million for the full year.

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Operator [13]

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Tycho Peterson, JPMorgan.

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Tycho Peterson, JPMorgan - Analyst [14]

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Hey, thanks. On clonoSEQ on the private payer discussions and guidance inclusions, you said it will take one to three quarters. Are these just standard pilot programs you have to go through? Or what is kind of the protocol and why you think it will take that long?

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [15]

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Hey, Tycho. It's Chad. What that comment was really about was in terms of how we estimate revenue for clonoSEQ, we have to start seeing payments come in once we've -- there is a policy that's put into place, you then contract it, and then you got to get paid on that contract.

And I think it is just going to take some time before we start getting paid before we can end up sort of baking in those new payer rates into the overall revenues that we recognize for clonoSEQ. So that's what that comment was really about.

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Tycho Peterson, JPMorgan - Analyst [16]

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And then on kind of the blood comment, following up on the earlier question, how do you think it kind of changes the market opportunity? Obviously much less invasive versus bone marrow. So what is the transition to blood when you do roll it out do to the adoption curve in your view?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [17]

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Absolutely. Hey, Tycho, it's Julie. So as you know, we are starting now penetrating ALL and multiple myeloma in our current label for bone marrow. When we file at the end of this year for CLL in blood, we will be able to see an increase ideally in the number of tests per patient in CLL.

When we file in ALL and multiple myeloma in the future when we transition into blood for those two indications, we also expect to see an increase in the number of tests per patient. And again, the filing in NHL, which will follow sometime in the future, will be directly in blood as well.

So overall, we are really moving to this paradigm where clinicians can use the same standardized sensitive MRD test from blood in longitudinal time points for all of their patients with lymphoid malignancies in the future.

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Operator [18]

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Derik De Bruin, Bank of America.

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Derik De Bruin, BofA Merrill Lynch - Analyst [19]

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Hey, good afternoon. Just -- if I missed it, my apologies, but did you give a specific breakout on the sequencing revenue between the contribution from the research partners -- the research side and the confirmation from the diagnostic side, the clonoSEQ side?

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [20]

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Yes, we haven't, but I will say that the clinical clonoSEQ product represents less than 10% of our revenues in Q2.

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Derik De Bruin, BofA Merrill Lynch - Analyst [21]

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Great. And I think the question being I think the ramp being a little bit lower than I thought maybe in the second half of the year, is that typically due because going back to just taking time for the commercial payers to come on board for that? Is that sort of like you just baking in a little bit of conservatism into the timing?

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [22]

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I wouldn't say it is conservatism. I would just say this is just our best view as of today. We are going to continue to see growth in overall sample volume for clonoSEQ and those clinical test results throughout the year.

I would just say that the majority of our investments, as Julie pointed out, have really been in terms of signing up accounts, developing market awareness, establishing workflow with our accounts. And as we continue to apply resources and turn the corner into 2020, those resources will be more focused on driving account utilization, physician adoption, and those types of activities.

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Derik De Bruin, BofA Merrill Lynch - Analyst [23]

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Got it. And pricing on an immunoSEQ kit, RU kit?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [24]

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We have not finalized the pricing on the kit yet. That will be disclosed during the launch period at the end of this year, beginning of next year.

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Derik De Bruin, BofA Merrill Lynch - Analyst [25]

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Great. And how should we look about news flow from the Genentech partnership? When -- I mean, is that stuff you are going to be releasing or they are going to be releasing in terms of when targets have been selected, what's going on? Can you just talk about how we should look at some of the data catalysts coming up?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [26]

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Absolutely. So I will first say we have a great alliance with Genentech and are thrilled to be working with them on this important cellular therapy product development effort in oncology.

As they are leading the commercial efforts, any communication that we make related to that alliance will be done in conjunction with Genentech. And so we don't expect many public announcements until the IND filing next year.

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Operator [27]

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Doug Schenkel, Cowen.

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Doug Schenkel, Cowen and Company - Analyst [28]

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Hi, good afternoon, everybody. Chad, I think you gave us diagnostic volume in the quarter, but I think I wasn't quick enough to take that down. I don't think I am making that up. Would you be willing to share that again?

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [29]

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Yes, absolutely. I think we had about 2,388 clinical tests.

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Doug Schenkel, Cowen and Company - Analyst [30]

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Okay. So I know there is some error parts around this math. But if based on what you said about clinical accounting for under 10% of sales, but if it is close to that and I divide that revenue number by that diagnostic volume, it does seem like -- and I know we don't have a lot of quarters of history here, but it does seem like ASPs are improving.

Is that largely a function of just starting -- getting the accountants more comfortable with essentially some of the payer coverage that does seem to be evolving in a positive way pretty quickly?

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Chad Cohen, Adaptive Biotechnologies Corporation - CFO [31]

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You are right on the math in terms of growth in ASPs for sure. In terms of -- I mean, the color there is we really improved from last quarter and from last year the number of total tests that are paid in part or in full. And so more than 50% of our tests are being paid in part or full. And this time last year, it was sort of less than 50%.

So directionally, everything is going up, which is improving our overall ASPs as well as bringing on Medicare coverage in the first quarter of the year. So we are continuing to make progress there and it will just take a couple quarters for those contracts to be realized and baked into how we estimate revenue for clonoSEQ.

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Operator [32]

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Brian Weinstein, William Blair.

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Brian Weinstein, William Blair & Company - Analyst [33]

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Hey, guys. Thanks for taking the questions. On the immunoSEQ product, Julie, did I hear you right that -- you gave an update on kind of celiac and Lyme. But what was the specific update on ovarian and the timing on that?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [34]

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We are working on ovarian cancer in addition to generating additional signal data for celiac disease, Lyme, and others, as you know. So we don't have a specific update, but all is moving along quite well in all of these areas of research.

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Brian Weinstein, William Blair & Company - Analyst [35]

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Okay. And then just kind of from a high level here, can you talk about the process as it relates to expanding indications that you are looking at for immunoSEQ? Is this exclusively driven by kind of your internal process?

Are you working with KOLs and are they kind of pushing you more towards an oncology focus, an autoimmune focus, an infectious disease focus? How are you kind of parsing through all the different opportunities that you guys are getting as you are building out the map?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [36]

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Sure. That is a great question. So to begin with, as we have mentioned, we have selected a particular indication within each of the three disease areas that we are interested in studying first, which are cancer, autoimmune disorders, and infectious disease.

And then within each of those categories, we have a variety of reasons for the various indications that we have begun to share publicly, ranging from really high unmet medical need to understanding the antigenic space really well to access to well-characterized samples from retrospective studies, and other key criteria that we used to select our initial set of indications.

We are beginning the early market development efforts now, where we are coordinating with KOLs in each of these areas and others. And we will be expanding those efforts in the very near future now that we have these two and other promising early clinical signals that we are going to be expediting additional studies to really validate these signals.

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Operator [37]

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David Westenberg, Guggenheim Securities.

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David Westenberg, Guggenheim Securities LLC - Analyst [38]

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Hi, thanks for taking the question. Sticking with immunoSEQ Dx, so what are the gating factors in terms of speed to cover? Is it cost? Is it personnel? Is it computational?

And then do you envision immunoSEQ longer term to be kind of maybe discrete in finding tests? Or do you see this more is kind of like a crossword puzzle, where you figure out a couple clues and then all of a sudden you have a ton of momentum?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [39]

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Can you repeat the first question first just so we are clear on the two parts of that question?

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David Westenberg, Guggenheim Securities LLC - Analyst [40]

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What is the kind of the gating factor in terms of discovering new tests on immunoSEQ? Do you think it is more -- speed of discovering new tests? Is it cost, is it personnel, is it computational?

I'm just kind of thinking about the IPO. You did raise a lot of money. Does that potential to maybe speed up timelines versus relative expectation? Or is it more you need the right personnel in place? Is it solving the problem? That's kind of the basis of that first question.

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [41]

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I think Harlan is going to take the first question and then we will hear the second question. Harlan?

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Harlan Robins, Adaptive Biotechnologies Corporation - Co-Founder and Chief Scientific Officer [42]

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Yes, so the difficulty in signal finding really is different depending on the different disease states. So infectious disease is actually reasonably straightforward and has proved to be easier. The autoimmune space is sort of in the middle; and cancer, because of the diversity of the antigens, is a longer road to tow.

We absolutely are stepping on the gas and collecting large amounts of samples with the various disease states. But also, as we are saying, we are scaling the antigen map lab that is going to produce the connections between T cell receptors and antigens. We have accelerated the rate at which we are doing this and using the increased funds to really both increase personnel as well as samples running through the lab, just overall workflow.

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David Westenberg, Guggenheim Securities LLC - Analyst [43]

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Great. And actually, I am just going to move on to another question. This one is probably a little bit more for Julie. We appreciate the color and basically on payer adoption, how it's not -- there is kind of a little more of an ad hoc back-and-forth process in terms of getting paid.

But can you maybe talk about payer adoption in terms of how that is correlating with physician ordering? Are physicians understanding of -- the system is adopting the test and maybe they are more keen on ordering? Or just give us a little bit more color on that overall process. Thank you.

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [44]

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Sure, absolutely. So we are really excited about the progress the team has made in such a short period of time to sign on so many private payers. And that certainly opens up access now for patients to be -- for a patient's clinicians to treat them by monitoring MRD with clonoSEQ.

It is a little separate from utilization still though. There is still the efforts that have to be put in place to educate the clinicians to sign on their accounts, to implement workflow, and to really help clinicians understand when and in which patients to use clonoSEQ.

So the coverage provides access. And then there is still all of the additional efforts underway to increase utilization by clinicians now that they have that access. So they are tied together, but there is still -- for us, we are really focused on both of those efforts at the same time.

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Operator [45]

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Amanda Murphy, BTIG.

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Amanda Murphy, BTIG - Analyst [46]

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Thank you. I just had a question. And just given the dynamics of where these patients are being treated, thinking about mostly in academic centers, and those centers probably have their own labs with multi-flow cytometry themselves. And then in tandem, you have maybe an appreciation for this need to have higher sensitivity in terms of getting the 10 to the minus 6.

I am just curious. As you now have FDA approval and payer coverage, are you seeing those centers more willing to send out tests to you? Or how is that flow working generally?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [47]

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Sure. Hi, Amanda, it's Julie. I would say there is a mix. Certainly in the United States, there is a lot of Tier 1 institutions that are open to and already sending us many samples. There are others that are sort of evaluating that decision that you so clearly laid out. And I think time will tell.

I do believe that clonoSEQ has many advantages, some of which you just mentioned. And right now, it's most sort of sensitive, accurate, standardized test out there for these patients and we hope that most of the Tier 1 institutions over time will be able to work with us. We are also, as we discussed with you previously, developing a clinical kit, which should help take care of that scenario that you described in the future.

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Amanda Murphy, BTIG - Analyst [48]

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I know we had talked about this previously, but how does it work if a patient gets -- let's say they go to a center and get the [toy test] first. Can they still then come to you for the monitoring aspect or do you need to have that initial ID first?

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Julie Rubinstein, Adaptive Biotechnologies Corporation - President [49]

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We do have to have the initial ID sample first. And we have quite an efficient way of ensuring that we can gain access to that sample now. We have operations set up to do that, and we work with our customers all the time to ensure that we get that ID sample for their patients.

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Operator [50]

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Thank you. And I am showing no further questions at this time. I would now like to turn the call back to Chad Robins for closing remarks.

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Chad Robins, Adaptive Biotechnologies Corporation - Co-Founder and CEO [51]

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Thank you, everyone, for joining the call. We look forward to building relationships as we move forward and continue to execute quarter over quarter. So thank you.

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Operator [52]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.