Good day, ladies and gentlemen, and welcome to Adaptive Biotechnologies’ Fourth Quarter Financial Results Call. [Operator Instructions] I would now like to turn the call over to Carrie Mendivil. Ma’am, the floor is yours..

Thank you. Earlier today, Adaptive Biotechnologies released financial results for the fourth quarter and full year ended December 31, 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 risk or events – 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 of the company’s prospectus filed in connection with its recent secondary offering on January 24, 2020, and other filings the company makes from time to time with the Securities and Exchange Commission, including when filed the company’s annual report on Form 10-K.

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, February 26, 2020. With that, I’d like to turn the call over to Chad Robins, Adaptive’s Cofounder and Chief Executive Officer.

Chad?.

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 fourth quarter and full year 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 Co-Founder will be available for questions. 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.

To achieve this goal, we have developed an immune medicine platform that reads and translates the genetics of the adaptive immune system, enabling product applications across life science research, clinical diagnostics and drug discovery.

Our approach represents one of the largest clinical applications of genomics and one of the largest global addressable markets in healthcare, because the adaptive immune system both detects and treats most diseases in exactly the same way.

During 2019, we experienced incredible growth and ended the year with just over $85 million in revenue, up 53% over 2018. Even more important that our current revenue growth is the critical progress we made in the development and commercialization of our clinical products. Starting with clinical diagnostics.

We made foundational investments throughout the year to ensure that as many patients as possible can benefit from clonoSEQ. In the field, I am seeing firsthand how the conversation around MRD is progressing. The doctors are no longer talking about if but rather how they are going to use MRD to manage their patients.

As this interest continues to grow, we are confident that clonoSEQ will become the standard measurement of MRD for the clinical management of patients with certain blood cancers. Today clonoSEQ has been used to monitor MRD for more than 10,000 unique patients across more than 150 institutions. And we believe this is just the beginning.

We are increasingly hearing from physicians about the real time impact clonoSEQ is already having on their patients. For example, Dr. Jeffrey Wolf from UCSF, recently detailed clonoSEQ usage on a patient with multiple myeloma.

This patient went through standard induction therapy followed by transplant and was ultimately placed on maintenance therapy from which like many patients he experienced life altering side effects. Even at a decreased dose, the side effect persisted and eventually this patient requested to come off of maintenance therapy. Dr.

Wolf used clonoSEQ to evaluate the patient’s disease burden, which indicated that he was MRD negative, meaning he did not have detectable disease. Based on this result, Dr. Wolf was confident to discontinue maintenance therapy for this patient who has since remained MRD negative for several years as measured by annual testing.

We believe that many patients with blood cancers face similar issues every day and they along with their physicians need to make crucial decisions about their treatment alternatives.

Having confidence in a patient’s MRD status can better inform treatment decisions throughout a patient’s treatment continuum and may result in better quality of life for that patient. In 2019, clonoSEQ test volumes grew 48% to 10,168 tests.

This growth was driven by the efforts of our growing field-based and medical teams, the increasing body of evidence around clonoSEQ and important progress on both the reimbursement and regulatory fronts. In January of 2019, we received CMS coverage for longitudinal monitoring in multiple myeloma and ALL.

Following Medicare coverage, private insurance coverage rapidly increased over the course of 2019. We ended the year with secure contractual agreements or positive medical policies from five of the largest national private health insurers in addition to significant regional coverage.

Bringing the total covered lives in the United States to more than 175 million. During 2019, we also achieved CLEP approval for patients in New York State and filed our first label expansion to the FDA for clonoSEQ to be used to monitor patients with CLL from blood samples.

In early January of this year, we announced that we would receive coverage by CMS for CLL, completing our first milestone for 2020. Looking ahead, we are planning to launch clonoSEQ for monitoring MRD and CLL following clearance from the FDA, which we anticipate in the first half of this year.

In the second half of 2020, we expect to file our second label expansion to the FDA for monitoring ALL from blood and are finalizing our timeline for multiple myeloma in blood as well. Additionally, we are assessing the timelines for our expansion into the basket of NHL diseases. Shifting to our diagnostic product development pipeline immunoSEQ Dx.

We confirmed our first clinical signal for Lyme disease in the third quarter of 2019. Data was presented at the Precision Medicine World Conference in January, proving that we can read and translate how the adaptive immune system diagnosis disease from a blood sample.

We have already submitted a suggested clinical protocol to the FDA to validate our findings during this summer’s Lyme season. We expect to submit the results to the FDA by the end of 2020, marking an important step towards commercializing immunoSEQ Dx.

Now that we have successfully identified a T cell receptor signature in our first disease, we are systematizing our process for the discovery of TCR signatures in multiple disease states.

We have implemented phase-gates from disease discovery through clinical validation and are confident that we can study at least five diseases in parallel in 2020 with the goal of confirming one additional signal by year end.

We continue to build the infrastructure to support immunoSEQ Dx and importantly we will soon be announcing key hires for this team. Turning to drug discovery. In the fourth quarter of 2019, we delivered a data package to Genentech for our first selected T cell receptor candidate that targets a shared cancer antigen expressed in multiple solid tumors.

The next step is to provide Genentech with a GLP compliant data package to support their first shared product IND submission to the FDA targeting year end. In 2020, we will also continue to deliver data packages for the possible selection of additional shared products for development into cellular therapies.

In parallel, we are continuing to work with Genentech to develop a personalized cellular therapy for each patient, where we plan to identify in real time the GCRs that are specific to that patient’s tumor.

Finally, in our life sciences research business, we completed the development of our upgraded immunoSEQ assay, which is now available for use in our own lab and as a kitted version for a distributed product to core labs, CROs and other distribution channels.

Overall, we made outstanding progress in 2019 and we will continue to execute across our platform, current products and clinical pipeline in 2020. As we look to the year ahead, we expect revenue to be in the range of $114 million to $119 million and we are aggressively scaling our organization to capture the massive market opportunity in front of us.

I will now turn it over to Julie, who will walk you through more information on our clinical diagnostics portfolio, after which Chad C will provide greater details on our financials.

Julie?.

Thanks, Chad. Starting with clonoSEQ. With the growing interest in MRD assessment across diseases, clonoSEQ is gaining traction and is well positioned to continue capturing market share in 2020 and beyond. Clinical test volumes for clonoSEQ during the fourth quarter increased 66% to over 3,200 tests compared to the fourth quarter of 2018.

The focus on MRD at the annual meeting of the American Society of Hematology this past December was truly remarkable. An extraordinary amount of MRD data was presented, demonstrating its established significance as an important tool for the clinical management of patients and as a validated clinical trial endpoint in many pharma trials.

Along with our collaborators, we presented data in more than 25 abstracts for clonoSEQ and there were many more abstracts highlighting the growing clinical use of MRD.

The data emerging from these studies are showing time and time again that prognosis is worst for patients who have a higher disease burden than it is for those who have a lower disease burden, especially if that disease burden goes up over time.

To expand the use cases for clonoSEQ, we are continually generating data through investigator sponsored protocols and biopharma partner trials. To date, clonoSEQ has been incorporated into more than 40 prospective investigator sponsored trials and included in more than 65 peer reviewed publications.

Additionally, clonoSEQ has been selected as the test of choice for more than 190 pharma trials and many of these companies are incorporating clonoSEQ into clinical trials that include MRD as a clinical endpoint.

In fact, we recently announced two additional pharma partnerships that use clonoSEQ to assess MRD status in support of the clinical development of venetoclax. The first is an agreement with AbbVie to use clonoSEQ to assess MRD status in response to venetoclax across clinical trials in multiple myeloma.

The second is with Genentech to use clonoSEQ to assess MRD status in response to venetoclax as a primary endpoint in the registrational Phase 3 CRISTALLO study for the treatment of newly diagnosed patients with CLL as well as additional future venetoclax studies in CLL.

This trial represents the first time MRD has been used as a primary endpoint in a registrational trial and is evidence of its growing acceptance as a marker of response by the FDA. With significant reimbursement in place, we are more than doubling our field team to support the growing demand for clonoSEQ across the U.S.

We expect to roughly double our clinical volumes for clonoSEQ in 2020 and have a multipronged approach to increasing market share.

First, by activating and training more accounts, second, by expanding use cases into new diseases and enabling non-invasive testing in the blood in multiple indications, third, by creating and publicizing a real world evidence registry with clinicians, who are using the test in everyday clinical practice, and finally by educating patients about the importance of knowing their MRD status.

Moving on to immunoSEQ Dx. As Chad shared, our first data set demonstrates that our approach to detecting Lyme disease from expanded Lyme-specific T cells is very promising.

In a well-defined cohort of 234 participants, immunoSEQ Dx is approximately two times more sensitive than standard serology testing for Lyme disease with a lower false positive rate. The TCR signature has been confirmed in an independent cohort of over 500 patients from multiple U.S. regions.

One of the key issues with standard serology testing, which measures the presence of Lyme-specific antibodies is that it can take several weeks for the antibodies to appear. And so there are often quite a lot of false negatives in the acute setting.

Conversely, these antibody levels do not tend to significantly decrease over time even after an active infection has been cleared. And so there are also quite a lot of false positives in patients’ overtime.

Measuring infection based on disease specific T cell clones that expands in response to pathogenic exposure allows for accurate detection almost immediately after the tick bite or first sign of symptoms and accurate detection in later weeks, when the disease has presumably been treated and the presence of expanded Lyme-specific T cell clones should diminish.

Importantly, it is estimated that approximately 20% of the 300,000 treated cases of Lyme disease each year do not respond to the standard three-week course of antibiotics.

While we are initially focused on diagnosis in the acute setting, in the future, we intend to assess our test in this population of patients, who are still experiencing symptoms to confirm whether or not there is still an active infection.

In short, we believe that detecting Lyme disease by looking at expanded T cell clones will significantly enhance the accuracy of diagnosis in the acute setting, and for the proportion of patients, who continue to experience long term symptoms even after standard antibiotic treatment.

As Chad mentioned, what we are most excited about is the confidence we have in the overlap of Lyme specific T cell receptors. We are finding across patients from different regions in the U.S.

We are exponentially increasing the throughput of TCR to antigen connections being made in our antigen map production lab, so that we can replicate this result in multiple disease states.

Each one of these TCR antigen connections is fed into Microsoft’s machine learning algorithm to continuously add more clones to the TCR signatures we are finding for each disease statem ultimately, enabling immunoSEQ Dx to become a self-learning diagnostic with increasing sensitivity overtime.

We are in active discussions with the FDA about this both conceptually and in regards to specific initial indications such as Lyme disease and we look forward to continuing our work with the FDA to advance this novel approach to diagnosing disease. With that, I will now turn the call over to Chad C for more details on our financials.

Chad?.

Thanks, Julie. Turning to our fourth quarter 2019 financial results, total revenue in the fourth quarter was $24.2 million, representing an increase of 41% from $17.2 million in the same period last year.

Our revenue mix for the fourth quarter consisted of 57% of our revenues coming from our sequencing category and 43% coming from our development category. Sequencing revenue in the fourth quarter was $13.9 million and grew 33% in the same period in 2018.

This increase was primarily driven by growth and revenue generated from our biopharma customers as well as revenue generated from our clinical customers through increased adoption and utilization of clonoSEQ.

Research sequencing volume for the fourth quarter, which includes sequences reported to both our biopharma and academic customers increased to 10,898 sequences. Clinical volume increased to 3,218 clinical tests, up 66% from the fourth quarter of 2018. Development revenue grew to $10.3 million in the fourth quarter, up 53% in the same period last year.

The increase was primarily due to our Genentech partnership, which comprised approximately $9 million of the development revenues in the quarter. Shifting now from our revenue to our operating costs, total operating expenses for the fourth quarter of 2019 were $48.4 million, representing a 54% from $31.3 million in the same quarter of last year.

Working down our operating expenses, cost of revenue was $6 million during the fourth quarter of 2019, compared to $5.3 million for the fourth quarter last year, represented a 13% increase, due primarily to higher sequencing volume.

Research and development expenses for the fourth quarter of 2019 were $21.2 million, compared to $11.1 million in the fourth quarter of 2018, represented an increase of 91%.

The increase reflects growth in headcount and consumption of materials to support our aggressive investments and the clinical development of clonoSEQ and new indications in sample types, scaling of our immunoSEQ Dx lab as it came online in the second half of 2019, as well as ramping our TCR drug discovery efforts with Genentech.

Sales and marketing expenses for the fourth quarter of 2019 were $12.6 million, compared to $8.1 million in the fourth quarter of 2018, representing an increase of 57%.

The increase was primarily due to investing in direct sales and sales support to scale our commercial clonoSEQ team as well as related marketing expenses to broaden our exposure customer events.

General and administrative expenses for the fourth quarter of 2019 were $8.2 million, as compared to $6.5 million in the fourth quarter of 2018, represented an increase of 26%. The increase was driven primarily by headcount and costs associated with being a public company.

Net loss for the fourth quarter 2019 was $20.6 million, compared to fourth quarter of 2018 net loss of $13.3 million. Net loss attributable to common shareholders for the period was $20.6 million or $0.17 per basic and diluted share, compared to $13.2 million or a $1.03 per basic and diluted share in the fourth quarter of 2018.

Our earnings per share are based on approximately $124.4 million and $12.8 million weighted average shares outstanding for the fourth quarter of 2019 and 2018 respectively. Adjusted EBITDA for the fourth quarter of 2019 was a loss of $18.7 million compared to a loss of $9.5 million in the same period of the prior year.

Turning briefly to our 2019 annual financial results, total revenue for the year was $85.1 million, representing an increase of 53% from $55.7 million in 2018. Our revenue mix for the year consisted of 51% of our revenues coming in from our sequencing category and 49% coming from our development category.

Sequencing revenue in 2019 was $43.5 million and grew 32% from 2018. Research sequencing volume for the year increased 35,491 sequences. Clinical volume increased to 10,168 clinical tests, representing a 48% increase from the prior year. Development revenue grew to $41.6 million in 2019, up 83% from last year.

The increase was primarily due to amortization of the $300 million upfront received in February 2019 from Genentech. Total operating expenses for 2019 were $163.5 million, up 55% from $105.4 million last year. Cost of revenue was $22.3 million during 2019, compared to $19.7 million last year, representing a 13% increase.

Research and development expenses for the year were $70.7 million, compared to $39.2 million in 2018, representing an increase of 81%. Sales and marketing expenses for 2019 were $38.5 million, compared to $24.5 million in 2018, representing an increase of 57%.

And lastly, general and administrative expenses for 2019 were $30.3 million as compared to $20.4 million in 2018, representing an increase of 49%. 2019 net loss was $68.6 million compared to a net loss of $46.4 million in 2018.

Net loss attributable to common shareholders for 2019 was $69.6 million or $1.01 for basic and diluted share compared to a net loss attributable to common shareholders of $46.3 million or $3.67 per basic and diluted share in 2018.

Our full year earnings per share were based on approximately $69.2 million and 12.6 million weighted average shares outstanding for 2019 and 2018 respectively. Adjusted EBITDA for 2019 was a loss of $57.5 million, compared to a loss of $32.6 million in the prior year.

We ended 2019 with $682.3 million in cash, cash equivalents and marketable securities and we had no debt. Additionally, in January 2020, we completed a follow-on offering comprised of all secondary shares.

Moving on to our outlook for 2020, alongside our expectation to roughly double our clonoSEQ test volumes, we expect full year revenue to be in the range of $114 million to $119 million, representing growth at 37% at the midpoint.

This range incorporates our best view of business today and includes our assessment of all the risks and opportunities available to us throughout the year.

Consistent with prior years, we expect revenue used to be more heavily weighted to the back half of 2020 with a slower first quarter driven primarily by both the trends we have seen historically and the deployment of biopharma customer budgets as well as increasing market penetration of our clonoSEQ product.

We will likely also continue to see variability quarter-to-quarter in our biopharma business, resulting primarily from the timing of research projects commencing and the corresponding receipt and running of customer samples.

Additionally, as we make aggressive investments in our commercial teams to drive further adoption and utilization of our research and clinical products, we expect sequencing revenues to become a larger portion of our revenue mix over time.

From a mixed perspective, we expect sequencing and development revenues to be roughly even at the start of 2020 and ramp toward 60/40 split between sequencing and development revenues for the full year. 2020 will be a year of significant investment, and on a percentage basis, we expect operating expenses to outpace our 2019 operating expense growth.

The acceleration in our operating expenses will be critical to drive large scaling investments into R&D for the clinical development and validation of new indications for clonoSEQ, new product developments for immunoSEQ Dx and drug discovery, which will broaden our competitive advantage and create even larger moats around our core technologies.

Additionally, our accelerating commercial headcount growth and prudent marketing investments for our commercial products will provide a foundation for current and future revenues as we penetrate into our massive market opportunity. As we entered 2020, we are incredibly excited about the future for Adaptive.

And with that, I will turn it back to the operator to open the call for questions.

Operator?.

[Operator Instructions] Your first question comes from the line of Brian Weinstein from William Blair. Your line is open, sir..

Hey guys, thanks for taking the question. Just as I’m quickly trying to type everything, Chad, that you were just throwing out there, I just want to make sure I heard this right.

On the volume for the year – I’m sorry, on the revenue split for the year, did you say it would be 60/40 for the full year or by the end of the year, it would be at that 60/40 split?.

For the full year, we’re contemplating about a 60/40 split with growing off of the more of a 50/50 split starting in Q1..

Okay, got you. Thanks for the clarification there.

And then so something that you guys did not really talk about that, I’ve been kind of curious a little bit about in obviously, the update on everything else in the business seems to be kind of in line with at least what we were thinking as far as the progress you’re making across all the different projects.

But one project that you haven’t really talked about, and I was curious, if you can learn a little bit more about was the paper in nature any opportunity with melanoma.

Can you talk about this a little bit in the implications for the platform holistically and kind of what next steps could be for you on that side?.

Sure. Brian, this is Harlan. So we had a publication in nature medicine with Dr. Kupper’s group at Brigham and Women’s Hospital, who is the one of the world’s experts in melanoma. And the collaboration was to explore T cell fraction.

We use our assay to basically count T cells molecularly, in primary melanomas, not metastatic, the primary melanomas to predict the likelihood of recurrence within five years.

And what we’ve – basically, how do you stage melanomas? And basically what we found is that patients with less than 20% T cell fraction were 2.5 times more likely to recur within five years. The standard method that people have been using for quite a while, many decades, is called Breslow thickness.

Effectively, it’s a literally a measure of how sick the melanoma is and that’s how they do staging. And fortunately, the amount of T cells infiltrating the tumor is orthogonal to Breslow thickness, so both of them are independent of each other. So it can be used together to make a really nice separation between who will and won’t go on to metastasize.

We are presently also working on a very similar study in other tumor types, which hopefully we’ll get back to it and when that studies – those studies are complete. And the feedback from the clinical community was actually quite positive.

So we’re working on – we’re exploring – presently exploring methods to commercialize and take next steps on this product..

Great. And then last one for me is you’ve talked about obviously doubling the volumes in clonoSEQ in 2020. Julie, I think you talked about a couple of other things that you guys are focused on there.

But can you give us a little bit more detail about some of the efforts that you’re making in order to do that? I mean, obviously, the market is moving in the direction you want it to be, but the specific steps that you can take to kind of accelerate kind of the overall penetration, where you are on sales force today, are additional hires being contemplated? Just other things that you specifically can do to make sure that, that doubling actually takes place and potentially can be even faster than that.

Thanks..

Sure. Thanks, Brian.

So as we’ve discussed before, at a high level, we’re focused on signing on new accounts and incorporating into the workflow, driving usage across departments in existing accounts and expanding clinical use cases among more patients within each account, and ultimately, increasing the number of tests per patient over time, which we expect to be enabled even more by non-invasive testing in the blood.

So I’ll take you through a little bit of detail on each of those components.

First of all, in terms of how we think about our targeted universe of accounts, we shared in the past that to date and for the foreseeable future, we remain very focused on about 250 Tier 1 and Tier 2 institutions in the U.S., where about 50% of the relevant patient population is treated.

To date, over 150 of these have ordered clonoSEQ and over 130 of them ordered in 2019. We’re looking to have approximately 80% of these accounts ordering in 2020 to really expand that first step. That’s the first entry point.

And interestingly, we’re starting to see now that the new accounts that were signed in 2019 are really starting to drive more of our volume now.

In terms of some more detail on then the patient population within these accounts, we estimate that approximately 75,000 patients are in active treatment at any given time in these Tier 1 and Tier 2 institutions. As Chad mentioned, the test has been used in over 10,000 unique patients to date with over 5,000 of those monitored with clonoSEQ in 2019.

So that gives you a little bit of sense of where we think we are and where we’re focused in terms of the patient population within these accounts.

And then the final step is the number of tests per patient, and we’re beginning to really get a little more clarity on that information, and we’re beginning to see approximately four tests per patient over an 18 to 24 month period of time. Hopefully, that helps give a little more detail. I guess, you also asked about field team.

As we’ve mentioned in the past, we’ve – we’re in the process and almost completed doubling the number of key account managers we have in the field. And we’re adding additionally, throughout the year, some more reps in the demand generation area, perhaps some more territory specialists and other folks who are focused on integrated delivery networks.

But overall, we’re on track to where we believe we need to be to continue penetrating in these various areas I just discussed..

Great. Thank you, guys..

Your next question comes from the line of Doug Schenkel from Cowen. Your line is open, sir..

This is Subbu Nambi on for Doug Schenkel. Thanks for taking my question. We just want to make sure that we are clear on the CLL time lines. Reimbursement is in place immediately when it was announced in January, but it seems like you aren’t launching until you get FDA approval, which you possibly expect in June.

Is that right? Is there an opportunity to launch earlier?.

That’s correct. We’re being very careful on pre-promotional activities, given that we have a current filing in with the FDA. Of course, you know that, in general, you don’t need FDA approval to launch a diagnostic test.

But in the case that we’ve chosen and self-selected to go through the FDA approval process, we have kind of pulled back on any true launch of the product until we have approval, given that also the time line is only few months. And we – and you are correct in that we expect to have approval by June..

Got it.

And for expansion of clonoSEQ for the different non-Hodgkin lymphoma, do you have to generate additional data for FDA approval? And additionally, would it be blood-based or bone-marrow based?.

Sure. So yes, we do have to generate additional data, and that’s what we’re in the process of doing. So maybe I can just outline for you our life cycle plan at a high level. As you know, we started with multiple myeloma and ALL in bone marrow. The filing that we recently completed for CLL is actually in blood.

We will be filing this year for ALL in blood, and we’re going to be confirming soon based on the additional data that we’re finalizing the time line for our filing for multiple myeloma in blood, and we are also completing the generation of data and the analysis of these data for the various NHL diseases which will be in various sample types and the timing for that will be determined over the coming months, and we’ll be sharing that as we confirm it..

Got it. And lastly, you had a nice step-up in volume – clinical volume growth from Q3 to Q4.

Was there anything specific that drove this, like specific account add, definitely the positive reimbursement and regulatory progress that you guys have made?.

We think it’s really the newer cohort of accounts that we signed on in 2019 began to really start ordering in the back half of the year, and that’s what we believe we saw in Q4..

Got it. Thank you..

Your next question comes from the line of Derik De Bruin from Bank of America. Your line is open, sir..

Hi. This is Ivy on for Derik today. Thank you for taking my question. Appreciate the color so far on clonoSEQ revenue.

Can you just share a bit more specifics on the clonoSEQ revenue for the quarter? Is it still around 10% of total revenue?.

Yes. So it has been hovering around 10% – just less than 10%. As you heard Julie mentioned, our goal this year is to effectively double our clinical test volume for the year. And alongside, growth in ASPs. Obviously, we’re expecting that revenue to continue to grow as a bigger component and mix of our total revenue. So it would be north of 10%..

Great. That’s helpful.

And then just regarding the 60-40 guide, can you talk more about how should we think about the ramp in that clinical volume, given all the commercialization efforts and the label expansion, meaning like what’s the quarterly pacing, where should we see a meaningful ramp-up in that revenue throughout the year?.

Sure. So I think the first thing to sort of think about is just sort of how to model our development revenues to sort of take that off to the side. And what I would do is start with our fourth quarter development revenues and sort of – and grow that sort of modestly throughout the year effectively.

And then when you really back that out, you will start to see an accelerating sequencing revenue throughout the year. We grew sequencing revenue 30 plus percent from 2019 to 2018. And what that implies, when you sort of back out our development revenues, is effectively a doubling of that growth rate as you look at the year.

So obviously, the clinical test volume growth will continue to come – much of that will come though towards – through the sort of back half of the year, which will drive this higher revenue….

Thank you for the color. And then one last question, maybe more for Harlan on the immunoSEQ Dx side.

Can you elaborate on what needs to be done to confirm signals for that immunoSEQ Dx, meaning when do you really know you have enough signal for certain indication? And what have you learned so far by looking across different indications across infectious disease, autoimmune and cancer? Is one indication proving to be easier or harder than the other to validate? Just wanted to get a better understanding of that whole process? Thank you..

Sure. So our internal standard for validation comes in two parts. First, it’s disease dependent. In the sense, we have to understand what the present diagnostic – best case diagnostic is as well as what would be useful clinically. And so we have to set an internal mark of how good we have to be before we have a relevant diagnostic signal.

And then we need to make sure that, that signal is confirmed in an independent cohort, so that we’re – just to make sure that there was no overfitting or something like that, that we weren’t – that you could fool yourself at times.

So those are our two standards for moving forward and certainly, if you’re asking about what we’ve seen so far in applying the signal across different disease states, so infectious disease at this point has proved to be relatively straightforward.

I think for the autoimmune space, we’re certainly seeing signals and feeling good about this, but that we haven’t put the same dedication to it yet that we have to through our Lyme results, mostly because there’s a lot of – not just signal finding, but there’s a lot of development that we need to do as our first kind of sort of test run are guinea pig to make sure that we get everything in line, so that we can start scaling this with other diagnostics.

And it’s a little too early for me to answer on cancer, but we have collected a significant number of cohorts now, so we’re able to start attacking the question, but we haven’t done so yet..

Great. That’s helpful. Thank you..

Thanks..

Thank you..

Your next question comes from the line of Amanda Murphy from BTIG. Your line is open ma’am..

Hi. This is Max on for Amanda. Thanks for taking my questions. Just a follow-up question to your response there about clonoSEQ sequencing revenue. And I appreciate that it’s not an exact calculation, but your comment around that representing 10% of revenue. Just kind of doing some quick back of the math – back of the envelope math.

I think if that’s the case based on the volume number that you disclose today or previously, I think I’m coming up with an ASP around $750 per test.

So just want to make sure I was thinking about that dynamic right? And maybe just get some commentary around what you’re seeing in terms of ASP for clonoSEQ towards the back half of 2019 and how should we think about that moving into 2020?.

You’re in the right zip code. So I think now that you sort of honed into sort of where we sort of are brought more broadly. I would just look at sort of growing those ASPs in the low-double-digit percentage through the rest of the year.

I think as we continue to contract with existing policies and continue to penetrate into those covered disease states, you’re going to continue to see an uptick in our ASPs throughout the year. So I would continue to just model that up in the sort of low-double-digit range.

We are contracting mostly at a discount to our list price, which is $1,950 and contracting slightly lower than that in the $1,600 to $1,700 range. And then given that just north of about 50-plus-percent of our tests are paid at this point, I would just take that into consideration and potentially grow that a little bit as well..

Got it. That’s helpful. And then a few questions – quick one just around some of the calls that we’ve had over the last couple of months with some large centers around their efforts to kind of implement sequencing in-house.

Is this something that you’ve noticed in terms of some general uptick in competition? Or how are you thinking about that moving forward in terms of other centers trying to replicate what you guys are currently doing?.

Sure. This is Julie.

Are you referring to clinical diagnostics like clonoSEQ?.

Yes, exactly..

Yes. So the high level, our focus is really making clonoSEQ available to as many patients as possible. And we’re definitely aware that some institutions and some markets, particularly outside the United States prefer the ability to run tests locally.

As you probably seen, we do have that option available to us with Illumina and we are currently evaluating the regulatory and reimbursement landscape, particularly outside the United States to determine our path forward. But it’s absolutely something we’re aware of.

I will say that, so far we’re having really great experience with most institutions sending samples to us at this present time..

Great. Thanks again for taking my questions..

Thank you..

Your next question comes from the line of Tycho Peterson from JPMorgan. Your line is open..

Hi. This is Eleni on for Tycho. Thanks for taking the questions. So firstly, I was wondering, last quarter you called out a temporary decrease in the academic business as investigators waited for a new version of the immunoSEQ assay.

Just wondering whether you continue to see this headwind for part of 4Q or whether you were able to recapture some of the business you may have lost in 3Q..

Sure. Absolutely. Yes, that was all resolved in the fourth quarter of 2019, and the new assay is up and running in our lab today..

Okay. That’s helpful. And then in terms of OpEx, I appreciate your comments on 2020 being another heavy investment year.

But just in terms of how we should be modeling it, would $200 million run rate for OpEx as you exit 2020 being the right ballpark and – with sort of a linear quarterly progression, implying sort of $5 million to $6 million increases each quarter?.

The only thing I would comment on that is I think you really have to step up your first quarter numbers from a modeling perspective, where you’re looking at a full quarter impact of some of the big increases and investments that we had in headcount and deployment of investments around projects like immunoSEQ Dx and drug discovery.

And so your growth rates year-over-year for sort of the first quarter of 2020 is going to be more in that sort of much higher double-digit range and then sort of trail off as you move to the fourth quarter and sort of – towards the sort of mid-double-digit range.

So I think that’s the best way to sort of think about the progression of our OpEx throughout the year..

That’s super helpful. And then in terms of immunoSEQ Dx, you previously talked about being – vary of being pigeonholed by the FDA in one disease category.

So wondering how the information sessions are going with this in mind?.

Yes. The FDA has been quite helpful, and there we’re really working together.

We’ve had multiple – over the last month, we’ve had multiple 1.5-plus hour information sessions where we’ve gone to the FDA to explain our basic technology and the strategy that we have going forward, so they could help us work together with them to have – create a plan that – basically, a validation plan that would allow us to really scale with mobile different tests being put onto the same chemistry.

So – yes, so all positive so far, but we have obviously a lot of work to do here, but we’re excited about this and the FDA seems to be excited as well..

Great. And then just one last one.

I wanted to follow-up on your criteria for new drug discovery pharma partnerships and how you’re thinking about sort of balancing new opportunities that present themselves such as those leveraging TCR-based antigen applications across newer first-line trials in MRD and – including cell therapies and vaccines? And sort of if you could talk about the areas and the deal types you’re most focused on in drug discovery as you ink these new partnerships?.

Yes. So we’re looking at a couple of different areas. One is within the cell therapy space, additional technologies or platforms that can be complementary to what we’ve kind of already engaged in partnership with Genentech to support the deal.

And separately, outside of that, we’re looking at basically prosecuting our immune medicine platform to other kind of drug modality, both within and outside of cancer. So a couple of examples that I could give you – and I would just take these as mere examples.

There’s a growing body of work being done from other companies in cell therapy in the autoimmune space. And so that’s obviously one area that’s of interest that we’re looking at. And the other application of our technology to the cancer vaccine space is another area that’s interesting to us at this present time..

Great. Thank you..

[Operator Instructions] Your next question comes from the line of David Westenberg from Guggenheim Securities. Your line is open..

Thanks for taking the questions and congrats on the quarter. So first one for Chad Cohen. The – when we look at the 2020 guidance, I’m not asking for you to break it down line by line, but I did want to concentrate a little bit on the payment from – our payments from Genentech and the assumption there. And sorry, if I missed this.

Did the guidance include an IND filing from Genentech? And if so, can you kind of give us the magnitude of how much that would be in guidance?.

So we are expecting to file the IND at the end of this year, but the milestone is based on acceptance. And so when we do see that, it’s not going to be in 2020. And so therefore, we have not modeled it in.

The guidance and the modeling that I discussed earlier with respect to development revenues is purely just in relation to how we amortize the upfront that we received earlier in 2019..

Got it. And then just a second one on – just because – I do want to make sure I get this right, given the fact that there’s a lot of these payments in there. When you give the 60-40 color, that was including the $36-or-so million on the year from Genentech, and that’s still the 60-40 or not.

So I just want to make sure I’m modeling this correctly?.

Yes. Sure. So the $36 million from Genentech that we amortized in 2019, that comp is included in the 40% mix of our 2020 numbers..

Pretty good sequencing revenue over the next year. All right. So then moving on to immunoSEQ. I appreciate the color in terms of the disease indications that you’re going at. And with respect to the fact that last year, Lyme disease came really quickly.

Is there maybe – thoughts to maybe going after the infectious disease market maybe more aggressively? And just taking a step back here, when you’re talking about the road map to the different tests, I mean, are we still going to be kind of looking out of it the same way as before? It’s Lyme and then maybe a little bit later, it’s autoimmune with celiac.

Just kind of maybe help us think about the wave of a test, and I understand there’s some strategic quietness you have to give here?.

Yes. So we’re trying to mix two different things. One is to really learn, which is to say – and that’s the strategy of going after both – the different categories of spaces where we think we’ll be able to learn infectious disease, autoimmune and cancer.

And then separate from that, we’re parallel tracking, expanding across the – for example, as you were saying, because the success in Lyme came pretty quickly, we’re absolutely ramping up efforts across the board in signal finding and infectious disease.

I’m not sure if – obviously, if there’s a straightforward signaling cancer, ramping that up quickly as well is probably vastly important.

So does that help?.

That’s fine. And then, I know the clonoSEQ ramp is kind of getting beating that, but just maybe when I looked at the sequential growth, I mean, I think I see 26% growth in sequential volumes. And that’s pretty exciting here. But then I would think you also have certain tests coming out of the back half or approvals coming out the back half of the year.

So then I would think the cadence would be fairly lower in the first half then maybe a jump as you get these – or am I thinking about that wrong, maybe you need to advertise this.

I’m just kind of thinking – trying to think about the 2020 cadence, and I realized that a couple of people have already asked that, but I – just a little more clarity there on how the new test would impact the steps there..

Sure. It’s Julie. So I think we’re really expecting the inflection point for clonoSEQ to be in 2021. As we know, it takes a while to change clinical practice, and we’re really thrilled about the expected approval of clonoSEQ in CLL, but it will take some months for that to really kick in, in terms of volumes.

So as we shared in the past, we do believe that the inflection point for clonoSEQ will be in 2021. And to remind you that, that really is also because our current indications, our ALL and multiple myeloma, which is 25% of the total patient population.

The approval in CLL will bring us – our serviceable patient population to 50% of the total patients in the U.S. with lymphoid malignancies.

And then when you add on top of that enabling testing in the blood as well as the investments we’re making the whole time in real-world evidence and peer-to-peer education and direct patient engagement, all of that combined is what’s kind of happening throughout 2020 to get us to the real volume inflection in 2021..

Thank you very much for all the color..

That concludes the Q&A session. I will now turn the call over back to Chad Robins, CEO for closing remarks..

Thank you, everyone, for joining us today. We look forward to a great year..

This concludes today’s conference call. Thank you, everyone for joining. You may now disconnect. Have a great day..