Adaptive Biotechnologies Corp Q2 2026 earnings call

Thank you, Sonia, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' second quarter 2026 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the second quarter. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will be referencing to the slide presentation that has been posted in the Investor section in our corporate website. During the call, management will make projections and other forward-looking statements within the meanings of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements, depending on a number of factors, which are set forth in our public filings with the SEC and listed in this presentation.

In addition, Non-GAAP financial measures will be discussed during the call, and a reconciliation from Non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-founder, and Kyle Piskel, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, I'll turn the call over to Chad. Chad?

Thanks, Karina. Good afternoon, and thank you for joining us on our second quarter earnings call. Q2 was an exceptional quarter for Adaptive and a clear validation of our strategy and execution. We delivered excellent operating performance, took decisive strategic actions to unlock shareholder value, and strengthened our balance sheet. Together, these accomplishments reinforce our confidence in the long-term opportunity ahead. Three achievements define the quarter. First, our MRD business delivered one of the strongest quarters in our history. Revenue, excluding milestones, increased 49% year-over-year, driven by growth across both clinical testing and pharma. Clinical testing volume grew 43%, adding more than 3,500 tests sequentially, while pharma sequencing continued its strong momentum. We expanded MRD sequencing gross margin to 71%, up nine percentage points from a year ago, and we increased adjusted EBITDA margin to 14%.

These results demonstrate the scalability of our MRD business and its ability to generate profitable growth. Second, we announced our plan to separate our MRD and Immune Medicine business. We are evaluating strategic and structural alternatives for Immune Medicine that we believe will best position the business to pursue its growth strategy, access the capital it needs, and unlock its full potential outside of Adaptive. We have retained Morgan Stanley as our advisor and continue to expect to identify our preferred path of separation by year-end. Third, we further strengthened our balance sheet through a successful $340 million zero coupon convertible note offering. The transaction enabled us to retire the OrbiMed agreement, simplify our capital structure, increase our financial flexibility to execute our separation strategy, and invest in the compelling opportunities we see in MRD.

Importantly, we paired the financing with a cap call transaction and share repurchase, significantly reducing potential shareholder dilution while optimizing the economics of the financing. We ended the quarter with approximately $357 million in cash. The performance we've delivered year-to-date, combined with the momentum we're seeing across clinical and pharma, reinforces our confidence in the trajectory of the MRD business. Accordingly, we're raising our full year MRD revenue guidance to a range of $268 million-$278 million. Kyle will provide additional details in his remarks. Now, let's take a closer look at the clinical business on slide five, which continues to be the primary driver of MRD growth. Clinical revenue increased 53% year-over-year, driven by a 43% increase in testing volumes and a 7% increase in ASP. During the quarter, we delivered more than 36,100 clonoSEQ tests, representing 11% sequential growth.

This reflects continued expansion of our ordering physician and account base, combined with deeper penetration of existing accounts and increasing adoption across the patient care continuum. Growth was broad-based across every reimbursed indication. CLL grew 16% sequentially, continuing to benefit from the 2025 NCCN guideline update. Multiple myeloma, our largest indication representing 44% of testing volume, grew 15% sequentially, driven by broader adoption of blood-based testing across both academic and community. In lymphoma, DLBCL and MCL now account for approximately 16% of total testing volume, and both delivered healthy double-digit sequential growth. We also continued to make progress on pricing. U.S. ASP increased to $1,382 per test this quarter, reflecting ongoing reimbursement gains, including a recent expansion of MCL coverage with Concert, as well as operational improvements from bringing key revenue cycle management functions in-house. The takeaway is clear. We're growing volumes, expanding adoption across indications, and improving pricing.

Those are the fundamentals that drive durable top-line clinical growth. Let's turn to slide six, which highlights some of the key drivers behind our clinical volume growth. What is encouraging is that each of these metrics continues to move in the right direction, supporting both broader adoption of clonoSEQ and increased testing over time. Starting with blood-based testing, because blood is less invasive and more convenient for patients, it supports more frequent MRD testing through the course of treatment. Blood-based testing grew 68% year-over-year and 14% sequentially, and represented 51% of total clonoSEQ volume in Q2, exceeding half of all tests for the first time. Importantly, we're seeing increasing adoption of blood testing in both multiple myeloma and ALL, two indications for which physicians traditionally have relied on bone marrow testing. Blood now contributes 30% of MRD testing in multiple myeloma and 42% in ALL.

The shift towards blood also expands our opportunity in the community setting, where blood-based testing is significantly easier to integrate into routine practice. Community testing represented 36% of total clonoSEQ volume this quarter, exceeding our full-year target, and grew 65% year-over-year. That growth has been supported by broader adoption of updated clinical guidelines, standardized testing protocols, and our EMR-enabled workflows, which are making repeat testing easier for physicians. We're also seeing encouraging progress in serial monitoring. One year after our Flatiron integration, 75% of repeat orders have been fulfilled, demonstrating that community physicians are increasingly incorporating MRD into ongoing patient management rather than using it as a one-time test. Importantly, physician adoption continues to expand. Nearly 5,200 clinicians ordered clonoSEQ during the quarter, an increase of 40% from a year ago.

We view this as another indicator that MRD testing is becoming a standard part of clinical care across a growing number of providers. These drivers are interconnected. Greater adoption of blood-based testing, continuing expansion in the community, increasing physician adoption, and higher rates of serial monitoring all support deeper penetration across indications and more testing per patient through the continuum of care. Let's turn to slide seven to take a look at our MRD pharma business. This was another good quarter for MRD pharma. Sequencing revenue grew 38% year-over-year, excluding milestones. Importantly, unlike the prior year, we did not recognize any milestone revenue this quarter, highlighting the continued strength of the underlying sequencing business. We ended the quarter with 189 active global clinical trials and a backlog of approximately $245 million, up 12% from a year ago.

We view this backlog as an important leading indicator of future revenue and continued demand from our biopharma partners. The quality of our portfolio continues to improve. Studies in which MRD is used as a regulated endpoint, either primary or secondary, now comprise about 60% of our active studies, compared to about 40% a couple of years ago. These studies not only carry higher economic value, but they also create opportunities for future milestone payments tied to regulatory approvals. Multiple myeloma continues to represent the largest portion of our registrational portfolio, reflecting the industry's growing use of MRD following the FDA's support for MRD as an endpoint. At the same time, we're seeing encouraging expansion in both CLL and ALL, with a number of registrational studies continue to grow as sponsors increasingly are incorporating MRD into their development programs.

Beyond the numbers, we're also seeing a shift in how MRD is being used. More studies are using MRD to guide enrollment, stratification, and treatment decisions rather than simply measuring response. That generates the clinical evidence needed to support broader adoption in routine care and strengthens the connection between our biopharma and our clinical businesses. To wrap on MRD, slide eight summarizes our progress against the key objectives we set for 2026. At the midpoint of the year, we've either achieved or remain on track to achieve each of them. Clinical testing volumes have exceeded our original expectations. Based on the first half performance and continued momentum, we now expect volume growth between 38%-40% this year, which is well above our initial target of more than 30%. The key drivers of growth are also ahead of plan.

Blood-based testing and community adoption have already exceeded our full-year targets, while EMR integrations continue to progress with 31 additional accounts integrated year to date. On pricing, we're on track to achieve our target of approximately $1,400 per test, supported by continued reimbursement progress and improved collections. Finally, strong revenue growth combined with ongoing operational efficiencies, keeps us on track to exceed 70% in sequencing gross margin while continuing to expand adjusted EBITDA. Overall, the business continues to perform ahead of expectations. We're expanding adoption, improving profitability, and executing against the strategy we laid out at the beginning of the year. Before I turn the call over to Kyle to go over financial results and updated guidance, I'd like to provide an update on our plan to separate the Immune Medicine business and the progress we've made. The timing for a separation is right.

MRD has scaled into a profitable, market-leading diagnostics business with a clear runway for durable growth. At the same time, Immune Medicine has evolved into a differentiated discovery platform built on proprietary immune data, AI, and target discovery. As each business enters its next phase, each requires a different operating model, capital structure, and set of investors. For Immune Medicine, we see the greatest opportunity to realize the value of its assets outside of a commercial diagnostics company. As such, Adaptive will remain focused on expanding its leadership in MRD diagnostics, while identifying the best path forward for Immune Medicine to advance as an independent business. Since announcing our plans, we've taken several important steps to move the process forward. First, as mentioned, we've retained Morgan Stanley to advise us as we evaluate the strategic and structural alternatives for the Immune Medicine business.

Second, Harlan Robins, my brother, is transitioning from Chief Scientific Officer role at Adaptive to a consultant role, supporting key R&D initiatives for MRD while dedicating significant time to advancing the separation of IM. Given his scientific leadership and deep knowledge of the platform, his active participation is important during this transition. Third, we've sharpened the focus of the Immune Medicine portfolio. Following a comprehensive review, we've decided to wind down our research use only pharma services business. While it operated around break even, it was not central to the assets that differentiate Immune Medicine. Going forward, we'll focus on the platform's highest value assets and capability, which are our proprietary TCR antigen data set, our AI and machine learning digital models, and our target discovery platform for autoimmune disease. We're also exploring new ways to monetize these unique assets and maximize their path forward.

Thanks, Chad. I'll start on slide 10 with our second quarter results. Total revenue was $71.6 million, an increase of 30% from the prior year, driven by continued strength in MRD, which represented 92% of total company revenue. As a reminder, amortization of the Genentech payments are excluded from all prior period comparisons. MRD revenue was $66.2 million, up 33% year-over-year. Importantly, excluding $5.5 million of milestones recognized in the second quarter of last year, the core MRD revenue grew 49%, driven by continued strength in both clinical and pharma businesses. Clinical and pharma represented 75% and 25% of MRD revenue, respectively. Immune Medicine revenue was $5.4 million, up 8% from a year ago, primarily reflecting revenue recognized as part of our target discovery agreement with Pfizer. Turning to margins, sequencing gross margin, which excludes MRD milestones, was 72% for the quarter, up from 64% a year ago.

This reflects lower assay costs following our NovaSeq X transition, along with continued operating leverage as volumes grow. We also maintained disciplined expense management. Total operating expenses, including cost of revenue, were $87.3 million, up 4% year-over-year. The increase primarily reflects continued investment in our commercial infrastructure, including reimbursement and EMR integration initiatives, partially offset by lower R&D spending in Immune Medicine. At the segment level, MRD adjusted EBITDA increased to $9.1 million compared to $1.9 million a year ago, reflecting the combination of strong revenue growth and continued operating leverage. Immune Medicine reported an adjusted EBITDA loss of $6.3 million, resulting in an adjusted EBITDA loss of $0.7 million for the total company. GAAP net loss for the quarter was $39.9 million, which included $26.4 million of debt extinguishment expense and interest expense related to our now settled OrbiMed financing agreement.

With the repayment of OrbiMed and the completion of our zero coupon convertible note offering, going forward, we will generate net interest income from our cash and investments on hand. Turning to slide 11. We are raising our full year MRD revenue guidance to a range of $268 million-$278 million, up from our prior range of $260 million-$270 million. This increase reflects stronger than expected clinical volume and pharma sequencing performance in the second quarter, as well as higher year-over-year clinical volume growth of 38%-40% versus our prior guidance of 35%. Our guidance continues to include $9 million of MRD milestone revenue, which was all recognized in the first quarter and assumes no additional milestone revenue during the second half of the year. At the midpoint of the guide, this implies 29% year-over-year growth or 37% growth excluding milestones.

We're narrowing our full-year operating expense guidance to $350 million-$355 million versus our prior range between $350 million and $360 million, reflecting lower spend in the Immune Medicine business. As a result, we remain on track to achieve positive adjusted EBITDA and positive free cash flow for the entire company by the end of 2026. With that, I'll turn back the call to Chad.

Thanks, Kyle. This quarter demonstrates that our strategy is delivering results. We're growing revenue and expanding profitability of the MRD business, taking decisive steps to unlock the value of Immune Medicine and strengthening our financial position to support the opportunities ahead. We're confident in the direction of the business and look forward to updating you on our continued progress next quarter. With that, I'll turn it over to the operator for questions.