Good morning. We're going to kick it off. I'm Tycho Peterson from the Life Science Team, Tools here at Jefferies. We're pleased to have Chad Robins from Adaptive with us. Good morning.
Thanks for having me, Tycho.
Maybe we could jump in with just a quick recap of 3Q. You called out an inflection point in MRD. You're now profitable on cash flow and EBITDA. Just maybe walk through some of the give and takes on the quarter.
Yeah. We had a really strong quarter on many different fronts. First of all, volumes grew 7% quarter over quarter and 32% year over year. ASPs went to $1,340, kind of setting us up to be able to hit our long-term objectives on kind of $1,700-$1,800 ASP target. We had meaningful increases in our gross margin. We went from 63% to 66% in one quarter. 2% of that was attributed to kind of the implementation of NovaSeq. We had meaningful wins in guidelines, in particular the first CLL guideline inclusion. So many, many different things that went really well. All that together led us to increase our guide for the year. The setup was really good. I mean, a little bit of surprise by kind of the market reaction. I know there's a lot of wind taking out there and profit taking.
Macro over the last kind of week or two hasn't been great. It is a really nice opportunity now because the setup is really strong going into next year. Kind of everything's pointing in the right direction.
Great. You touched on ASPs. I want to maybe just talk a little bit about some of the steps you've taken there and maybe the path to kind of hit that $1,700-$1,800 target. Maybe just talk about some of the drivers of ASP. CMS pricing sits at $2,000. What's the state of the adoption among players, specifically Medicaid and commercial? What are the largest remaining gaps?
Yeah. As you mentioned, the gap fill rate has been adjusted to $2,007 per test. That gives us confidence that over the next kind of several years, we'll be able to hit that $1,700-$1,800 kind of long-term target. If we unpack the initiatives, they come in kind of three different buckets. The first is coverage. The second is policy expansion. Really, the third is operational or revenue cycle management. We can dig a little bit deeper in each one of those buckets. In terms of coverage, we've had kind of meaningful coverage wins over the course of the year and even more so this quarter. If you look at Anthem, which last quarter got coverage and this quarter got implemented, you had kind of Florida Centene.
We have had kind of many of the Blue Cross Blue Shield plans that have initiated coverage on us. It's been really nice. In terms of kind of policy expansion, we had our first commercial payer cover DLBCL this quarter. We've also had kind of some major policy updates from Aetna and UnitedHealthcare in terms of our CLL coverage. All in all, that's also pointing in the right direction. Operational wins. MCL Medicare, we've now kind of put in place kind of all the logic to be able to bill for that. We've also implemented some really AI technology that we did last year for prior auths that we're now bringing into the appeals process. Very, very focused on collecting cash. We had a 20% increase in cash collections from 2Q to 3Q and 85% year over year this year versus last year.
I mean, it's been really, really nice. We've been making investments in terms of our market access group and particularly in terms of the operations. Again, things are really moving in the right direction in terms of getting paid for our tests. One more thing, if you look at just our commercial cover, taking Medicare out of it, last year total commercial coverage was $800. This year it's moved up to $1,100 average ASP. Even on the Medicaid front, which as you guys all know, we don't get paid a lot for, although we've had some nice wins and continue to see some nice wins. We went from $200 to $400 last year to this year. We doubled our Medicaid pricing. All these things together kind of lead us to believe that we're going to get to that $1,700-$1,800.
Actually, one more point on policy that I just want to make sure that we get out there. Almost every major commercial payer is looking at policy updates over the next couple of quarters and some of our new indications. Really confident that we're going to continue to see that the payers continue to see the value in our tests and continue to pay for them.
Guidelines are an important part of the story. DLBCL, MRD got NCCN for the first time earlier this year. CLL guidelines now specify serial assessment and recognize NGS as an alternative to flow. Maybe just talk about some of the utilization changes you're seeing on the back of the guidelines. What additional data are you generating to reinforce superiority against flow in particular?
Yeah. I'll cover all that. I just think that I want to just start with a level set that kind of beyond kind of the sensitivity, flow continues to miss MRD even at the specificity level and sensitivity level of 10 to the fourth. That comparison, we're talking about using clonoSEQ all throughout, not just the comparison to flow for deeper sensitivity. It is the test that should be used for MRD assessment, period. We've had, as you mentioned, and I'll kind of go through them one by one, we've had kind of meaningful wins really throughout our indications in the year. Diffuse large B-cell lymphoma, this was the first time that we've had guideline inclusion just this quarter where we're talking about indicating that there's growth in recognition of the importance of MRD in assessing lymphoma.
CLL, we got this quarter, first-time guideline that talked about recurrence monitoring and the necessity to do serial testing in CLL. And multiple myeloma, you had a baseline clonotype assessment for that, again, was for the first time said you need to get that kind of ID sample upfront in order to do MRD. This is incredibly important for us for two reasons. The first is it's incredibly important from a logistics standpoint so that we don't have to do kind of pathology retrieval and go get the sample. But secondly, if you talk about our importance of growing in the community hospital setting, having the community hospital practitioner be able to get that clonality assessment upfront, even if they're referring into an academic medical center, is incredibly important kind of for the growth. So super just really impressed with the team and how they've kind of continued to manage.
We're in front of guidelines committees. It's a major initiative for us. We've seen a significant amount of success. If you talk about data, this is a very strong focus of the team, to continue to generate data that shows the clinical utility of clonoSEQ and how a doctor is going to use that for interventional action on a patient. Using that information to say, how am I going to treat a patient differently, kind of based on MRD status. If you look at a couple of good examples of that, in CLL, we've had great data on VENETOSTOP this summer in June at the ICML conference. We'll have additional readouts at ASH that's really equivalent to our master study in multiple myeloma that says you can take a patient off of maintenance therapy if you have two subsequent MRD negative tests.
Patients want to go on a treatment holiday. That same thing in the VENETOSTOP trial is going on to take patients off in CLL. You also have in MCL after first-line therapy with an MRD negative test readout, the decision not to transplant a patient. Again, we'll have additional data coming out at ASH. I mean, speaking just in ASH, just take it. It's really the totality of the data. We've got 90 abstracts and oral presentations this year at ASH. That's just an incredible body of work across all indications showing not only the prognostic value, but what I keep talking about is really the clinical utility value and the interventional value of using clonoSEQ MRD assessments. Really, really pleased with the data. It's a major focus for us.
Maybe we could hit on just test per patient. Your revenue model contemplates four tests per patient over a treatment cycle with that revenue obviously recognized over time. CLL guidelines recommending serial MRD assessment every three to six months. Is there upside to average test per patient? How could that materialize in the numbers?
Yeah, Tycho, there is upside for average test per patient in every indication, I would say that. It is not just because of guideline inclusion. That frankly takes some time to play out as clinicians look at guidelines. They start incorporating it into their practice. When you talk about EMR integrations, when you talk about blood-based testings, when you talk about the data that we just mentioned to how you are going to use this test interventionally, all these things together are really leading to kind of more tests per patient. I will give you also a couple of practical examples of this.
In terms of EMR integrations, our Flatiron OncoEMR integration, we now have the ability to essentially build into the system when we have the ability for the doctor to be able to push on a button that says, I want to test the patient every three, six, or 12 months. What we're seeing is so far 75% of these orders have come in with a recurrence essentially built into that initial order set that they're clicking on serial monitoring. Extremely encouraged by that. That being said, you still have to go out and get that patient to come back into the doctor's office. You essentially are building in the pipeline upfront. Right now, our test per patient is actually not at four. If you look across the indications, it's a little bit below four.
We also have to figure out because, you know, our Medicare coverage is for four tests as a bundled payment. Our commercial payer coverage is on a test-by-test basis. We are working really hard to figure out how do you get paid for more tests per patient when we start to flip above the four per patient. To that end, we've got our first recurrence monitoring claim in mantle cell lymphoma. We are working on other indications as well. Really, the goal is to get a pan recurrence monitoring claim. Unfortunately, Medicare kind of makes you go one by one at the initial.
Once you have like, I don't know what the number is, two, three, or four, and we've already had this discussion to say, what does that kind of data set look like that says, okay, let's go and get a pan recurrence monitoring test? I do believe that is possible in the future based on the conversations that we're laying the groundwork for.
Great. I want to maybe just pivot and hit on the Neo partnership. I'd love to hear kind of early learnings from the pilot rollout and just maybe walk through the workflow and how orders flow from COMPASS CHART to clonoSEQ and what's the messaging in the field?
Yeah. Our work with Neo really continues to progress. In the third quarter, we really launched this. We launched kind of our first partnership. What we're trying to do is really define our operational workflows and who does what. Notably, for one of our large community network practices, we did our first EMR integration where we actually got up on Neo's EMR system. Now we're at the point where we're kind of collecting that data. We're seeing how we can roll that out to more sites and operationalize this going into next year. To set the stage, if you remember, what we said was that the second half of this year, we would roll this out. We would pilot it. We would take in the data.
We would kind of implement this and kind of start to see the fruits of this in 2026. That is exactly where we are at. We are kind of assessing that, how the workflow works, how the sample and order management and everything kind of flows through to deliver a test back to the practitioner. It is all going well, but kind of more to come on this.
I think you've noted 60% of Neo's sales coverage or accounts where Adaptive is not yet present. How quickly can you kind of penetrate that white space post-launch?
Yeah. We're definitely encouraged by kind of what we're seeing. We'll see. I think it's early. We still have kind of a data set of kind of one. I think we'll see how quickly we can penetrate it. It's certainly the goal.
I know it's still early days. Are you able to talk at all about how responsibilities are split with Neo in terms of sales, billing, customer support, just some of the kind of nuts and bolts of the deal?
Yeah. I mean, we've cross-trained the different sales teams in terms of customer support. That comes to us for kind of the clonoSEQ side of things. It's still kind of a little early to talk about exactly how it will work. We continue to refine based on our pilots as to kind of how we're going to operationalize this.
EMR, so you touched on some of the initiatives there. You completed the integration with OncoEMR with Flatiron this summer. Talk a little bit about how that integration along with other EMR connections, obviously Epic, impacted conversations, turnaround times, reorder rates in the community setting in particular. Have you achieved your goal of exceeding 50% of EMR integrated testing volumes? I guess that's by year end.
Yeah, yeah. We're on a path to do that. We're currently at about 40%. Looking, peeling back the numbers, we now have 165 EMR integrated sites, 46 of which are Epic integrated and 116 which are Flatiron OncoEMR integrated. This is a huge strategic priority for us. The reason is for a couple of reasons. One is to increase our volumes, in particular in the community setting. EMR integrated sites are growing faster than non-integrated sites. EMR integrated sites grew kind of 9% last quarter versus 6% for non-EMR integrated sites. It's incredibly sticky if you look at particularly in the academic medical center. This is the point, the workflow. Once you're integrated into the workflow and you get kind of the entire practice using it, it's very hard to get off of the system. That's been great. Been great growth, great stickiness.
It is incredibly important for recurrence monitoring. Once you're up and running and not only the ability to kind of build into order sets, which we've talked about, but once you're up and running, it's sticky. Doctor comes in. This is just what you do because it's into the workflow. We look to continue to make investments in EMR, other EMR systems, et cetera. This is an area that is already the returns are early. Remember, I mean, we just implemented kind of Flatiron EMR kind of this semester in July. At the end of the day, that recurrence monitoring order sets that are kind of being placed now build for the future.
If you talk about our growth this year, which I'm sure we'll touch upon kind of the absolute numbers, but continuing that on into 2026 and to be able to have a really high growth rate, a lot of that, it's not attributable to any one factor. We'll cover that. The EMR is certainly incredibly important to us.
I want to make sure we hit on the pharma business. So MRD backlog over $200 million now. I guess, how do you think about the opportunity to expand this business, especially as we think about the importance of clinical utility studies, potential companion diagnostic labels on the solid tumor side? And is this transferable to hematological MRD as well?
Yeah. First of all, we have over $200 million in backlog. If you look at backlog, it's really the kind of health of the portfolio. Just to kind of level set, our highest penetration rate is still in multiple myeloma. There's kind of a practical reason for that because that's been in that indication, pharma companies have been using MRD for several years now. It's been accepted even kind of prior to the ODAC standards for sensitivities already at 10 to the minus fifth. ODAC has also, though, had a halo effect on other indications. If you look, for example, at our CLL bookings, they more than doubled this year. That primarily was because of ODAC.
In totality, too, if you look at kind of our MRD in terms of going from a research tool to a tool for assessment to be able to get approvals of drugs, that has gone up, but doubled in the last two years. It is really a new factor for us.
Anything you can kind of say in the cadence of recognizing backlog as revenues in the coming years? How do we think about the quarterly burn pattern, seasonality, potential lumpiness around the pharma business?
Yeah. So backlog is really a lead indicator of kind of the health of the portfolio. It does vary quarter by quarter. There are three levers that influence pharma revenues, which is kind of the contribution from our backlog, retrospective samples, and then milestones, which we tend to view and guide as upside on the milestone progression. About 85% of our total backlog will be converted to revenue at some point. 15% of that usually is in kind of that first year of signing. The cadence goes from there to kind of 30%, 45%, 55%, and then 65%, 70% in those first five years. The remaining of that total 85% will be done kind of over those two years or the seven years. I mean, it gets replenished. Our backlog gets replenished every year with new bookings as they come online.
We're really kind of monitoring this shift as our mix of studies has shifted kind of towards, we were talking about just a minute ago, like 60% of our studies now are primary and secondary endpoints versus kind of two years ago, which was about 60% RUO. That's where I'm talking about kind of that mix has really shifted to the primary and second, which is really a good thing in terms of kind of how important of a tool this is for MRD-directed therapy and fixed duration therapy. Pharma companies are really using this in a way that matters.
Maybe just pivoting quickly to immune medicine. You had the Genentech termination last quarter. You generated $3 million in immune medicine revenues ex Genentech. I guess, what does the revenue cadence look like from here? How are you looking to offset some of that rolloff?
Yeah. Just to be clear, we terminated the agreement with Genentech after a portfolio review, which means that we accelerated the amortization of the rest of that revenue, which was $34 million, which we accelerated in this quarter. Remember, this is non-cash revenue. It sort of creates a tough comp for us. We are very, very clear to exclude that and do an apples-to-apples comparison to essentially exclude that non-cash revenue. We understand that that does provide kind of a little bit of a kind of a tough challenge. Revenue from IM pharma services, we anticipate to be around $20 million, which is kind of really stable to our 2024 as we continue to serve our customers.
I just want to be clear, our investments in this area in terms of kind of pharma services are relatively minimal, which allow really a nice margin profile to offset the burn in IM. That's kind of really how we're thinking about it. We'll talk a little bit more about, I know, in a minute about IM and how we think about our cash burn there.
Yeah. I mean, before we go there, let's just talk a little bit about some of the interesting developments you framed. I think TCR antigen projection is the next frontier in protein interaction modeling. Maybe just talk about what milestones we should be looking at for you as you work towards furthering your AI capabilities.
Yeah. Yeah. Thanks for bringing that up. This is something we're pretty excited about. Just actually to set the stage, the Nobel Prize was won this year for AlphaFold 2 on this really protein folding. They've really solved essentially the protein folding model. We believe the next frontier in immunology is this protein-protein interaction, which is kind of the TCR and antigen, what the relationship between kind of our body cells and kind of antigens that they see are. And we've been essentially making investments to build up what we think is one of the most important data sets in immunology. We think this has incredible application. And we're building ML and AI tools on top of that. And we think this is going to be kind of one of the most important data sets in immunology to use for many different applications.
I'll give you one in particular, which is in drug discovery. And across really cancer, infectious disease, and in particular, an area that we're focused on is in autoimmunity. The data is very important. We're looking at kind of multiple ways to monetize it, including some key partnerships. I'll just say kind of more to come in this area.
On autoimmunity, you selected a lead T- cell depleting antibody. I think you're planning CMC talks work toward an IND enabling studies. What are the next few milestones we should expect to see here? Are you able to say what spending looks like on the OpEx side in the next year or two? I guess, how do you prioritize investment here compared to other parts of the business?
Yeah. I think that's a really good, great question. I'll hit on kind of how we're prioritizing spend. Maybe just first to touch on kind of the program, which is to say what's happening in an autoimmune disorder is kind of these autoreactive T- cell receptors are attacking self-tissue. We've identified this set of autoreactive T- cells for several different diseases. We've selected one as our lead program to create an antibody to essentially block these autoreactive T- cell receptors from kind of attacking that self-tissue target in the body. We've really characterized this antibody with great specificity. We've looked at kind of the binding properties, the cytolytic activity, kind of how well our antibodies are essentially killing the autoreactive T- cell target. All this is looking really, really, really strong.
We continue kind of to develop these data sets for kind of IND filing. I do want to be clear, our goal is not to be a therapeutics company. This is really getting to a proof of principle to show that we have the kind of killer data set to be able to uncover this. Not only that, we also have really a patient selection tool. Essentially, kind of our underlying TCR platform is extremely powerful in being able to pick out and find the patients that should respond to these therapies. Because essentially, that therapeutic target of the T- cell receptor is also kind of the diagnostic patient selection. Because we can identify at a very deep level these T- cell receptors. That is what we are looking at.
All that being said, I want to be clear, the importance of maintaining profitability in our MRD business in clonoSEQ is really number one. We are going to gate our investments based on the success that we are seeing and on potential deal revenue that comes in so that we continue to maintain kind of that low cash burn that we set out to hit this year. We are going to hit that target at the end of this year. We will obviously set a new target next year. I can assure you that that is going to be a very modest number. It is going to be a number that is gated based on success.
Hopefully, we'll continue not only the $20 million from the pharma services business in there, but hopefully, we'll continue to have kind of deal flow that kind of supports. My goal is to have it really self-fund these programs.
Great. I know we're at time. Maybe just to wrap quickly, you're wrapping up a great 2025. Any just quick comments you want to make on 2026 at this point?
I'll just say really, the setup is really good. Let's just particularly start with the MRD business. If you look at it, it's multiple factors. I mean, we've been growing really strong. We're going to continue growing strong into 2026. But we're pretty low in terms of penetrating the ceiling. All the work that we've been doing has shown that there's a, I think there's a TAM expansion from kind of multiple serial testing that we've talked about. And we're low penetrated in most of our indications so far. If you look at it, it's multiple factors we touched on, but I'll just highlight them again. It's EMR integration. It's blood-based testing, which we haven't really hit home, blood-based testing. But I'm going to hit it home now. The importance of moving into the blood is extremely high, particularly in the community setting, right?
Because in the community hospital setting, which is 65% of patients that have these blood cancers are treated in the community setting, they do not do bone marrows. That is the other huge area of growth for us, just not only blood-based testing. It kind of works in concert with going after the community and a huge penetration into the community. All of this is underpinned by continued data generation. We need to continue to show clinicians how to use the test interventionally, how it is going to change treatment decisions on a patient. We are doing that over and over again, as I mentioned, kind of 90 studies at ASH. Finally, look at the immune medicine business as an extremely low-cost call option, right? There are many things that are happening. We are generating, I think, what ultimately is killer data.
We all know the importance of data. Kind of more to come on deals there. The setup for 2026 is incredibly strong and could not be more excited to be kind of running this business right now. Appreciate it.
Great. We'll leave it at that. Thanks.
Thanks, Tycho. Appreciate it.