Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to the Bank of America 2020 Virtual Vegas Health Care Conference. I'm Derik de Bruin, the life sciences and diagnostic tools analyst -- senior analyst. With me today is my associate, Ivy Ma, who also covers diagnostics on the team. And we're very happy to talk with our next company, Adaptive Biotechnologies. With us is Chad Robins, Chief Executive Officer of Adaptive. Welcome, Chad.

Thanks, Derik and Ivy, for having me. Appreciate it.

Our pleasure. So the -- we're in a sort of a different world than we were a few weeks ago. I think when we last spoke, we were -- you were going to come down to do a lunch for us in Seattle for -- our bus trip got canceled, and I think we didn't really appreciate it. But I mean a lot has obviously changed in the last few weeks. And suddenly, people are paying attention to immunology who didn't even know what immunology was, myself being one of those at that point. So COVID sort has really upended the world, but it's also created some opportunities for Adaptive in particular given sort of where you sit. So what's -- so I've been asking companies, how do you think COVID is going to change your business going forward? And what do you think is going to happen to customers? Now I'm going to start with that question for you because I actually think that is very relevant question given what Adaptive does in your platform. So with that I'll throw it up for that.

Yes, I'll try to -- thanks, Derik, I'll try to weave in some of the kind of ways in which COVID in the world we're living in right now change -- really, on the one hand, provide some opportunities, but also change how we think about the world moving forward. And let's just be clear. I mean COVID as devastating as it is, it's just another disease that the immune system sees the same way it sees any other disease. And we have an immune medicine platform that's been -- that's built to be able to look at the immune response to disease. And the first thing -- when we realize that this was going to become a pandemic, actually, Julie, our President, said, "We have an obligation to point our platform directly at COVID and see how we can contribute to help solving this crisis for the world." And so we jumped in with 2 feet first on the diagnostic front with Microsoft to extend our partnership to look at the kind of immune response to COVID, essentially looking at the T cell receptor response to COVID antigens. And then next, partnered, as you know, with Amgen to develop a neutralizing antibody therapeutic. And so we can kind of cover both of those. And with those, I'm going to talk about how we see COVID, and really, the world we're living in right now, how that can potentially accelerate different aspects of the platform.

Great. So before we do that, let's talk a little bit about your platform. Because I think it's a little bit complicated for some people to understand because it's not PCR. It's not serology. It's a completely novel diagnostic moiety. So can you talk a little bit about what exact -- can you talk about your technology platform there? And then we're going to go into the Microsoft and the other applications.

Yes. I'm happy to do that. So our platform consists of, really, a few different components, the ability to sequence immune receptors, T cell and B cell receptor, at extremely high throughput to be able to map those receptors to their clinically relevant antigens and then be able to then characterize them for therapeutic use, which means that we can pair them together, and then we can look at a bunch of different properties of the receptor that makes them good targeting molecules for therapeutic use. And so that combination of the ability to sequence, map and characterize is really what our platform is. And so now with respect to COVID, let's first talk about the diagnostic. We entered into a partnership with Microsoft 2.5 years ago to essentially build a map of the immune response to many diseases, essentially go disease by disease and map T cell receptors to clinically relevant antigens for each disease. And what's interesting about that from a science standpoint is every disease has antigens that are specific to that disease. And then we can -- our chemistry can actually find receptors that are binding to those antigens. And it's really a many to 1 relationship between T cell receptors and antigens. And what's interesting is once we've mapped that disease, and that requires, really, the 2 components of the platform, the ability to sequence and the ability to map. But once we've mapped that disease, now we can essentially take a blood sample from a patient and apply our baseline kind of sequencing assay to look at all of your T cell receptors in your repertoire and diagnose that disease from a blood sample, from looking at your repertoire. But not only can we diagnose that disease, any disease that we've mapped, we can diagnose all from the same sample because you're -- when we're extracting your immune information out of the blood, we're getting everything that your immune system sees from that 1 sample. And so once we map the disease, then we can diagnose it from a sample. So it's a sequencing -- we'll talk about different kind of potential commercial applications of a COVID diagnostic. But the baseline application is -- what we're doing is we're mapping the immune response of COVID T cell receptor signature to the clinically relevant antigens for COVID-19. And once we've mapped that, then we can then -- then we can use that information, and I'm going to use the term "diagnostic" here kind of in quotes because there's 3 things that we're looking at in terms of diagnosis. And I think it's important. Let's talk about what those are first, and then we can talk about what the product market fit is and the commercialization opportunities.

Perfect.

Because -- and you -- so you mentioned, Derik, you mentioned 2 types of tests, PCR testing and serology testing. Let's talk about what their use cases are and then what we're trying to do. In terms of PCR testing, that's upfront, looking at diagnosis. And then serology testing is looking at -- let's say, PCR is looking at actually the presence of the virus itself. It's looking at the virus to say, do you have it? And then serology testing is looking at -- on the back end, have you developed an antibody response so that now that confers immunity, right? So we're looking at 3 things. The gaps in the current testing paradigm are, on the front end, there's a bunch of false negatives for PCR-based testing, meaning depending on the operator and how you do the nasal swab, you might miss the presence of a virus. Also, what we do know is these PCR tests aren't able to pick up asymptomatic patients. So there are 2 kind of issues on the false negative side. And then with serology testing, there's potential false negatives in that your antibody response doesn't come up right away and that potentially not everyone develops an antibody response. That's false negative. But the bigger issue on the antibody side is really the false positive, meaning that these tests are picking up other coronaviruses and giving you a -- kind of an immune clearance and potentially sending people back out or will send people back out into the workforce saying that they've had the coronavirus, where they actually might not have had the coronavirus or don't have the coronavirus. And so we're developing a test that we believe there's 3 aspects: one is we think that everyone has a T cell receptor response to the virus, to COVID-19; and secondly, we think that comes up right away, okay? So that's on the front end. On the back end, even though your T cell receptor response comes up right away, it also goes down after you have it. So there's a potential that this could be used as either an alternative to or at least part of this kind of immune clearance. But perhaps there -- in terms of kind of the utility of the assay, it's really in the middle, we believe, and this is -- I do want to say that it's going to be really data dependent and how strong the data is in these different aspects, meaning if you -- if we're able to pick up asymptomatic patients, there probably may be utility on the front end, but that's going to be dependent on the data. But we believe that perhaps the fit that no one's doing right now is looking at how you stratify patients. So the question is, why do some patients wind up having what I'll call corona-like or cold and flu-like symptoms versus others that are having very severe symptoms, require hospitalization, high mortality risk. And what we're hoping to achieve is that the kind of -- by looking at kind of the immune response to the virus that we can potentially stratify and triage these patients from not going to the hospitals and recovering at home versus those that we know require immediate hospitalization. So maybe I'll pause there, and then we can talk about how this then plays out from a product market fit and a commercialization standpoint.

Yes. No, I think that's a really good explanation. I think we've had a number of people asking exactly where the fit is. So I think that covered pretty much everything -- all the major ones. I think the other question we got on is, how would you -- the stratification is a different -- it's a different interesting point because it's a different price point than sort of thinking about a serology test or thinking about a PCR test. So can you talk about how you see -- cost of goods economics in terms of how you would do that? Because it's an interesting -- I mean it's a premium-priced asset -- assay, given what the information is, in my opinion.

Yes. Yes. So actually, let me talk about pricing in the context of what the product looks like. So I think the first cut is, do you need to look at the whole repertoire of T cell receptors and therefore, require a sequencing-based test? And so that's the first cut. And if you do, before we get to pricing, I think there's one advantage and something that might be overlooked, which is, remember, we've actually already developed a distributed product to look at the T cell receptor repertoire. This is our immunoSEQ RUO, or research use only, kit. The performance of this in terms of lab-to-lab concordance is really beautiful. So this thing works the same in every lab that we put it in, and we've proven this out. So what we would take advantage of if it needed to be a sequencing-based test is the emergency use authorization pathway by the FDA, and we would try to get a diagnostic label on our distributed product, whether it's a kit or a tech transfer in terms of reagents, to enable the LabCorps of the world. Ultimately, we're going to need to get this at scale and scale up the product, so that's Adaptive in our own lab. While we can do a lot, we're not going to be able to do the required amount of testing. Assuming that data is -- has the utility that we're hoping that it has, we're not going to be able to do that in our own lab. So we would go to the EUA pathway and get this as a distributed product, which, remember, I think it's going to -- this is going to have a significant amount of advantages as we look forward. Because, for example, and I won't -- I'm not going to take us in a Lyme tangent, but I'll just say, like, our Lyme diagnostic test and every other immunoSEQ Dx tests, it all comes from the same test with many test results. So -- and it's on the exact same platform. So if we have the diagnostic approved in the EUA and we've been able to educate the FDA in an expedited fashion, I think that would be, to your earlier question, one of the ways that -- the opportunities that are emerging from a business model perspective. So that's the first cut in terms of sequencing. Now in terms of addressing pricing there, it depends again on the strength of the data and the utility. Remember, this is going to be -- while you have now hundreds of serology and PCR-based tests, this will be the only test that looks at the T cell receptor response. And I -- I'm fortunate to be on a weekly call that has 2 former FDA commissioners, the CEOs of a couple of the major insurance carriers, policymakers, the CEOs of other diagnostic companies. It's about 20 of us on a call every week. And I think there is kind of the notion that tests are going to cap out at $100 a test right now because that's what's being offered for kind of high-throughput testing. Again, I think it's going to depend on what the value is of what you're providing. And by the way, I'm not suggesting -- 2 things. I'm not suggesting that you're going to get paid like a high-complexity molecular cancer diagnostic. But is there -- do I believe that there's room to have a decent margin profile from a product? I do. Meaning, if you look at our COGS rate, I think we can deliver this on a sequencing-based test at scale in the, call it, $125 to $150 range, again, at scale with the amount of tests that are going to need to be done, and that's with multiplexing. So the second point is, I don't think this is going to be our highest-margin product. Actually, I know this isn't going to be our highest-margin product, but I do think that there's going to be a reimbursement paradigm that supports a healthy margin profile. So that's number one. And secondly, we are also -- it depends -- again, I keep going back to this, but it really depends on what the data says. There might be a world in which the T cell receptor signature is confined to amount of kind of receptors that lends itself to a -- to other technologies that are -- have a different cost of goods and a different -- and an expedited turnaround time. And we're evaluating those in parallel with the generation of data.

Great. That was a ton of very useful information. So in the interest of time, so can we -- before we sort of talk about the therapeutic avenues, can we talk a little bit about clonoSEQ and where you are in that process? I thought your conversation -- your discussion yesterday on the earnings call about your LabCorp partnership with phlebotomy and blood draws and doing like that, I think that was really interesting. And then some news on the reimbursement front. So we can talk a little bit about clonoSEQ and sort of that pathway.

Yes, sure. So the news on the reimbursement front, which, again, we hadn't press released because we're being -- been extremely cautious with the submission into the FDA for CLL in blood, but Medicare did -- through the MolDX contractor program, did put out a policy giving -- enabling coverage for clonoSEQ in multiple myeloma, ALL and CLL in the blood. And so we are now able to be -- we are being reimbursed by Medicare for those in the blood. Now we haven't -- we're not yet marketing that until we get the FDA authorization clearance to be able to do that. But with corona, that has expedited, really, our thoughts around how we collect samples and also potentially the willingness of both the patient population who -- and the clinical community who are treating these patients. When a lot of these centers are -- as we know, are closed right now and even as they start to reopen, I think patients, in many cases, are hesitant to kind of rush back into cancer centers. So we're looking -- we just partnered with LabCorp to be able to have patients go into LabCorp clinics to collect blood and send it in for MRD testing. And as I just mentioned, kind of our first indication will be in CLL in the blood. And if you look at our predetermined -- or the milestones that we set about for the year, the second is we'll be submitting by the end of the year ALL in the blood, to be followed with -- we haven't specified a time line yet and somewhat data dependent by multiple myeloma in the blood following that. So again, as we look at kind of, like, not only the COVID world, but hopefully the post-COVID world or the kind of tempered-COVID world, we see kind of blood-based testing for residual disease as a growth opportunity for us in the future that, obviously, it's less invasive, that goes without saying. But the less invasive nature of that testing, we believe, will, hopefully, in the future, lead to more frequent testing on a per patient basis as well.

And I mean, obviously, there's been some volume declines in -- as people couldn't go in. Can you sort of talk about how you're sort of thinking about the pickup in the return in the market and when people start to come back, I mean, to do blood -- to get -- to use clonoSEQ just for follow-ups?

Yes. I mean what we saw and we mentioned on the call yesterday, it started in kind of early March. And then we saw kind of a peak, kind of average decline of 40% to 50% in usage. We saw -- I don't know if we can start calling it a trend yet, but early weeks in May, we started to -- saw -- we started to see a -- some bright spots in a pickup. But we think out of the return to volume and strength will be somewhere between -- hopefully, kind of barring a second wave in sometime kind of third to fourth quarter in terms of kind of pickup. The low point will certainly be -- as we outlined, the second quarter volumes will be kind of, we believe, the low point of volumes. I think first quarter, just to give a little bit more color, those numbers we reported, the last 2 -- I mentioned kind of earlier March, but the really last 2 weeks of March, we started to see more of a significant decline. But for that, we were -- we still put up a nice volume increase, and we probably would have done, it looks like, just having extended that line out, it's about 3,700 tests in the first quarter, obviously cut by the last couple of weeks of March. So really, we're kind of pleased with the trajectory on pace. And obviously, COVID put a -- now we're paused, and hopefully, we'll hit play again when we're able to, and that's when we see that picking back up in the third or fourth quarter.

Great. Let's move on to the drug development side of the business. And I think, first and foremost, let's talk about the Amgen partnership to try to find neutralizing antibodies and sort of like the opportunity there.

Yes, sure. So first, maybe a little bit of history. I started talking to Bob Bradway 5 years ago when this technology was developed. This is really the ability to pair together the chains of a B cell receptor, which ultimately secretes antibodies. We started talking about this in light of the Ebola, what we thought was going to potentially, and thank God it didn't, become more of a pandemic. So we kind of shelved our discussions there. And then as soon as we kind of recognized that this -- that COVID-19 was going to become a -- and becoming a pandemic, we picked up those conversations, and Bob and I kind of talked over a weekend and the teams got involved, and we quickly said, "Hey, we've got an obligation to deploy this technology to help solve this COVID crisis." And where we -- how that's broken down in terms of our respective capabilities is we're really good at the kind of high throughput screening and immunology and characterization. And obviously, Amgen is excellent also on the science side in immunology, but they're very, very strong at engineering, manufacturing and commercialization of antibodies. We -- yes, if you're taking a step back again, why we still think that COVID-19 is a great candidate for neutralizing antibody, it's a -- we believe to be a slowly mutating large RNA virus. So that lends itself to either a monoclonal antibody or a few antibodies that can potentially neutralize the virus without the virus being able to escape out from under because it mutates so quickly -- escape out from under the antibodies that you -- that we develop. And our strategy here -- and what we're able to do is be able to screen tens of thousands of these antibodies all at the same time and look for the best antibody or combination of antibodies. And the difference in that approach is we don't have to preselect kind of a priority. We don't have to preidentify a target. And I think some of the questions that, Derik, we were talking about after the earnings call and on a precall today, one of the questions of, hey, do these guys -- and I'm going to paraphrase this as, hey, are you late for the party here, right? And I think we clearly recognize we're not going to be first here. If you think about Regeneron and Eli Lilly and Vir, they're going to be first. But the difference is -- and by the way, we're fully rooting for anyone who's going to come up with a solution. And if they beat us to market, and it works on everyone, gosh, more power to them, and that's great for the world. But what I more likely suspect will happen is they might have an antibody that will work on a certain kind of patient population or a certain set of kind of -- within the disease course, if you will. What we're trying to do, instead of kind of having to preselect a target like the spike protein, we're letting the immune system tell us what targets to go after. And we're able to do that because of how we screen, and then we're able to pick the best candidates based on that. And so that -- after we do kind of this large screen, then we've got a series of assays and techniques where we look at kind of properties and can characterize them and get them -- get down to a certain preselected set of candidate neutralizing antibodies that then we can then kind of pass over to Amgen. Amgen is able to do live neutralization assays. We don't have a -- the BSL-3 capabilities and animal model capabilities and certain things that Amgen does. So we're focused on the screening and immunology, and then that's where the hand-off happens.

Great. And just sort of coming here. So I've got a couple of questions from the audience. Can you talk about potential economics for the LabCorp relationship? Does this -- how much are you paying them? Just sort of some characterization around your sort of interaction there.

We're not yet at liberty to discuss the economics of the LabCorp relationship. I think we might be able to do that on the next quarterly call. But no, I'm not going to talk about the economics right now of that.

Fair enough. And finally, you also have a very large partnership with Genentech developing T cell therapies. Can you give us a sort of a status update on what's going on with your Genetech relationship?

Yes, absolutely. And first thing I'll say is there's a lot of parallels, right? It's essentially what I just mentioned, we're doing with Amgen on the antibody side, we're doing with Genentech on the T cell receptor side where we're screening at the top of the funnel a lot of T cell receptors against targets and then we're characterizing them or we're looking at properties such as binding, killing and safety and getting them down the funnel and handing them over to Genentech to be used as targeting molecules for cell therapy in cancer. I would say it's going very, very well. We -- our time lines are on track, as I mentioned. And as known, we're looking at filing our first IND on what we call the shared product, which is T cell receptors against antigen targets that are shared between patients, by the end of this year. What I also mentioned is we just executed a lease where we're moving forward in parallel with Genentech making investments in the personalized product where we're developing a personalized cellular therapy for each cancer patient based on their immune response to their specific tumor. And that's where we've kind of made some significant investments on both sides. As of right now there's -- we -- everyone in our lab and their labs that are working on this are at work and continue to press forward, and our time lines are on track. Derik, did I lose you?

Yes, you did. I was on mute. My apologies. I got a couple of questions from people just asking about balance sheets and how stable your financials are, like that. I just think -- I mean you have plenty of cash, but I think people just wanted some clarity if you need to raise funds anytime soon.

I'll just take this as extremely well capitalized, strong balance sheet. We have over $650 million of cash on the balance sheet at the end of the quarter, or in that range. My CFO would know the exact amount. And have -- we've got multiple years of cash on hand. That being said, we would raise cash to be able to press -- if some of these things panned out, to be able to press in certain areas in terms of kind of investments in accretive opportunities where we thought additional cash would expedite our ability to kind of leverage our platform and growth opportunities.

And with that, we're out of time. Thanks, Chad. Appreciate the time, and good luck. And thank you, everyone, for listening. We appreciate your support, and have a great conference. Thanks, everyone. Bye.

Thank you, Derik. Appreciate it. Bye-bye.