Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

[indiscernible] Healthcare Conference. I'm Tejas Savant and i cover the life science tools and diagnostics sector here at Morgan Stanley. Delighted to have Adaptive join us today. And representing the company is Chad Robins, CEO. Welcome, Chad. Before we get started, just a quick safe harbor. Please see Morgan Stanley research disclosure website at www.morganstanley.com/researchclosures. If you have any questions, please reach out to your sales rep.

So with that, Chad, maybe just to set the stage. Can you give us a quick overview of what you're most proud about in terms of Adaptive's achievements year-to-date? And what are the most important strategic priorities you have penciled in heading into '22?

Sure. Happy to, Tejas. Thank you so much to you and the Morgan Stanley team for having Adaptive and me back on. Really appreciate it. Happy to walk through kind of our achievements year-to-date and set the stage. I'm actually proud of a lot of things that we've accomplished this year. And I'm also very excited about what's ahead of us. First and foremost, if you look at our COVID efforts to combat the pandemic, it's not only been a great proof of our platform, but we also have helped so many researchers vaccine developers and patients in a lot of different ways. And if we just walk through those kind of one by one, based on the mapping work that we're doing with Microsoft, we launched a research product called immunoSEQ T-MAP COVID in 2020. And this year, we generated a ton of data from our partners at AstraZeneca and J&J to really understand their -- the COVID vaccine response to variants. And these are published in key journals that demonstrate the T cell responses contribute to protection from COVID-19 even in the presence of lower antibody response. In addition, I think we recently announced that we started to deal with Moderna to use T-MAP COVID in measuring their T cell response to their second generation of COVID vaccine and their Zika vaccine. So that's really on the research side. And then as you take that forward to the diagnostics side, we achieved a milestone in really our marquee franchise, our T-Detect franchise, with the launch and emergency use authorization of T-Detect COVID. And remember, this is the first T cell-based test that's validated by the FDA. And what I really did is it enabled us to educate the FDA about the power of using T cells and to really inform them about our underlying technology that makes up the T-Detect franchise. And we can use all this to improve our models and techniques and build awareness with our HCPs and our consumers. And lastly, we signed an agreement -- well, not lastly, but lastly is with respect to kind of using COVID data, we've signed on an agreement with Vaccibody's to use the information that we development for the design and development of a next generation of a T cell-based SARS CoV-2 vaccine, which we can go in a little bit more later. But the one thing that I want to kind of hammer home is that the achievements that I just mentioned on our COVID efforts, is really a perfect example of our ability to unlock multiple commercial opportunities from the same underlying immune receptor data set. It's the same data that we generate by characterizing the immune response to a particular disease that we can then use to generate value and really revenue streams across our product offerings, including research, diagnostics and drug discovery. And so that's really kind of using COVID. And then just a couple of other kind of milestones this year, we extended that immunoSEQ T-MAPPING opportunity from COVID. We extended that to cancer with our partnership with AstraZeneca to map T cell receptors in their portfolio of cancer medicine. We signed several new MRD collaborations with Pfizer and Janssen. And we've seen -- what we had kind of these milestones on our balance sheet, we're seeing those start to materialize from the MRD partnerships. And then kind of finally, if we look at our efforts in furthering the T-Detect franchise, it -- extending to autoimmune disorders has been a critical step for us, and we confirmed signal in a certain type of Crohn's disease and distinct from ulcerative colitis, we found early signal in multiple sclerosis. So I think as you can see, there's a ton of kind of many exciting things, which we'll -- I'm sure we'll go into more details but I'll stop there because that was a long intro on what we're excited about.

Yes, lots to unpack there. Maybe we'll start with the double-digit increase sequentially you saw on the clonoSEQ side in community accounts, Chad. Can you describe some of your efforts there to drive that growth? And what proportion of ALL, multiple myeloma and CLL get treated in the community channel today?

Sorry, can you -- I missed that last...

Well, the question was just around the double-digit sequential increase in clonoSEQ in the community channel that you spoke about and just some of your efforts there. And what fraction of the cases in ALL, MM and CLL are treated in the community setting today?

Yes, sure. So in the second quarter, 40% of the CLL business came out of the community setting. This is a much higher proportion than we see that's coming from the community setting for multiple myeloma and ALL and it's also a pretty notable increase versus Q1. However, we are watching the dynamics pretty carefully in the community segment. There -- it may be disproportionately affected by COVID resurgences. Our community practices tend to serve a larger proportion of patients from the nonmetropolitan areas with lower vaccination rates. Also of note, CLL is being treated more heavily in the community and the guidelines are to kind of stay at home unless treatment is absolutely necessary. But based on the data available to us and kind of our knowledge of the market, multiple myeloma and CLL are more likely to be managed in the community, whereas ALL, especially pediatric ALL, is more likely to be managed in academic institutions. If we look at it -- we estimate that the mix is 60-40 community versus academic for multiple myeloma and CLL. And then we actually reversed that where it's 40-60, 40 in the community and 60 in academic for ALL, with most ALL patients in the community being adult and not pediatric patients. So our -- if you talk about kind of the growth, our efforts to drive growth are really centered on our partnerships with national strategic accounts. These are the oncology stakeholder groups, such as the ACCC, which is the Association of Community Cancer Centers, the COA, the Community Oncology Alliance. Also group purchasing organizations like ION, large community practices networks like AON or U.S. Oncology, national health care quality organizations and companies providing community oncology oriented via the EMR systems and integrated kind of patient management tools. So hopefully, that kind of gets to where we're at.

Yes, absolutely. And on your point on COVID sort of impacting the community channel a little bit more, obviously, you mentioned on the last earnings call that you expect volumes are unlikely to double this year on the clonoSEQ front. Do you think that's captured in what you've seen since? Or are you incrementally more concerned about the trajectory given the resurgence here?

No. I think our guidance captures the researches that we talked about. I mean I think it's the reality that the Delta variant is a concern for us. There's still certainly a lot of uncertainties around it. I mean, as I mentioned, our rep access is definitely variable and more restricted in certain geographic locations and being particularly impacted in the West, Northeast, but also in selected states such as Michigan. If you kind of -- if you follow the trend, we're seeing some of the same issues that we observed at the start of the pandemic, and then again in Q1. And then we came out and we saw actually a bolus of orders kind of sitting on the sideline come through. And then when the Delta variant came back and rep access was restricted kind of -- it's really kind of an inverse -- somewhat of an inverse relationship. But we do believe that we've captured -- really captured the sentiment in our latest guidance. I do have to say, if we look at the MRD business as the clinical test volume business, plus MRD pharma, and that business continues to really do well as evidenced by not only by taking down kind of some of the milestones, but we're really replenishing those milestones with new deals that we continue to sign as really the test of choice and if you're doing a trial where MRD is being incorporated in some way into the trial.

Got it. Have you sort of quantified like what that sort of backlog for clonoSEQ RUO looks like? I mean, obviously, you took down that $7 million milestone as you noted. But beyond that, I mean, the breadth of the biopharma traction, any color you can share there?

Yes, the $330 million, that's what it is. I think we -- and you can kind of do the math. We don't -- we're not -- to extrapolate, I think all the way had come down to $300 million or a little south of $300 million [indiscernible] down, and now we're back at $330 million. So this -- these are real dollars and they'll keep replenishing. And I think as we're noting, a lot of these dollars are conditioned on multiple myeloma being an endpoint in trials. And that we do believe that's going to happen as -- I mean, I can't give you a specific time line, but the writings on the wall that we believe that's going to happen based on everything that's going on behind the scenes, not just by us, but a lot of white papers and KOLs pushing for MRD as an endpoint in myeloma trials and the pharma companies. Frankly, they've got the most to gain.

Got it. Switching to T-Detect. I mean, obviously, we've had sort of case counts going higher here. Despite the advantages of a T cell-based approach, the workhorse tests are still sort of rapid antigen with potentially a reflex to PCR, that seems to be the way the world is settling down in terms of the testing protocol of choice. How should we be thinking about sort of T-Detect volumes shaping up in the year ahead? And what do your turnaround times look like today for the test?

Yes. Are you -- just to make sure that we're on the same page, Tejas, you're specifically talking about T-Detect COVID, correct?

Correct. Yes.

Yes, So -- a couple of comments on it. We are seeing an increase in our T-Detect COVID testing volume. It is a 5-day turnaround time for the test. It is sequencing based. So it is a more expensive test. That being said, right now, it's a more accurate measure if you've had the disease. However, T-Detect COVID can do quite a bit more, and we're in discussions with the agencies about how it can do more and how it can be deployed, not just with the agency FDA, but we're also in discussion with the market access community, the payer community, in particular, in Medicare to determine if we can be paid a healthy price for the test that supports a nice margin profile. So I think, obviously, there's a lot of questions out there right now that I'm sure you have, I have, which is how long do vaccines last? Should you get a booster? When do they wear off? When do you need a next booster? We believe that T cells ultimately will be able to answer these questions. We're running studies around this with ourselves and with pharma companies to hopefully be able to answer these major questions of correlative protection. And then we will bring that -- if we have the data that makes sense, we'll bring that kind of back to the agency to talk about how do we expand and extend the label that it has kind of utility, given the fact that -- you're absolutely right, I mean this is a more expensive test. It's a longer turnaround test. However, it's also a test that we believe has the ability to -- potential ability to provide more information than an antibody serology test.

Do you think there's an angle here, Chad, in terms of the neutralizing antibody test being used as a proxy for measuring vaccine response just because they are quicker, they are cheaper? And frankly, I mean, they advocate for more frequent booster shots versus perhaps what something like T-Detect COVID might, say around long-term capability of the immune system to respond.

Yes. I mean reality is there's definitely an angle because people are already using it for that, right? I mean people are -- older folks, immunocompromised folks are using antibody levels to determine specifically that question, okay? Do I need a booster or what do my antibody shots look like, in light of having received a booster because we know that there have been boosters already given either in trial or off-label so far. So certainly being used already. The question, ultimately, you're asking kind of the business question is, hey, will this ultimately, because it's cheaper, because it's a faster turnaround time and because it has some proxy value and benefit, will it be used and will be the test of choice? And the answer is yes. But the -- what I'm trying to get at is from a scientific standpoint, does it provide the entire answer or the best answer. And we don't think so. We're doing the work. And based on the work we've seen. We think that T cells ultimately will provide the best answer. And there will be some relatively significant amount of people who are willing to get kind of the better test and wait for the turnaround time and pay more for it even if it's out of pocket, if we can provide that information. We're convinced of that, and we're already seeing that based on the tests that we're providing just based on your previous status of whether you've had the disease or not.

Got it. I want to turn to the pipeline for T-Detect because in a sense, I mean, COVID is just the beachhead indication for you guys that just came about serendipitously. But as you think about Lyme, and you've outlined a couple of times, the TAM and the pricing, is that still consistent? And should we be thinking of a ramp more in '22, given that you launched only around year-end? And then as you think about the other set of indications, I mean, you've talked about potentially a GI panel, can you describe sort of how exactly you plan to position that panel and what visibility you have in terms of launch time lines there?

Yes, yes. So let me -- I'll cover Lyme first. I'll give a little history of where we are in terms of the science, and then we can talk about timelines and pricing, and then we can transition into IBD. So the ImmuneSENSE Lyme study, just so everyone is on the same page, this is a clinical validation that we started last year. The study population is 990 individuals. It's really -- it's enrolling really well. We're on track to complete it this year, including, if you remember last year that those 60 patients with the confirmed rash cohort, we were able to get that this year, and we're going to -- As we also said, we're going to be able to kind of roll out that data and communicate in the appropriate time and forum once it's all aggregated and written up. And more specifically the objective of the study is to evaluate the specificity and the sensitivity of T-Detect Lyme relative to [ STTP ] which is a standard 2-tier serology-based testing. The reason we think that there is a market for this is that the current standard of care in serology, it's pretty poor. There's a high false negative rate of 60% to 70% in the acute Lyme setting. And also, if you look at kind of the patient population, the long-term effect of underdiagnosing or under -- or not treating Lyme, it's really bad for patients and it winds up having this -- a pretty severe burden of cost on the health care system. So to your answer -- to your question kind of regarding kind of time lines, assuming everything kind of continues to check out as expected in terms of the data, the goal is to make T-Detect Lyme the test available in our CLIA lab around year-end, and then have really the commercial readiness in place for next Lyme season. Lyme season is not really over the winter. So we're not expecting to see a significant ramp in the beginning of the winter season, but we do anticipate more of an uptick during Lyme season. But also keep in mind that with any diagnostic, a full product launch with reimbursement is going to take some time. It's kind of this chicken or egg thing that's necessary to make the test available to demonstrate the clinical utility, the usage of the test. At the same time, we're trying to kind of finalize our pricing, which is really expected to be around the $500 mark is really where our discussions with payers are lining up. And if we look at it as where we had kind of T-Detect COVID and then T-Detect Lyme, it's really this -- we're kind of building up -- this is the next stepping stone and it's the second proof to the T-Detect platform. It's going to really continue to pave the way and accelerate for the future indications, which I think are going to have a much more meaningful revenue contribution. Lyme may be more of a niche market, but we do think there is a real market for Lyme, especially in certain kind of selected geographies. But what -- where we're really getting excited from a revenue contribution standpoint is kind of transitioning into this differential diagnosis concept in autoimmune disorders, which you mentioned. And this is really the -- this is the key for Adaptive's future. And going back to the data -- one data set with multiple opportunities, it's key across all of our business areas. And there's, I would say, a big focus on autoimmune. So I can pause there or I can go into the IBD and MS and different things that we're working on.

I mean, fair to say that you would prioritize the GI panel over MS? Is that fair characterization?

Tejas, not necessarily. I mean, right now, we're looking at both of them. And it's kind of somewhat of a horse race based on a variety of different factors. I mean, it's based on the data that's continuing to emerge. It's based on our work with the clinical community and our advisory boards on exactly what the use case is for the assay. When, where and how in terms of how it's going to be used first, how it's going to be used in terms of a land and expand strategy. It's predicated on our discussions with payers, really the market access community, to understand where pricing would be. Frankly, we intend -- knock on wood, if the data is there and continues to emerge how we want it to -- how we think it should emerge, we intend to launch both of them. And really, it's a matter of all those different factors that come in to take on which will be first, what's the appetite by the -- the -- I'll give you a couple more, like, if you can get breakthrough designation by the FDA, and we want to go through that channel, that may be a factor in terms of kind of what goes forward. We're definitely moving both of those forward at the same time.

Got it. And are your COGS across most of these indications in the same sort of ballpark and pricing is more driven by sort of what's the status quo that you guys are looking to displace, is that the right framework to think about?

Well, the framework to think about, Tejas, is our COGS are exactly the same. And not only are they exactly the same. They're fixed. It's -- remember, it's that one test that can give you -- if we've mapped MS and if we've mapped Crohn's, if we've mapped COVID, we -- that one sample is going to give you the -- your repertoire, your immune -- your T cells see all of that at the same time. So -- and we're learning how to read that. So our -- the idea is these are software modules that you layer on top, so that your -- actually, your margin profile as you offer more tests, becomes -- and you're right, and you can potentially charge on the revenue side based on what you're looking at with a fixed set of COGS. And that's, I think -- that's what we're most excited about in terms of the long-term vision of this product. It is to say that, hey, we can diagnose many diseases all from the same sample by reading what your T cells are naturally seeing.

Got it. Makes sense. Switching gears to immunoSEQ T-MAP and RUO traction, Chad, I mean, just any quick updates on academic lab activity in that business? And then you've highlighted sort of CRO customer traction as an important driver there. How has that trended over the last few months?

Yes. So if you look at kind of the academic -- I mean, let's just take in general, the Delta variant, right, there's some kind of headwind -- puts and takes or headwinds and tailwinds, however you want to say it. On the headwind side, the academic lab activity, there's some folks that aren't going back in and doing as much research. But on the flip side, a lot of the research being done is on the virus and on the immune response to the virus. So that's a tailwind for us. And also on the other side, the vaccine manufacturers are kind of more interested than ever. If you look at kind of more extended version of immunoSEQ T-MAP, the immunoSEQ RUO business, they're really more interested than ever in understanding the immune response to the vaccine. So if you -- all the puts and takes that we're kind of taking into consideration, they're included in our -- in the updated revenue guidance we provided last quarter. We'll continue to monitor, but I wouldn't say there's anything different from what we've already contemplated and released in our statements from last quarter. But we're in a business having kind of a true platform business and the fact that we're working on COVID in many factors. Even though the clonoSEQ business in some areas and certain -- on the academic research are facing some tailwinds -- or headwinds, we're also getting tailwinds that are kind of offsetting in certain areas as well.

Got it. And then on the collaborations, Chad, with [ AZ ] across our oncology portfolio and you're working on COVID with J&J, and then Moderna as well on Zika on COVID, how should we be looking for sort of, I guess, guideposts of progress or success externally?

Well, through a couple of different areas. One is through kind of publication. And the second through -- is through expanded deals with these companies, both in terms of what they're already doing, but also expanding into other areas. One great example and then coming back to it is the idea of using kind of one data set for multiple opportunities across kind of research, diagnostics and drug discovery. One area to look out for that we're certainly excited about is that what we talked about in terms of our autoimmune data and IBD MS, take that, that we're developing a T-Detect test out of -- if you think about that in terms of using that for pharma in the research business for patient stratification to figure out which patients should be on which trial or to more accurately get to an enriched population in terms of kind of therapy selection for a trial, that was a big area for us on the one side of the research business or partnered with pharma. And on the other side, kind of the other end of that goalpost, as you put it, is there a target discovery opportunity. Are we -- from the information where the T cells are seeing targets, are we discovering those targets that can be used therapeutically, either in the context of a design of a vaccine or in the context of a therapeutic as a target to potentially block. So these are things that we're incredibly excited about that really, again, we're used -- somewhat -- some of if you think about kind of COVID as a model, we're extending that, and those are conversations that we're really excited about.

Got it. Two-parter on Genentech. How have your conversations been with them more recently after that shared antigen failure that they had disclosed earlier in the year? And secondly, I mean they recently announced a deal with Adaptimmune for cell therapy. Can you help us understand how this impacts your work with them and why you think this is a positive for Adaptive?

Yes. I'm going to flip the answers to your questions to answer the second one first on Adaptimmune because I'm really -- im actually really happy you asked about it because we're very excited about the collaboration between Genentech and Adaptimmune. It's the very -- what it reflects is the fact that Genentech is increasing its investment and commitment to the success of the overall cell therapy program. We also know the Adaptimmune team, and we're -- we think highly of them. But if you look at it what it is, they're -- Genentech is investing in really a specific cellular manufacturing capability called the iPSCs, which are induced pluripotent stem cells. And what iPSCs provide is -- think of it as a master cell bank approach to develop allogeneic or what you call kind of off-the-shelf cell therapies. And what this does -- it gives you the potential to improve gene editing of cells, you can reduce variability and really increase the flexibility of manufacturing. So this is really a more scalable, faster and cost-effective delivery of Adaptive, our shared and private TCRs for each patient. And we think it's going to potentially help accelerate the success of TCR-based cell therapy programs at Genentech. So these are totally complementary. And for -- you may or may not know, I mean, Adaptimmune has its own TCR-based program. That was not specifically excluded, it's not included as part of the deal. So Genentech is really doubling down on their commitment to cell therapy program, and at the same time saying, hey, we're doubling down on essentially Adaptive's TCRs because we're using iPSCs potentially and other things you're looking at to deliver essentially the payload of Adaptive's TCRs. So this is something that's totally complementary and it's great to see that Genentech is doubling down. And really -- I mean, it goes now, if we flip that now to your first question is, are they excited about -- based on, I would say, the delay or the moving on from the first shared program, this is one area, one proof point to say, hey, these guys are -- Genentech is moving fast and putting their dollars behind cell therapy and things are moving very well. We've had a lot of meetings with them. There's a ton of excitement about what we can do together.

Got it. One quick question on the financials. I mean, you ended the second quarter with about $700 million in cash. As you think about key investment priorities for you heading into '22, what are the areas you're looking at?

Yes. Well, we're increasing our investment in product development and commercialization. We view really 3 primary areas of investment as investing behind the commercialization of our current brands for clonoSEQ and T-Detect and that includes the launch of the later-stage indications of COVID and how we potentially may extend COVID and in Lyme. We're doubling down in our antigen MAP labs to accelerate signal generation validation. So we've talked about IVD, we've talked about MS, but we're working on many other disease states in parallel and making those investments into not only the wet labs and the chemistry, but the algorithms, our work that we're doing with Microsoft in the pipeline, we're just kind of continuing to make those investments to accelerate how we generate signals. And then drug discovery activities are areas in where we continue to kind of press on the gas. We haven't -- We spend a lot of time on why and we did a Vaccibody deal and why that's important, but there's areas in drug discovery in general which we continue to look at that we think our technology is applicable to. We talked about the autoimmune as well and leveraging that data to -- for drug discovery and autoimmune as well. Also from a logistical standpoint, we recently moved into our new headquarters building, which is awesome. It's been an investment as well. It's going to house our new molecular lab. And what we're putting in this automation that's going to allow us to really scale rapidly as we advance into our development and commercialization.

Got it.

And then from a -- just from an -- I'll stage the question like from M&A. We're always keeping our options open, and looking. We've got a really structured corporate development activity group that's looking at opportunities out there. And if there's a path to accelerate that makes strategic and economic sense, we would look at areas to tuck-in technologies, people, commercial pathways, et cetera.

Got it. Just to wrap up, Chad, I mean, one of the questions we always get on Adaptive is that you have this highly differentiated platform, you alluded to that as well, because of the versatility of the platform and the myriad use cases that it can enable, in a sense, sometimes it can become sort of a victim of its own success because there's a lot to focus on. There's a lot going on at any given time. You recently hired Nitin Sood from Guardant as Chief Commercial Officer. But can you just peel back the layers of the onion a little bit in terms of highlighting for us, what have you done to sharpen Adaptive's execution focus as you head into '22?

Yes. It's a great question. And thanks for kind of pointing that out. We continue to bring talent on board and structure and design the company and organization so that we can kind of optimize the benefits of the platform and that we can share -- one of the things that we're really focused on is kind of how we share data and how we develop opportunities across the different groups and franchises. So for example, when we talked about IBD as a potential diagnostic for T-Detect IBD, as a differential diagnostic first patient stratification in clinical trials for our pharma team and then potentially as a drug discovery opportunity for our corporate development team. How bringing together the parts of the organization that were responsible for co-lending, making sense of and then essentially exploiting those data sets for different revenue opportunities is something that's bringing that vision to life in a way that makes sense from an org design and an execution standpoint where we're continuing to not only on a front-end invest in generating that signal faster. But then once you get that data, okay, what are the models to be able to quickly kind of turn on? And what are the models and/or relationships that you have that we can kind of turn on to be able to plug those into kind of revenue opportunities? And that's one of the key focal points and one of the things that Nitin Sood is going to bring together for us or help bring together and accelerate for us.

Got it. This was a fantastic chat. So thanks so much for taking the time this morning. We appreciate it, and I hope you enjoy the rest of the conference.

Absolutely, Tejas, great to see you, and thanks for having us. Appreciate it.