Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Everyone, welcome to the 2022 Bank of America Healthcare Conference live from Las Vegas. I'm Derik De Bruin, the senior life sciences and diagnostics tools analyst here for Bank of America. And with us this morning is Adaptive Biotechnologies. Chad Robins, Chief Executive Officer, Co-Founder and Chairman, is here for the company. Chad, thanks for being here. Thanks for making the trip down from Seattle...

Thanks for having me.

To here. A little bit different -- when I was flying in on Sunday, my plane was delayed because there was a massive dust storm blowing through, so Seattle a little bit different than Las Vegas in that sense.

So look, a big-picture question to start. I know we only have 30 minutes to do this. But relative to a lot of the other diagnostic companies that I -- that we cover that are in the space, Adaptive's platform is vastly different than what a lot of the other companies do. So brief -- for the people in the audience, just like a brief synopsis is like how does the company -- how does the Adaptive platform differentiate from some of the other things that people are more traditionally thinking of, from the PCR-based technologies and other things? Just quick sales pitch on your platform.

Yes. Sure, Derik. So we, Adaptive, look specifically at quantifying the adaptive immune system, specifically T cells and B cells. And we can also determine the diseases that those immune system cells bind to. So we've got this wealth of information. And then we can essentially turn that information into products, into clinical products, both in diagnostics, which we'll talk about, and to discover new drugs.

Right. And are there other companies -- I guess that's the question asked a lot of by investors, like are there other companies that are sort of taking similar approaches to this? And I know there's been similar technologies that are starting to look at immune profiling, schedule. Is there anybody that's sort of like on -- nipping at your heels?

Yes. So in terms of competition, think of Adaptive as the trunk of the tree and we've got certain branches. There's competition in -- on certain of the branches, for example, and we'll talk about it in minimal residual disease, although not much in there for kind of research-based sequencing and profiling of the immune system. In trials for pharma, there's certain competition. There's -- but no one really puts together at throughput and scale the data and the information to be able to essentially develop kind of product after product after product in multiple arenas like Adaptive does.

Got it. So just sort of getting into more nuts and bolts, so you recently did a business restructuring and headcount reduction to streamline the business. I mean, you broke the business into two segments: the MRD business, Immune Medicine. Can you sort of elaborate on what sort of like drove the reorganization, R&D prioritization, commercial strategies? Just sort of give us a reason to why this is a better approach.

Yes. So from an internal perspective to drive the business, we split it into MRD and Immune Medicine for focus. We want the right leadership in the right place and to be able to allocate capital to those businesses based on the time horizons that products would come to market from those businesses. So if you talk about MRD, which again we've got a very differentiated position in hematologic malignancies, and MRD consists of two different opportunities that are synergistic. One is a clinical test delivered to a health care provider. And the second is MRD pharma. We're integrated into almost every clinical trial, so it's our MRD clonoSEQ to pharma partners. And then the second business is Immune Medicine. This is where we're mapping T cells to antigens or pieces of disease that are specific to that disease. And then we're leveraging that information to three different opportunities. One is called pharma services, the second is clinical diagnostics and the third is drug discovery. But it's that same underlying data sets of mapping T cells to antigens that leads to kind of multiple opportunities. The other added benefit from that is having a real kind of clarity and transparency to The Street and to say, "Okay, this is the MRD business. Here's what it consists of. Here's what the kind of revenue profile is for that business and the timelines associated with that business. And here's the Immune Medicine business." And correspondingly, we can provide that level of detail clarity the same. So I think there's a dual benefit. But first and foremost, it's how we're going to drive our business, set milestones, set very clear deliverables for each one of those businesses, which I think is -- we're already starting to see the benefits of it.

Great. And the -- when you sort of think about the cost savings that are sort of like this because obviously -- did you deemphasize some programs? Did you deemphasize some of the R&D that was going out with it or just reprioritized?

Yes. No, so we essentially -- I want to say, because I kind of saw this coming, we were certainly proactive in getting out ahead of this market downturn to the extent that anyone is totally ahead of it, which is we did a -- along with the realignment, we did a reduction in force back in March, looking at every line item and being very, very smart and looking at kind of what programs and what investments we'll make, have kind of a near-, medium- and long-term ROI, did a prioritization and then did kind of wind up focusing on those areas that we thought provided the best return on investment. There'll be a couple of examples of that as we go through different kind of products as to what we're emphasizing and what we're deemphasizing.

Got it. And the -- obviously, the market has not been kind to early-stage companies in the last few quarters. I think you ended the quarter with $500 million in cash and equivalents. Are you -- how long is that going to be able to sort of fund the operations and do that? Are you worried that you're going to need the cash anytime soon?

Yes. Let's talk about that and let's just get it on the table. It's been incredibly frustrating and painful kind of knowing what we have. But I think the name of the game in general is you have to survive to thrive. You have to be very, very smart about your cash. And within today's economic environment, kind of raising costs with a high cost of capital and diluting the company is not something that we're looking to do. We're looking at several different ways. I think it's a multi-point plan to be able to get to cash flow neutrality or profitability without having to dilute the company. Number one is executing on the business. right? And number two is, as I mentioned, like being very, very judicious and smart about your capital allocation and your cost base. And number three, looking at ways to bring in non-dilutive cash flow, either through partnerships or creative structures that are going to essentially bolster our cash position. But as you said, we are well fortified right now with $500 million in cash. We've got at least a couple of years of cash on hand. We're looking at ways that we can extend that. And with our kind of new CFO, Tycho Peterson, who's in the room, we're working on kind of the plan to be able to kind of bring in that out-year, if you will, to be able to get to profitability. But you've got to be in it to win it. And we absolutely are -- you've got to be making moves. And I don't think it's any one thing right now, but -- and we're doing it. We already started in March.

So turning back to the -- and we can actually begin talking about business, can you talk a little bit about the first quarter? I mean, in Q1, clonoSEQ test volumes are 45%, good delivery on -- in the quarter, on test quarter -- test volume in the quarter up 12%. Can you sort of talk about what you're sort of seeing in that market, penetration within that market? Like what are some of the drivers of the clonoSEQ business?

Yes, absolutely. So -- and thanks. Yes, first quarter was a good quarter, 45% year-over-year, 20% quarter-over-quarter growth in tests delivered. We did overall kind of last year, kind of a 48% growth. We certainly expect that growth to accelerate this year. How that growth is going to accelerate and we're going to hit the inflection, it's again a multi-point prong. One is continued penetration, both in new accounts and penetration within existing accounts with dedicated hematology specialists. It's moving and increasing from the blood -- sorry, bone marrow to blood-based testing, it's increasing both continued and guideline inclusion. Payer, bringing more payers on right now. We've got 240 million covered lives. And we're bringing up our ASPs. And also the expansion into a new indication of diffuse large B cell lymphoma. We submitted our tech assessment to MolDX. We expect to hear on that kind of later this year. So that opens up another kind of half of the market. So there's going to -- and we increased our sales force to 70 people kind of last November. That sales force, just at the field within the last few weeks, so we're expecting to be able to accelerate that growth from the 48% last year. In penetration, did you want to...

Yes. Let's talk about penetration in the marketplace. Yes, it's like you still are -- it's still not -- I think a number of investors have been surprised that, given that clonoSEQ is such a good test, FDA-cleared and it's got reimbursement, that the growth rate has not been stronger. And some of that is also is like have you -- what are still the COVID-related headwinds on the business?

Yes. A lot of it -- and there are some COVID-related headwinds in terms of account access. But I'm not going to put it on COVID. Let's take a step back. The business is growing nicely, but we are -- it goes by indications, we're about 12% penetrated in ALL, 5% in multiple myeloma and 1% in CLL of the indications that were kind of approved, reimbursed for. So these are very low penetration rates so far. But remember, our competition right now is kind of changing standard of care. So we're competing against how doctors have done things for the last 30 years. And MRD in general in the heme malignancy space, it really follows drug approvals. So as you've got a new class of drugs that have become more and more applications, they're working, you need better tools to be able to monitor them. So that followed in with Darzalex in multiple myeloma, now venetoclax in CLL. And we're well positioned to do it. And we do expect that we can -- we're going to be able to increase those penetration rates. And we're starting to see that, as of first quarter, we're going to -- we're starting to see that inflection in trajectory. And there's a lot of hand-to-hand combat going on out there right now.

I mean, why has there been so much resistance to moving away from like flow cytometry and like this? I mean, it's just like it's -- this is obviously a better test.

Yes, it's obviously a better test. Well, it's just integrated into -- there's two reasons. One is you're competing with a pathologist, right? So when pathology likes to do test kind of in-house, so now you've got the -- what's happening now is your heme/oncs are saying, "I don't care, Mr. Pathologist, like we know this test is better and Stanford and MD Anderson and Mount Sinai, everyone is using this." We need to use a better test, and they're starting to win that battle more and more. And the second is we've made significant investments in kind of workflow, so we've made it easier to be able to order that test. But we're -- as in general, in diagnostics, changing medical behavior is hard. But we've been doing that, and you're starting to see the dam starting to break in certain areas. And again, we made investments in the sales force, so we'll -- and it's indication-by-indication. And it's -- remember, MRD hasn't been done, right, so a lot of it's you're introducing a new test. When you say flow cytometry, that's an ALL. Remember, multiple myeloma a few years ago, they weren't testing MRD. They weren't testing MRD at all in CLL. And now as you move to non-Hodgkin's lymphoma, there's -- MRD isn't being done. You're talking about imaging and scan. So you're competing against technologies that doctors have been doing. Will it all shift over to MRD? A good portion of it will. It's just time. And that's why we're putting in all of the pieces to be able to shift the market. And we're starting to see it happen. And that's why I think we're at the beginning of a massive ramp.

Yes. I mean, for what it's worth, I mean, my -- our dog nanny in New York just had NHL recovery like this. And his physician absolutely -- absolutely did it. Because he had a relapse and diffuse large B cell coming with it. And so they automatically went to the Adaptive test. So you are getting people that are sort of like -- there is sort of like clear recognition for it. And it's like -- it's not -- wasn't even me prompting this like, "Oh, you should try this new test." It's like his doctor went out and was already recommending it that he should do it. So it's like that.

And by the way, and it's just starting to emerge in the non-Hodgkin's lymphoma category, which is the largest category of hematological malignancies at 15%. So that's a total untapped market. I think myeloma is a great case, right, where you're starting to see -- we are starting to see that kind of penetration rate go up at a clip that hadn't seen historically. And that's because again the first drug came out in kind of 2015. Now you've got great data from the MASTER trial. Well, one of the big questions is when can I go off-therapy? So when can a doctor take a patient off REVLIMID. And patient really wants a treatment holiday. And so what we have is data is showing now for -- and this is going out. It's a continuous trial. But after 15 months, if you're negative and negative, so MRD-negative, meaning you can't detect disease burden in the patient, then they're taking patients off REVLIMID. And very, very few patients have relapsed, meaning it's a very accurate measure of your disease burden. And so that's a dual benefit for the patient, but it's also a benefit for the payers, right, and extracting costs from the overall health care system.

And how soon would the whole portfolio be ported over to blood?

it's really again by indication-by-indication. So ALL right now, tests about 30% right now in ALL have converted over to the blood. And multiple myeloma is about, call it, 10% to 12%, and CLL, 87%, because it started as a blood-based test. We have this year -- so we've been kind of waiting on data from a Dana-Farber trial that's been kind of slower to emerge. It's really good for the patients because there's not enough events. But it's good to -- it's tough to -- if there's not enough events to be able to do the comparison. So we've identified two fantastic data sets, one from Mayo Clinic on blood versus marrow. And we hopefully should be able to present that data at ASH this year on that comparison. And doctors are just waiting. So that's one where ALL are just -- sorry, multiple myeloma is a disease of the bone marrow. And we shouldn't be comparing marrow -- we should be comparing our blood-based test to what they're doing in blood right now, which is an m-protein test. And that really is the fair comparison to be able to do. And we're actually much more sensitive in blood than flow is in bone marrow. So think about that, our test, more sensitive in blood than flow cytometry is in the bone marrow. So it's just a much more accurate and much more sensitive test.

So I think there's always -- you and I have had this conversation, it's a terminology question. I think when people -- we have historically used MRD for liquid tumors. But now everybody uses MRD for solids and stuff like this. And with that sense, we get a lot of questions on, "Well, but wait a minute, but Guardant and Natera, these companies are doing MRD tests." It's like not really, right? So -- but can you talk about the competitive landscape on the blood-based --I'm sorry, on the hematology cancers?

Yes, absolutely. And when I say not really, they actually are doing MRD tests, but they're just not doing MRD tests for hematologic malignancies. Adaptive is kind of clearly positioned as the market leader in MRD for heme. And that's -- there's multiple reasons for that. One is -- actually, let me take a step back and tell you what the test does. So whereas MRD in solid tumors are measuring something that's shed from the tumor into the blood, for -- in MRD, these hematologic malignancies are actually diseases of the immune receptor, of the immune system cell, and that one carries with it the receptor, which we can track. So we're actually measuring the cancer cells themselves, if you think about it that way. So after treatment, so we essentially have a diagnostic sample that says what is the kind of lymphoproliferative or what is the cancer itself. It makes up a good proportion of your -- all your cancer cells. And then a patient gets treatment, where myeloablation is trying to kill the cancer. And then we can simply go to that tracking clone as a numerator and say, "Okay, this is the amount of cancer cells versus all your other cells." So it's a very -- you're measuring the cancer cells themselves. So now why do we have such a strong competitive advantage in heme? Many reasons. One, the sensitivity and specificity of the test is like incredibly high, like 99.99%. Number two, we're integrated into almost every single pharma trial. If you're a company developing a hematological malignancy drug, you are using a clonoSEQ to incorporate into your clinical trial. And that is a huge competitive advantage. Number three, we have FDA approval in several indications. We've got massive payer coverage. We've got guideline inclusion. And we've got -- so there's probably 150 publications that are all saying, "This is the way to measure minimum residual disease testing." And where we went earlier and your kind of first question about kind of MRD, why are these businesses together? And I just mentioned pharma. So if you're a clinical investigator, you're on a pharma trial and you're treating patients, once you get that trial -- once that kind of trial reads out, you're going to use clonoSEQ as your clinical test to be able to treat patients. Similarly, pharma companies are saying, "Hey, doctors are using clonoSEQ as an endpoint, and we'll get to kind of the milestones and that whole profile." As an endpoint in a trial, you are literally looking at a measure of efficacy of a drug to say, "Hey, I can stop a trial earlier based on this kind of, I'll say, biomarker of MRD negativity." MRD -- trial reads out MRD negative, the drug can get approved, well, starting as a secondary endpoint and moving to a primary endpoint.

So you mentioned the milestones. It's like you're starting to see some coming through. I think you've said you've got a $330 million-ish potential milestone. How should we sort of think about those rolling through the...

Yes. No, it's a good question. But of the $330 million, those are milestones that are available to us, of which 168 active trials, which represents about half. Half of those are currently in process, meaning, the trial has started, and about half of those are yet to start. And then further, if you look at the breakdown of milestones, 1/3 of those relate to kind of secondary endpoints and 2/3 of those relate to primary endpoints. And what you're seeing, like on -- milestones are a little bit lumpy, and we can address this. But these are a real source of revenue that, on a quarterly basis, we're starting to see, "Oh, that one hit, that one hit." And this kind of profile -- and this is real money available to us, will we get the whole $30 million to $330 million? That means that every trial reads out successfully. On the other hand, we continue to replenish this call for milestones as we draw them down. Because on a quarterly basis, we're signing new pharma deals that have milestones associated with them with their trials. So that's really how kind of -- if you think about the milestone profile. And by the way, this is an exercise that Tycho and Karina and I are working on to be able to kind of lay out the milestones that are associated with each trial and provide more clarity. We're never going to be perfect on this one, right, because it's a little bit out of our control as to when the FDA is going to approve certain drugs. But the fact is these are real dollars that are associated. And we get the sequencing cost of the trial. It's not -- just to clarify, in the MRD pharma business, sometimes you get an upfront payment for a pan-portfolio deal, but you get a sequencing cost that's significantly higher than the ASP of a clinical test because you're providing GMP, GLP and GCP-related testing in your lab on a per sample basis and then you get the milestones. So that's what that kind of overall profile of the business looks like.

So let's move on to the Immune Medicine business and talk through everything. T-Detect COVID, I mean, is that still a product that is generating revenues? Is that still there?

It's generating very low revenue at this point. But it had -- it served a very distinct purpose. But this is one where you kind of asked earlier, what are you deprioritizing? We're looking at deploying our capital to the highest return on invested -- the highest ROI opportunities. And this is one that as the pandemic can move more to an endemic state, you're seeing kind of numbers going to wind up kind of falling off. And therefore, we're not making the same level of investments in supporting it. That being said, if certain things change with the FDA, I think, and we're able to do certain things under the EUA, I think that could be an opportunity. But until that happens, we're being kind of very judicious with our spend with respect to kind of the COVID opportunity. In particular, we're working on a correlate of protection study with kind of a major pharma to show that your level of T cell response correlates to how protected you are against various variants and new variants.

And so let's quick round robin, Lyme, GI, autoimmune. You've got these in your pipeline. What sort of like the status of each of these?

Yes. So Lyme, we're making available this Lyme season actually very soon. And Lyme is an interesting one in that it's really providing the foundational setup for all of the other tests that we're going to launch under the T-Detect franchise. So it means that two things. One, you had to get kind of the entire system and ordering setup. But two, from a CLIA, how you validate tests and be able to use real-world data and evidence to have kind of a self-improving or improving diagnostic based on that data combined with clinical validation studies. So we're planning to launch to -- really consumer-directed, physician-ordered tests first with a very high level of specificity and a threshold level of sensitivity that meets a minimal viable product and then improve that sensitivity over time and then go for reimbursement when you've got that kind of full package. So essentially, you think about kind of the consumer-directed test as not as a burn offset until you get reimbursement but also a way to kind of improve the product profile. So that's one of the main reasons for Lyme. In particular, Lyme, and I'll just spend 2 more minutes on it and then go to your other disease status, we're launching in the acute setting with the hope to kind of move to the chronic setting, which is a much bigger market, I think, as higher utility of Lyme-based tests. But just on the metrics, I mean, these are the 99% specific tests that's about two times as sensitive as the highest level of testing, which is standard two-tiered serology testing in the marketplace right now. And so that is the power of T cells. T cells are specific, right? And so that's the kind of the beauty of a T-Detect test. And then we're focusing our efforts in two areas. One is -- in the autoimmune space. One is in GI and the other is in multiple sclerosis. And we're running clinical validation studies that will be initiated this year in those two indications. One thing to remember here though, Derik, this is very, very important. That underlying data set of mapping T cells to antigens has a clinical diagnostic that has a certain time frame associated with it. But in the near-term time frame, we're going to be able to leverage that data for pharma partnerships. They come in two different forms. One is in terms of kind of sequencing, drug response and monitoring. And the second is in discovering new targets. And those are things that we're working on that, I think, have a potential to provide upside for the company.

So you mentioned the drug group partnerships. I mean, it's -- I think it's fairly safe to say that people are not giving you any value for the Genentech relationship if you sort of look at like where the stock price is right now, and it's -- I think there's been a little bit of an overhang on the stock on that one. Can you just sort of update on that? And should we be worried about some of the clinical development delays and the future collaboration with this? I mean, my sort of answer to investors who have asked this is like, "Well, drug discovery is hard and it takes time. So you can't -- I mean, you can't rush nature."

Yes. Look, it's -- we're getting negative value for it right now if you look at it. But that -- I was just on the phone yesterday with Ira Mellman, head of the program. Genentech is making massive investments into this program as are we. And when you say -- there was a timing delay but not a program issue, right? So they -- out of abundance of caution, they moved away from the first target because of a potential safety-related issue that wasn't even validated. They're just saying, "Hey, for our first one, let's be d*** sure here. So we moved on, and they picked another target. They picked it last quarter. And they're picking two more this year or they're evaluating two more data packages that are being presented to them this year. And then look, when we get our first milestone based on IND acceptance, they're marching forward. They're doing their final kind of evaluations and they're going to be hopefully filing an IND. We can't control the commercialization path, so I understand -- like first of all, I understand it's frustrating. It's incredibly frustrating to us to be in a position where we can't control the timing and/or really the dissemination of information, right? That's hard part. But let's take a step back, we're trying to cure cancer in a new way. We're trying to use T cells to cure cancer, right? And you're right, the biology is hard. Drug discovery is hard. Timing is hard. But this is a massive opportunity. And it's in two different forms. One is in kind of a shared product, which is a product in its own right, but it's also -- if you consider kind of the training wheels for a truly personalized T cell therapy, which is what we're -- we're excited about both, but there's incredible amount of excitement and really great data that's emerging, showing that within a specific patient, we can look at the adaptive immune response in T cells that are responding to that patient's tumor and then kind of package those up, give them to Genentech, grow them up and put them back into a patient. So this has an opportunity to have really a beautiful safety profile and a great efficacy profile. And what I think is also not well understood, that's happening in parallel. These aren't sequential, whereas we're going to do the shared product and then later on down the road, we're going to launch kind of a private product. So I would just say it's going really well. And that will be a major catalyst and inflection point. But it's going to take a little bit of time, but it's not that far out.

I would normally close by asking what's misunderstood about the company. But I think you just sort of -- I think we just sort of hit on these points on this. I think I'll ask the question as like if you want to judge the success of Adaptive over the next 12 to 18 months and if you want to look at value creation, it's like what are the key milestones? What are the key catalysts? It's like what -- what should we hold your feet to the fire to? It's like, okay, here's the -- here is what we need to see to get the stock moving.

Yes. So first, we've got to execute on the base business in MRD and, to your point, continue to increase penetration and show the growth from a clinical test perspective in HCPs ordering clonoSEQ in the clinic. That's number one. Number two is in the immune medicine business, I think you need to be able to kind of track the partnerships and deals that we do this -- that we say, "Hey, we're going to be able to leverage T-cell antigen mapping to create monetization opportunities. We just did this with Janssen and with the RSV deal. And there's kind of more to come on that. So if we can prove that out as another revenue potential emanating from kind of that same underlying data set, I think that's going to be incredibly helpful to the company. And then the third, we've got to launch Lyme in the T-Detect setting because that's what we said we're going to do. And then fourth, Genentech. And again, I think that, look over a 12-month period, we should be in a very different spot with respect to that programming. And when that's -- when there's more visibility into that, it's going to be -- right now, like I don't even know if it's being priced as an option, but it's a major call option on the stock that -- when that starts to have value, it will be -- I think we'll start to inflect. And at the end of the day, we're going to heads down, operate, execute and control what we can control and have an awesome team together. And we're going to be there.

And with that, we're out of time. Chad, thank you for being here. Thanks, everybody, for being here. Be safe, have a good conference, everyone.

Thanks, everybody. Appreciate it.