Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good afternoon. My name is Brian Weinstein. I'm the Group Head of Life Sciences here at William Blair. I'm responsible for coverage of Adaptive. I also cover broadly life science tools and diagnostics. My Compliance Officer, Mr. Michael Besenjak, who's birthday is this week, please wish him a happy birthday, he's told me to tell you that to go -- you should go to our website at williamblair.com for a complete list of disclosures or conflicts. Logistically, management presentation followed by a brief Q&A between me and the management team together about 30 minutes. Following this, we will do a breakout upstairs in the Richardson Room. That will be a fireside chat. And obviously, we would welcome your questions at that time. With that, let's jump in today. We are fortunate to have Chad Robins, fellow Chicagoan, fellow North sider, Central Suburban League guy as well and a fellow pickleball player, we got a lot in common, the company's CEO and Co-Founder and Chairman with us today. Also with us for those who don't know, Tycho, Tycho Peterson just joined the company as CFO and he's here as well. So welcome to our conference. So it's good to have you here. I'll turn it over to you, Chad.

Thank you, Brian, and thank you to William Blair for hosting us. I appreciate it. And I know there's a lot of folks new to the story. So I'm looking forward to telling you about Adaptive Biotechnologies. I started Adaptive with my brother in 2009 with the simple premise that if we could learn how to read and translate the genomics of the adaptive immune system, that we could create clinical products that essentially mirror how our immune system naturally detects and treats disease. See, it all starts with the adaptive immune system, and that's what Adaptive does. Your adaptive immune system does 2 things. It detects disease and it treats disease. And it does this through these specialized cells of the immune system called T cells and B cells, who -- they're responsible for recognizing disease. And once they recognize disease, they spring into action and then go and kill the disease. So essentially, if we could learn how to read how they recognize disease, we could create diagnostics. Similarly, if we can characterize how they go and spring into action and treat disease, then we can kind of create these natural therapeutics based on the immune system. And so think of it this way is that these T cells and B cells, we think of them as the source code of our platform. And our platform does 4 things: we sequence, we map, we pair and then we characterize immune receptors to create these broad applications across many disease indications of cancer, autoimmune disorders, infectious diseases because the adaptive immune system essentially applies to almost every single disease that we come into contact with. And so we've created these unique capabilities with over kind of 380 patents. We've got unbelievable computational biology expertise, coupled with our partners for machine learning from Microsoft. We've got a partnership in cell therapy in cancer, which we'll talk about with Genentech. And we have this growing immunomics database that allows us to more rapidly assess the information and create these clinical products that we'll talk about today. So we've broken the business up into 2 key areas of focus and execution. The first is MRD and the second is immune medicine. So first, let me talk about MRD for a minute. MRD stands for minimal residual disease. And I want to differentiate MRD as it applies to heme malignancies or blood cancers. And you guys may have seen some presentations throughout the last couple of days on MRD, which applies to solid tumors. A clonoSEQ, which is our product, is we are the clearly defined category leader in hemologic malignancy with a tremendous amount of moats around the business, which I'll describe. But the MRD business consists of the clonoSEQ business for clinical testing, which is doctors using the test to make informed treatment decision on a patient and it also consists of our pharma partnerships, which is pharma incorporating the technology or assay into clinical trials for many different reasons, particularly as we're moving up the value chain as an endpoint in clinical trials, so you can stop a trial based on MRD status. The second area of the business is immune medicine. And the immune medicine side of the business is essentially underpinned by a major effort we have with Microsoft to map T cell receptors to antigens. And what happens is every disease have certain pieces of diseases that are called antigens that your immune receptor recognizes. So since if we could create this map, then we can learn how to diagnose disease earlier. But it's that same information or data that also allows us to work with pharma companies to assess response in their trials and taking it one step further, we can characterize these immune receptors, look at properties that make them good targeting molecules for therapeutic use. And we've got many activities going on in T cell therapeutics and antibodies and in vaccines. So -- and I put this upfront, just because I want to highlight the strength of our management team. A lot of us have been together for a long time, but we continually add great talent. Tycho Peterson, who Brian mentioned, 23-year veteran, top high-rated investor and the analyst on the Street came into us -- actually just started June 1. We have Julie Rubinstein, Sharon Benzeno, both worked at Pfizer and AstraZeneca, respectively, Harlan is a world-class converted computational biologist from theoretical physicist. Nitin Sood, we took over from Guardant, who started and ran their MRD business there. Francis Lo, huge impact on culture because culture, I think, is the heartbeat of our company, and we actually took someone out of a Whole Foods, Amazon, who I thought had a unique perspective on culture and growing the business. Let's take a minute and focus on the MRD business. First, I want to define what it is. MRD or minimal residual disease refers to after treatment, the tumor burden that's left in a patient. And why our technology is so special is we can actually count cancer cells. Unlike other MRDs, where you're looking potentially a derivative of the cancer or something that's shed from the tumor, what's unique about heme malignancies about certain types of blood cancers is that they're a cancer of the B cell or T cell themselves. And it starts with this one cell and the cell lines up metastasizing. And as that metastasizes, it carries that B or T cell barcode. Think of it as a bar code with it. So essentially, at diagnosis, we get a clonally ID sample. And this is the cancer clone that's grown out of control that metastasizes. We can simply write that down and track it. Then the patient undergoes some myeloablation, something to essentially knock down the cancer clone. That preidentified clone now acts as the numerator and all your other cells as a denominator. So we're extremely specific and extremely sensitive up to kind of 1 in 1 million cells, where essentially we can count the cancer cells remaining in the body after treatment, okay? But why is this important? If we didn't have drugs that were working, there would be no -- whether you could measure tumor burden and number of cancer cells after treatment really wouldn't matter. But the fact is, and fortunately, there's been a tremendous amount of progress in the efficacy of different drugs in the spaces in which our technology is applicable. Think about ALL with BLINCYTO, multi-myeloma with DARZALEX and KYPROLIS. Now you've got CLL and venetoclax. You've got all the -- or VENCLEXTA -- all these amazing drugs that are coming. That means that it's patients are living longer with these diseases, and doctors need a better set of tools to manage patient decision-making. How -- whether we escalate or deescalate therapy, whether you can take a patient off maintenance therapy, all of these -- should a patient get transplanted or not -- all of these decisions are now being able to be made with MRD. And we'll talk and show some data on this as well. What's cool about the technology is, though, it's universally applicable to many different types of blood cancers. And as I said, while there's a lot of competition in the solid tumor space between kind of Natera, Guardant, Exact, all these different companies, it's very clear that clonoSEQ is a clear leader in the field of heme malignancy MRD. And one of the reasons it is, is because we're also embedded into all of -- almost every pharma company that is developing a heme malignancy drug is now using clonoSEQ in their trials. And this is very synergistic to the value of the overall franchise because if you think about it, the clinical investigators that are doing the pharma trials are also treating patients in the clinic. Likewise, if you're in the clinic, you're using the -- those doctors are using the therapies that are coming out of pharma trials, so these businesses are really feeding each other. And just some quick steps, we're the only MRD test that is FDA cleared. We also have broad coverage. As you guys, I'm sure, are well aware, in diagnostics, reimbursement is key. You got to get paid for your test. And so in ALL and multi-myeloma, we have over 240 million covered lives. We have 150 million covered lives in CLL. And this is used in every single one of the 31 NCCN cancer centers. So kind of major lead there. And just looking at the growth of the clinical business, if we focus and drill down on kind of a quarter-over-quarter, year-over-year growth. In fiscal year '21 and '22, we delivered 48% growth year-over-year and 45%, respectively, and this was still with a COVID overhang. We had a 35% increase in ordering accounts. In the first quarter, we now have 320 accounts that are ordering. And what's really important is we look at kind of the catalyst to this business really inflecting as it's growing quarter-over-quarter is transitioning into blood-based testing, expanding indications for myeloma and CLL and ALL into a large category called non-Hodgkin's lymphoma, of which we submitted our first tech assessment to MolDX, which is essentially Medicare coverage. We're expecting to hear back in the second half of this year and penetrating into the community. So when we talk about blood-based testing, it's really important for the community who doesn't do bone marrow pulse. And blood-based testing, by the way, just another fancy name for what you hear about kind of the liquid biopsy companies, essentially MRD is a liquid biopsy as applied to heme malignancies for MRD. And again, this is just kind of a quick snapshot. clonoSEQ truly is the gold standard in pharma trials. A couple of logos here, but we could put almost every pharma company up here, but it's over 60 companies. We're in 168 clinical trials and 5 recent drug approvals, I mentioned a couple of them contain clonoSEQ data in their label. So this is BLINCYTO, DARZALEX, ABECMA was the most recent. What's also important is a very unique and rare for a diagnostic company to get milestones based on drug approvals, but we're actually written into the label in contracts that we have $330 million of milestones that are on our balance sheet, which we're essentially drawing down on an annual basis based on how we're used in the label. So very, very important. And it's also important to note that we're used really across the spectrum of drug trials. So from early research and development, all the way to kind of Phase III and pivotal trials. So just -- I mentioned 2 of these. I think based on time and the audience, I'm not going to go directly into the Kaplan-Meier curve, but I mentioned a couple of the clinical utility of how a doctor actually uses this to treat patients. So 2 things that happened and how MRD is evolving in this just essential tool to be able to manage the patient populations across the care continuum. So if you have multi-myeloma or if you have ALL, there's different points along your treatment care continuum that a doctor has to make a decision. And this is an awesome one. And it's awesome because it's awesome, it's a dual benefit for patients as it is extracting costs from the health care system. And what this data says, and by the way, this is as presented at ASH, American Society of Hematology Conference just last December. That said, if you're MRD-negative in 2 successive time points that you can take a patient off of maintenance therapy in multi-myeloma. So why does this matter for the patient? Well, REVLIMID is a maintenance therapy. These patients do not like being on these therapies because they don't feel like themselves. They don't feel normal. There's associated toxicity, side effects with these therapies. So now it gives a patient a treatment holiday and at the same time, $150,000 a year. So you're talking about for a test that costs $2,000 that you can take someone off from a business perspective though. For us, this is a test that I said you need the ID sample, but it's also successive points throughout the care continuum. So it's a land-and-expand strategy that says, okay, now if a patient uses -- if a doctor uses this 1 point of, okay, I can make a maintenance therapy decision, maybe the next point is this, which was just presented this week at ASCO that says that it implies for the first time based on MRD status that a patient's 5-year overall progression-free survival may not be differentiated whether or not they have a transplant. So what this means essentially -- and there's more follow-up data that we're accruing on this, but this is the first look that says, hey, you may not have to undergo an unnecessary transplant because of the ultimate like 5-year data is going to be the same regardless of whether you're transplanted or not. So there's another point. Then think about escalation and de-escalation of therapy. These are all like really important points. And the quote here, I'm actually going to read this quote for you, which is the elimination of minimal residual disease of increasing importance in tailoring treatment and informing clinical care and as a treatment goal given as prognostic value for better outcomes. So I've been going to ASH for 13 years. So this conference for 13 years. And the conversation went from, oh, this is interesting, this is a nice research tool to this is essential and clinical decision-making for patient decisions across the care continuum, and that's just growing in importance. Okay. I want to now switch -- that's MRD. I'm happy to take questions on it later. But I do want to just kind of wrap up with MRD to just repeat that differentiation of Adaptive in heme malignancies as the clear category definer with a pharma relationship, with reimbursement in place, with regulatory approvals in place and with a growing sales force and execution around the commercial opportunity. Okay. So I'm going to shift focus now to our immune medicine business, which think of the MRD business as the B cell part of the business and immune medicine is largely comprised of the T cell part of the business. And I'm going to kind of talk about this again, just to kind of repeat the fact that what we're doing is we're building this massive map of how our bodies intersect with disease, essentially building a map of our T cell receptors to antigens and antigen -- disease-specific antigens are just that, they're disease specific, meaning for each disease, they have antigens that are specific for those disease. And from that same underlying data set, there's 3 different growth opportunities. And those 3 different growth opportunities are in pharma services. They're in clinical testing, which is diagnostics, and they're in drug discovery. And what's important to note is these different opportunities have different time horizons that are associated with both the total addressable market opportunity and the revenue contribution. So pharma, right now, is kind of the here and now. Our diagnostics will take time to develop, but we've already had -- I'll show you in a minute, our first kind of proof of principles. And then drug discovery is right now is our kind of big partnership with Genentech, but there's more to come in drug discovery, which I'll start giving a sneak peek into. So first, let's talk about T-Detect. And so this is really a novel class of diagnostics based on our ability to read how the immune system or your T cells are naturally seeing disease. So what does this mean in principle? And I'm going to try to equate this to, I think, a more financial audience is essentially we're creating a map that's like a VLOOKUP table in Excel, okay? If you think about the rows of the VLOOKUP table being the disease and then you can kind of double click on each disease and have the number of antigens for each disease. And then in each column are T cell receptors, okay, where you have kind of a lit-up -- on the screen there where you kind of have a lit-up dot, that's a match between T cell receptor and antigen, okay? The fact is there's trillions of T cells in the population that bind billions of disease-specific antigens. So this is a massive machine learning problem. This is why Microsoft invested $50 million into the company. That's why they provided us 30 full-time employees that are working on machine learning from Cambridge, England to Redmond, to Cambridge, Boston and in Japan. So we've worked on this from 4 different sites across the globe for us. The interesting thing about this map is once you have this map built, the power of this is once we can sequence -- we can take a blood sample from a patient, sequence your immune receptors and map your receptors to this VLOOKUP table, okay? And that means that if there is a hit, we can diagnose that disease from a sample. But any sample that any disease that we've mapped, we can diagnose all the diseases from the same sample. It's not currently how diagnostics work. Right now you go one by one or you go in a panel. And that is kind of the strategy for us as we started with one, we're moving to a panel with the goal of getting to kind of this broad-based diagnostic. But the reality is what's cool about it is the same kind of underlying -- it's the same underlying data set that leads to newer opportunity in pharma, which I'll get to in a minute. But let's talk about T-Detect for a minute. This is diagnostic. This diagnostic, we started with COVID. We have the only emergency use authorization for COVID, which means that T cells can detect past infection. They can actually do a lot more in terms of being semi-quantitative and look at response to vaccine. We're negotiating on that right now. The Lyme disease. We're launching that kind of in the next 2 months, and that's going to be a test that's twice as sensitive as anything else on the market to be able to diagnose first acute Lyme disease and then chronic Lyme disease as more data emerges. Then we're doing -- we're making investments into data generation in 2 distinct areas in the autoimmune space, which is the next disease category that we're tackling. The first is in GI and the second is in neuro, which is more specifically focused in multiple sclerosis. What's interesting about GI, it's basically -- it's a panel. If you're symptomatic and go into the doctor with a stomach ache or chronic GI symptoms, you don't know whether it's Crohn's, ulcerative colitis, celiac, et cetera. The idea is to have this differentiation because your T cells are specific. They know what you have. Your T cells know what you have. So if we can read what your T cells have by creating this map, we can essentially have a rule in diagnostic as opposed to a rule out diagnostic. Think about that with MS. I think unfortunately, we all have friends relatives that have MS. How do you diagnose MS is essentially go to specialists to specialists, they settle on a disease diagnosis by doing a bunch of different things, tests and it's never like definitive. Whereas if you can have a rule in, you're really compressing that diagnostic odyssey to going in and getting a test and then being able to diagnose multiple sclerosis. So that is where we're going with T-Detect. But we -- that data set, that underlying data set has a near-term revenue opportunity here and now, and we've already proven that. Again, we mapped the T cell receptors of SARS-CoV-2 antigens. And now we're using this on clinical trials with Moderna, J&J, Janssen -- sorry, Janssen, AstraZeneca, et cetera. And now we move to the next disease, which is RSV, which said, hey, Janssen's developing an RSV vaccine, they said, can you build us a map that we can essentially use to assess response to the disease. That's great. That's near-term revenue. That's money for building the map. But as we move forward, there's also an opportunity, what I call, moving up the value chain to targeted therapeutics, meaning if we can essentially validate targets, new targets, particularly in the autoimmune space, we're looking at potential really nice deals with pharma companies where we can essentially capture more of the economics and take a piece, just like we do with Genentech, which I'll describe in a minute, where there's an opportunity to create something where we get upfronts, milestones and royalties from essentially characterizing new targets, particularly in the autoimmune space. So think about that for a minute. Autoimmune disorders, the best drug out there is a blunt instrument, right? It's HUMIRA. The efficacy on the patient population is pretty low and the cyto profile isn't great. So if you can create a targeted therapy in autoimmune, which is where we're going in partnership with pharma, and we can really kind of unlock the code of what's driving the auto antigens that are driving these diseases will have a massive runway to be able to create targeted therapeutics and autoimmune disorders. Where are we today? We've got many discussions going around that. But the first area we started in our drug discovery efforts is in cancer, particularly in -- we did -- struck a deal with Genentech in 2019 that for cell therapy in cancer. And then if you guys have been following the cell therapy space, it started with these CAR Ts or half T cells, half B cells that only work in hemologic malignancies, where we're developing TCR-based therapeutics and the unique thing about T cell receptors, they can see inside of cells. So it has the promise to be able to kind of move the cell therapy field into solid tumors. So this was a deal of $300 million upfront, they paid us, $1.9 billion in potential milestones. And we have a really, really nice royalty profile based on the deal. And it's comprised of 2 different parts. The first part of the deal is what we called our shared product. There are known cancer antigens out there that drive disease in certain tumor types. And knowing those cancers, they're saying, find us really proprietary, unique specialty cell receptors that have a great targeting molecule profile to go after these cancers. So what does that mean? Say, okay, we'll find those T cell receptors that bind well to the cancer, that kill the cancer, but they don't find what they're not supposed to. They don't have any kind of cross-reactivity effect. So the toxicity would be lower. So that's what we're doing on the shared product. It's going -- it's going well. The Genentech selected -- the first quarter of this year, they selected a candidate to move forward and are looking at 2 additional candidates this year. First half of next year, we should have an IND filed and accepted. That's what we're targeting. We don't control what Genentech does, but I can tell you that's going very well. At the same time, we're working on strategy 2 in parallel. And strategy 2 is really revolutionary. It's a potentially curative approach to cancer, which is we're -- whether you know it or not, I know cancers are bucketed into different tumor types and different groupings. But the truth is that every cancer is an n of one. And so what we're developing is a unique or bespoke personalized therapy to each cancer patient. What does that mean? That means that for each patient, we get their tumor, we sequence the mutations in the tumor and at the same time, we look at the responding T cell receptors to that patient's tumor. So essentially, we're doing a closed-loop experiment on that patient, designing a bespoke therapy to that patient. We put in place an entire end-to-end workflow in our South San Francisco lab. Genentech is investing billions of dollars into this, developing manufacturing facilities, developing engineering techniques because ultimately, when we hand them over the T cell receptors, they've got to put them in a T cell and then put them back in the body. And we're trying to do this in a 30-day vein-to-vein time period. So this is really cool, unique. But this isn't sequential. This is happening. At the same time, it's probably a year behind the shared program, but it's moving along very well. Just briefly, financial profile, the company has been growing kind of year-over-year, and we expect that growth to continue and then hopefully accelerate. Interesting, this is a growth conference. Everyone knows that growth has been absolutely whacked. But obviously, we're all trying to look at perspectives and lessons learned from history. And I go back to the dotcom bubble, the 2008 housing crisis. And I look at this as an opportunity not only to survive, but to survive and thrive, right? At the end of the day, there's companies that are going to emerge from this crisis stronger than went in. And I think the space is going to consolidate. And I think it's going to be the strong management teams with a differentiated vision, with true intellectual property that are very well positioned in the market that has something extremely differentiated and really strong science. If you can put that all together, you're going to win. And I love the team that we have, and we've got a phenomenal platform. And you cannot stand still during these times, and we won't. So we're going to not only survive but thrive throughout this period. So thanks for your time today. I appreciate it, and look forward to -- are we doing questions here or in the breakout?

We got 58 seconds left.

And we got 58 seconds so fire away. But thank you guys very much. Appreciate it.

Because I know it's a topic that you were sort of leaning into right there about not standing still and positioning yourself to thrive as you think about the financial position of the company and maximizing the opportunities that you have, but also keeping an eye on the burn and things that you're doing. You've talked about exploring some creative opportunities, you've talked about cost savings initiatives. Can you just talk about how much time you're spending on that and the importance that is and any kind of details that you can provide there?

Yes, we're spending a lot of time on it. I think it's important -- it's more important than ever, and Tycho coming in, back half of the year, we're going to -- we've committed to promising kind of a path to profitability without raising additional equity capital and will dilute the company. We've got several cost-saving initiatives kind of moving from real estate to cutting kind of reagent costs. We got ahead of this. We in March, we did a RIF. It was kind of a little bit of a surprise, but I think you're starting to see a lot more of that. So unfortunately, but I think the right move, we had to eliminate 100 positions from the company, and we continue to look at that. In addition, I think there's some creative ways to be able to provide, what I'll call, nondilutive financing, meaning non-equity financing. And I also, at this stage of the company, don't love kind of a bullet payment on certain debt structures. So I think there's other creative structures out there that we're examining that could provide a path to profitability, again, without going back to the equity capital markets. So I don't think it's any one thing. I think you got to really be nimble. You got to have active -- to be super active. And don't get it wrong, we should always be financially disciplined. But like when growth was rewarded at all cost, I don't think there was that same level of kind of structure and discipline. And I think I'm actually looking forward to it. I think it's a very healthy thing for our company to be able to do. And I think bringing in Tycho and some of the right talent to help us put a framework and structure around it is the right time, the right thing to do, and we're looking forward to it.

Okay. Great. Well, a great answer, and thank you so much for the presentation. We'll adjourn up to the Richardson Room, where I'll continue the conversation. Thank you.

Thank you, Brian. Appreciate it.