Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good morning everyone, thanks for joining us. Really pleased to have the Adaptive team here with us. We have Chad Robins, CEO of the company; and Tycho Peterson, CFO of the company. With that, Chad, can I open it to you for opening comments here?

Sure. So we founded the company in 2009 with my brother, Harlan, [ spun-off ] Fred Hutchinson Cancer Research Center based on the premise that if we could learn to kind of read and translate how the adaptive immune system naturally both detects and treat disease that we could create clinical products both in diagnostics for earlier detection of disease, and we could harness the power of the immune system as a targeting molecule for therapeutics and drug discovery. And so that's what we've done. We've -- the business is comprised of really 2 segments. One is in MRD or minimal residual disease. What's different about our MRD is specifically focused on hematologic malignancies and then immune medicine. And the immune medicine business is really delayed by a partnership we have with Microsoft, where we're mapping T cell receptors to antigens and then using that information in 3 different segments in, call it, pharma services, in a -- also in a clinical diagnostic called T-Detect and then in the drug discovery arena. And in drug discovery, we have our Genentech partnership and then kind of future partnerships based on this underlying information of T cell antigen mapping.

To start, maybe here, Tycho, you joined Adaptive recently. Can you discuss what drew you to the company? And what your vision is here strategically and then the plan to kind of maximize value from each vertical.

Sure. Yes. Look, it was a couple of things. clinical impact, right, I wanted to kind of be at a company that was actually going to impact patient lives. Big kind of shots on goal, right? They're plenty of clinical companies that are very narrowly focused. I mean what always blew me away about Adaptive is there's tremendous platform value here. And obviously, that's being monetized across different business opportunities. But in terms of the overall kind of shots on wall, it really kind of stood out. I've had a long relationship with Chad and Harland and Julie Rubinstein, so I kind of known the management team for a long time, was kind of involved in introducing some of the early investors. We [ covered ] the IPO with you. So like there's been a long kind of history and familiarity. I think the culture at Adaptive is exceptional, and that was a big draw. So those are kind of the primary factors. There were some ancillary factors, geography, don't have to move to New York, don't have to move family. So that was part of it. Karina, Julie and I are all kind of based out of the New York office. In terms of kind of strategy and thoughts going forward, so a couple of priorities in the near term. We're kicking off long-range plan, 3- to 5-year plan, and we're doing a lot of work on kind of the cost side to better understand our cost structure, better understand our COGS. In conjunction with my announcement, there was a realignment of the business. So it's more kind of transparent from the outside. There was also a restructuring. And going forward, we're doing a lot behind the scenes just to get more efficient. So it's workflow enhancements, it's leveraging lower sequencing costs. There's some stuff in the near term we're doing on the real estate side, cloud compute. So there's a lot of opportunities for us to just be more efficient as a company. We've been talking publicly as well about pursuing nondilutive financing opportunities. So the goal here is if we do anything -- and by the way, it's from a position of strength. We've got over $480 million in cash in the balance sheet. So we don't need to do anything right now. Street has us profitable in 2025, but we'd like to bridge that realistically. And if we can do something nondilutive, I think that would be well received. So those are kind of the priorities in the near term.

Maybe to follow up on the restructuring aspect and the changes that you've made, what are the benefits that come out of that? And maybe talk about whether there's nuances with the business segments that you seek to drive more value from?

Yes. So I think the reality is we grew very fast during COVID and where growth sake was rewarded. And when we came out and recognize that kind of the necessity of a path to profitability. And we took a look at some of the efficiencies and said, "Hey, I think this is now the right time." And we did it in March. We got out ahead of it. We kind of saw this was coming. It was a little bit of a surprise when we did it. Now you're seeing it a lot more throughout the industry with kind of some of the pain. But the alignment of the business is between MRD and immune medicine. I think the ancillary benefit of that to the Street is that we can provide a lot better visibility. It's a lot cleaner story. MRD consist of our MRD clinical business plus MRD Pharma, immune medicine business is essentially delayed by the T-cell antigen mapped to 3 different segments, and it's really easy to tell that story. But the real reason we did is not [indiscernible] story, it is because we could focus and provide kind of leadership in both one of the business areas and really deploy capital to those areas as appropriate to effectively tackle the market opportunities for each one of those business areas. So it got -- there was -- I think we simplified a lot of the complexity by doing that kind of restructure along with kind of bringing Tycho and the cost reduction, just simplification streamlined and we're running hard in both those segments now.

This is a benefit of the great management team, but also a great Board, right? I mean, we've got people on the Board that have done this before in cycles.

You talked about trying to bridge through some plan to bridge your path to profitability. Maybe talk a little bit about that. And then you ended 1Q with about $500 million in cash. Just remind us on the runway there? And how you expect all of this to kind of play out together?

Yes. So 1Q for this year would be kind of the peak for burn. We burned $70 million. What we're seeing going forward is $50 million to $60 million per quarter. And so our cash balance gets us just over 2 years right now. Again, we're doing some stuff to try to get a little bit more nimble around OpEx. So we may be able to extend that a bit anyway. But then, we had a goal on the kind of bridge financing, we wouldn't issue equity here, right? It doesn't make any sense. Debt is not very attractive given kind of balloon payments, but there are synthetic royalties, and we've had a number of those discussions. So that could be an option, potentially just do it off the overall top line as opposed to kind of do it by product.

What do you think people are overlooking when they look at the story? Do they really understand kind of the depth of science there and the ability to be able to branch into not just the diagnostic and sequencing space, but to also head into therapeutics.

I think that is one of the areas that's overlooked. If you just kind of take a step back, I think MRD business is relatively easy to understand. I will say there is still some confusion in MRD between what is MRD for solid tumors and MRD for liquid tumors or heme malignancies. And just clonoSEQ is the brand that for heme malignancies, I would say, it's really the crown jewel of the heme space. We don't really have a lot of competition in clonoSEQ -- it's FDA approved. We've got 250 million covered lives. We're in almost every pharma trial. And there's a ton of moats and it also has a specificity and sensitivity advantage, the technology been in 120 publications, clinical utility. So I don't -- once you kind of understand that and how MRD Clinical and MRD Pharma work together, I think that's a pretty easy story to tell and understand. I think what's harder to understand is, really, if you look at the connection between kind of our bodies and diseases, which there's T cells in our body that bind the disease-specific antigens, mapping those connections at scale and then deploying those data to different strategies -- It's a little bit complicated, both in the science but the applications aren't. And what is really simple to understand is that the exact same dataset that we can then leverage in different areas that come with monetization streams that come at different times. So as an example, here and now, there's a clear pharma services business. If you're in pharma running a clinical trial and looking at kind of patient response, patient stratification, monitoring segmentation, you can use our assays here and now. Second, T-Detect is a diagnostic -- it's basically saying, can you -- can we learn how to read how our T cells are naturally detecting disease by essentially taking this map as a Vlookup table. T cells to antigens, taking a patient's blood, sequencing their T cell receptors, mapping them to the map and then essentially diagnosing disease from your T cells. That, I think, is understood the pathway we have to outline and I think we have clear, concise and put the pathway. What isn't understood which we mentioned is the application then of that technology, the underlying technology to drug discovery, particularly target discovery. We have our deal with Genentech in cell therapy and cancer where all the technology we talked about were then overlaying characterizing those receptors as targeting molecules for therapeutic use, what makes T cells good binders, killers with a good safety profile, so they don't cross-react. Then the next frontier for us is really in the autoimmune space. There's no targeted therapy in autoimmune. You've got really blunt instruments. And what we believe is that this map is going to be able to uncover and validate targets particularly in the auto-immune space, and that's really the next frontier where we'll be able to kind of use the technology to kind of -- and first, we'll partner and then over time, we'll look to kind of move up the value chain in kind of drug discovery therapeutic realm.

Would you keep autoimmune in-house, which you've discussed doing in the past? Or do you think you would partner in?

Yes. I think it -- so when you say autoimmune, obviously, automate so many different diseases. So what I -- what the path is, is initially partner and just being honest about our capabilities and how we need to be public. If we're looking to bring in assets in-house and bring them further ourselves, there's work where you need to be done investments that we need to make. But initially, kind of partnering like we did in Genentech in cell therapy, in cancer is an area that we kind of like to move the company.

So heading back to clonoSEQ just given the revenue outlook there. You've talked about an expectation for growth acceleration this year. Walk us through the drivers underlying this and when you expect to hit an inflection point?

Sure.

Yes. I mean there's a number of steps we've taken. We doubled the sales force, 70 reps. So that's a driver. There's expansion indications right launching DLBCL later this year. which NHL is kind of half the market. So that's a big, big opportunity. We've publicly talked about potentially doing an epic integration. So we're kind of early in those discussions. That's kind of a 9-month process to lay the groundwork, but then once you do it, you kind of flip it on institution by institution very quickly. So some of our peers have done it [indiscernible] exactly, usually you get a pretty nice return on that on the back end. So those will be the biggest drivers. And then -- the other thing is pricing continues to go up, right, kind of mid-single-digit quarter-over-quarter increases on pricing, and that's just a mix shift benefit as we get paid on more of the test we run. So...

And then probably one other I'd add to that is blood-based testing and doing more in blood particularly in the community setting is an area that we're driving with data generation.

What is the field stand with MRD as a clinical endpoint here? And how do you participate in that discussion with education?

Yes. I mean there was a great paper just written when you say the field, the field is advocating and pushing hard to have MRD being a primary end point, particularly in myeloma there's a paper in clinical cancer research center calling for this with a ton of the top KOLs, industry advocates, Academia [indiscernible]is a consortia. And by the way, it has been allowed as an endpoint in some, but as a de facto clinical endpoint. The FDA is actually now publicly talking about that it is in consideration. We do think this will happen. It's hard to put an exact timeline, but I do think this will happen in the next, call it, 18 months or so. There -- and why you asked the question, of course, is just we have $330 million on our balance sheet as in milestones. It's actually quite rare for diagnostic companies to be able to structure deals where you have milestones. And we've been able to do this in the MRD space particularly because we're the only FDA-approved test in MRD and heme malignancies. And there's -- we've been able to kind of extract that value to say, if you're used in different ways, label-enabling as a surrogate endpoint, secondary and then primary, you get different payment amounts. We're currently on 168 active trials. And those 330 million milestones, those aren't stagnant. So we've been drawing down those milestones and then we're replenishing them almost on a quarterly basis and how that is, with pharma, we usually start with like a 1 asset deal, like, for example, like I'll start back in the day, like those who worked with Janssen and then it expands to a pan portfolio deal. So every heme malignancy drug that Janssen does, that Amgen does, that AbbVie does, they started with one, and now we're on every trial for every drug that's a lymphoproliferative heme malignancy.

Do you want to take a stab at where you synced all your efforts for what the ultimate kind of peak sales? I mean, the TAM is huge, but the peak sales opportunity is where the trajectory is going longer term?

Yes. It's I think we public -- it's a few hundred million dollar business with 70% margins. And that's a combination of MRD Pharma and MRD Clinical. We've talked about ASPs in clinical being around $1,000 moving up to $1,300 over the next couple of years, single-digit growth quarter-to-quarter. We don't disclose our ASP in pharma, but they're significantly higher than that. The reason we don't is because we don't want other pharma companies to negotiate against that, but they're significantly higher than that. And then we got the milestone. So we got all those together. And so it's a nice business with a good growth trajectory in front of it. Do we -- we think there's other opportunities that have larger total addressable market opportunities and that could be the potential bigger, but it's a really nice, steady growing business.

And feedback from KOL suggests that the data correlating signals in the blood with what has been observed in the bone marrow would be encouraging to promote further uptake here? And this has been seen notably in the community setting, what data sets can we expect this year? Or how are you thinking about that?

Yes. I mean, there's two. One is we have kind of our own studies going on that are real-world evidence of data generation of clinical utility across disease states that we're aggregating for ASH. And secondly, we have a study going on. Well, there's 2 studies. One is with Mayo Clinic that we hope to be able to get done and published by ASH this year. The second is the next readout of the DFCI-10106 study, there's the determination trial just read out at ASCO last week. That was actually super cool data that said for the first time that you could actually consider MRD status for a transplant decision, meaning if you're MRD-negative may not benefit from a transplant in terms of your progression-free survival. So that data came out. And then the data came out at ASH in December, we said you could be taken off a maintenance therapy, if you have 2 successive MRD negative time points year after year and you're basically taken off of Revlimid. So -- but one of the comments, that will be on the blood versus marrow, I don't think that's right -- and by the way, we set this up and we're changing how we're talking about this. I don't think it's the right way to look at it to say, is the sensitivity the same in blood versus marrow. I think there's 2 points to make. One is, what is MRD testing in the blood versus what the doctor is doing now in the blood? And is this a better measurement. So that's point number one. Point number 2 is it's a reflex. So if you can't find -- if you can find MRD in the blood, we can track MRD in the blood. And it's obviously, I'll just state the obvious, much better for the patient to get a blood draw than a marrow and much less costly to the health care system. But if you can find it in the blood, you can track it in the blood. If you can't find it in blood, then you can do -- then you can reflex to the marrow. So that's how we should be thinking about these as tools and where it fits in the clinical practice.

Do you have visibility into the pharma milestones that you're receiving longer term? And maybe a second question here. How do you think this space will evolve over the next 2 to 3 years?

Yes. Look, on the milestones, I mean, you talked about the $330 million, 2/3 of those are from a dollar amount of primary, 1/3 secondary and about half of those are ongoing trials that we've got kind of line of sight on. One thing, I think, going forward is we're thinking a little bit about is do we take a little bit more conservative approach around the milestones just to [ bake a little bit more cushion ]. So we're not kind of relying on that quarter-to-quarter. So that's something we're thinking about maybe for 2023. But yes, generally, we've got pretty good visibility here in the near term on an annual basis, right? It can move quarter-to-quarter and saw that in the first quarter where $3 million milestone moved up.

So -- and Tycho is working with Karina on a path to provide more visibility on kind of be able to show that you guys can track those milestones to the pharma trials. And so we'll have more on that in probably second half.

Anything on the competitive front here that we should be monitoring?

Yes, it's interesting, like Natera made some waves at ASCO so just a little over a year ago about a test in multimyeloma, we literally haven't heard anything, and we've asked a bunch of investors, and we follow this space, obviously, very very closely, but haven't really seen much. [indiscernible] solid tumor is a bigger market, but we have a proprietary position in kind of own heme. And we're always looking over our shoulder, always looking at new technologies. I think there's new technologies emerging in the non-Hodgkin's lymphoma space where cell-free DNA is going to be important. Just to be clear, too, we are combining a cellular test and a cell pretest that will be launched around November. And we already have a test in non-Hodgkin's lymphoma that's a cellular test, but we're going to be doing some tech enhancements because just the biology of the disease would indicate that tracking the cell-free DNA is going to be important in getting a full picture of MRD. But -- in general, this is a space that's ours to continue growing the market share and capturing more market share. What's really -- what we're really competing with, and I mentioned this, but I'll say it again for the sake of completeness, we're competing with, one, is just market awareness and education, what it is like to go to a community doctor say what is MRD? And here's how you use it, here's how you use at a time point in your clinical practice, the decision that you'll make that comes out of it. And what are you doing now? Are you doing flow? Are you doing an M protein test? Or are you looking at it IG light chain, different things that they're doing now. And here's why MRD is a really important thing to be looking to make clinical decisions on your patients throughout their care continuum.

Pivoting to the immune medicine platform, you've announced the launch of Lyme in the acute setting. Can you discuss what you're hoping to achieve in terms of priming the market and how this sets you up for the chronic setting and when that might be?

Yes. So two things. I think that term that you used priming the market is really applicable here for 2 reasons. One is [indiscernible] just take a step like T-Detect is a partnership with Microsoft, where we're using T cells to detect earlier based on what your -- how your T cells are seeing antigens for disease. T-Detect Lyme, we actually got T-Detect COVID. We got the only -- first and only EUA for a cellular immune response to COVID touched by the FDA. But because it was an EUA, it can't be a clear LBT test. So we wanted to set up the entire infrastructure of bringing on test after test after test. So Lyme is a good way to do that. So how do you improve your diagnostic in a CLIA setting going through analytical validation and clinical validation and what are the protocols you need to do. You can't do that and go through the FDA. It would just take too long. So we wanted to do it in CLIA. And that's why Lyme is kind of a test case, if you will. Now specific to the disease itself, acute diagnosis of Lyme, I think, is interesting, and there's probably a small market there. But using that data and the patients that come in along with additional studies to improve sensitivity, not only in acute diagnosis, but moving to post-treatment Lyme disease syndrome or what we call chronic Lyme, there's a much larger market. So if you have 3.4 million Lyme tests are done a year, 400,000 done in the acute setting, the rest, about 3 million tests done in the chronic setting. We're moving kind of hopefully, rapidly to be able to kind of uncover this mystery because chronic Lyme has been confused with like now even long-haul COVID, like is confused with chronic Lyme. So there's a lot of neurological symptoms that if we can really have a positive diagnosis, I think will be incredibly helpful.

And then GI and MS are kind of next diseases you're going after here? Maybe walk us through the strategy?

Yes. Let me give you the overall strategy and we'll talk about GI and MS. T cells by nature are very, very specific. And so we're leveraging that biology of the specificity of T cells to diagnose disease. And so what that means is we're going to set our threshold level of specificity at incredibly high, like 99-point-something percent, right? And then we're going to launch with a threshold level of sensitivity that's better than standard of care that allows us ultimately to say if you're incredibly specific and you're sensitive enough, we can -- we will have no false positives, meaning if we tell you that you have [ for gamble ] multiple sclerosis, you have multiple sclerosis. And the idea is to launch with that threshold level of sensitivity and then with data both clinical validation studies like we're doing one with IQVIA in IB, in Crohn's, and we're doing one in multiple sclerosis. With those data sets along with launching to the consumer first, taking that data in, we will increase the sensitivity over time. So that we'll have a very specific and very sensitive test. And then when we had that data package lot, we'll take that and go to reimbursement, basically, we'll get payers to reimburse it. But what is missed is that -- and I'll say it again, just to hammer it home, that same data set, for example, that we're working on MS, we can go to now pharma company X and say, "Hey, we're mapping, we're mapping the TCR antigen map for multiple sclerosis. You're working on a multiple sclerosis drug. Can you -- do you want to use this in your trial? And/or can we help you help discover potentially new targets in that disease state and accrue kind of near-term revenue again, depending on what the deal is in the meantime before you have to reimburse diagnostic down the road.

As you look to launch, as you are launching here with these various diseases, how do you think about getting that value proposition you see. I mean these are big markets? So how hard is it? Maybe that's my question to fulfill the promise of these tests?

Yes. It's hard. I mean diagnostics are hard. They're particularly hard because payment is hard and getting reimbursed for these tests is hard. Changing clinical mindset is hard. Therefore, why -- but there's also a major barrier to entry once you're adopted and in workflows, et cetera. So that's why I think the pharma piece of this is so important. There's a huge amount of parallels to the MRD business. It took a long time, right? It took a long time. And by the way, you mentioned about inflection and that business is growing nicely, but changing clinical mindset is hard in MRD, but then we went and got all of our pharma partners to say, "Hey, this data is really important in our clinical trials. We're doing the same thing on the T cell side." We're basically saying, "Hey, we've got a unique set of data that's going to give you a window into your patient response and can potentially help you develop new drugs. Can we leverage that in the meantime, while we're putting in all this infrastructure and investment in a smart way, again, we're trying to be really smart about our cost and efficient about it to be able to get to a point where you have a reimbursed diagnostic.

So let's talk about the Genentech Roche collaboration, which is really exciting. When will we find out what these targets are? And when do these programs start to enter the clinic? Any information would be great here.

And by the way, I just know from the tone and tenor, it is a source of frustration for you guys as to how much we're actually able to share on this because really it's Genentech, who's controlling kind of the timelines and the clinical development pathway. But I can tell you, it's going to -- They picked a target and they are looking at 2 more this year. we expect an IND to be filed and accepted, call it, first half of next year would be a fair timeline or potential upside and maybe there's more than one target that's combined in an IND filing, that would be the upside case. At that time, you will find out what the target is and what tumor types are associated with that target. I will have to say though, because as we all know, they did. Genetic moved up from the first target because of our potential future safety issue, which I think was kind of widely misunderstood. Just to be clear, there wasn't like a current patient safety issue. They just said, "Hey, for our first target, let's pick, this we've been public about, let's not pick a tumor-associated antigen, let's pick a neoantigen that has a lower safety -- or better safety profile." But the benefit to that is there's 2 strategies. One is us characterizing T cell receptors against known cancer targets. And the second strategy is developing a bespoke or personalized therapy for each patient where we take a patient's tumor-specific mutations and look at the responding T cell receptor to those mutations and hand those over to Genentech. They put them in a T cell and back into the body, 30 days vein to vein. So we developed in the meantime, this whole end-to-end prototype lab. And in parallel Genentech built this manufacturing facility outside of Portland, like that's now probably only a year -- roughly a year behind the first filing for the shared strategy. That's going really well as well. Again, not a lot of visibility, but I can just share based on our joint research committee and joint development committees that that's moving along quite nicely.

Last question here. It's been a tough tape as you look at where you trade currently. What do you think about why people should come into this stock to value proposition here, the actual items that are on your plate in the next 12 months or so?

Why don't we both take a stab at this because I would just make one comment. Our MRD business alone is probably worth significantly more of our market cap, right? And just by -- any way you slice it. So especially, we're getting negative value for everything else we do and our enterprise value is almost flappable right now. So I can also tell you from a sentiment standpoint, not everything to imperfect and things happen, especially in drug discovery, the timeline slip, but fundamentally, I feel better about where the company, even though our stock is [ $67 ], I did when it was at $60. We've made a lot of progress since that time. So obviously, there's a big dislocation and disconnect, but it is what it is. And we're going to -- I think there's companies that are going to survive and thrive through this, and we certainly hope to be one of them.

Yes. I mean to your point, like companies that are agile and scrappy. I mean this is the time to shine, right? And this will -- this environment will weed out a lot of companies that are inefficient, and we're making some very shrewd moves right now to kind of make sure we're a much better company coming out of this and we've got big catalysts coming up, right. Genentech IND we talked about, we talked about clonoSEQ ramp, launching an autoimmune, I think, for T-Detect will be a big opportunity, so there you got some catalysts over the next 12 to 18 months, that could be really interesting.

Great. Well, on that note, thank you so much. Really appreciate that.

Thank you, Salveen. Thanks for having us here.