Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Thanks, everyone, for joining us. My name is Tejas Savant, and I'm the Life Science Tools and Diagnostics Analyst at Morgan Stanley. On the stage with me are Chad Robins and Tycho Peterson, CEO and CFO of Adaptive. It's a pleasure to have you guys here.

Maybe, Chad, just to kick things off, big news this morning with the OrbiMed deal. Do you want to just spend a few minutes walking us through how the deal came about? What are the terms? And how do you see it sort of on a go-forward basis, transforming the opportunity for Adaptive?

Yes, sure. But first, Tejas, thanks for having us here. I really appreciate the opportunity -- we're really excited about the OrbiMed deal. And we've been talking about for the last couple of months that we were pursuing a non-dilutive financing structure. We were fortunate that we had multiple kind of offers to finance us, and we can be kind of really accretive on structure. And this is really an opportunity because Adaptive is a platform company, we were able to essentially use kind of that -- be able to collateralize all of our different revenue streams kind of together to come up with a very low weighted average cost of capital. I'll have Tycho in a minute kind of walk through the deal. But what this does for us -- we were already in a very strong cash position. We have $450 million of cash on the balance sheet. This is a $250 million facility. We add -- this obviously extends kind of the runway and actually takes us to a place of kind of profitability. We're going to come out with our long-range plan as promised in our Q3 earnings call. But very, very, very healthy. And kind of one of the things that I'll mention is once we hit a repayment cap, the deal is done. So I'll have -- again, Tycho walk, maybe you can kind of walk through the specifics on it, but we're very, very excited. It looks like it's a little bit misunderstood out there right now. And we've been talking to some investors who said it's little misunderstood. So I'm glad we have an opportunity to really clarify the terms.

Yes. And as Chad said, obviously, doing it from a position of strength, so raising cash, though we don't need it, going with a blue chip partner. And then in terms of the deal structure, as we laid out in the 8-Ks, there's 3 tranches, 5% royalty on the first $125 million, which we've drawn down. That goes up to 8% if we do the next $75 million, and then there's an M&A sleeve. We've had some people ask if that's tied to a particular deal, it's not. That's just optionality down the road if we want to start to look at some bolt-ons. There's some pretty attractive prepayment terms too, if we pay it back with an 18 to 24 months, it's a much lower hurdle as well so...

Got it. And how are you planning to utilize these funds, Tycho?

What we said in the press release and 8-K with general corporate purposes. So we're not going to -- we're in the middle of our 3- to 5-year long-range plan. We're updating that now. And so this will kind of help feed into that, but it's general corporate purposes.

Got it. And are there any specific sort of time lines you have in mind or trigger points for pulling on the second and third tranches or...

Not that we've laid out at this point. So we did draw down the first $125 million. The M&A tranche would be obviously the last one we would do, and that's a little bit further out.

Got it. Got it. And is this sort of a one-and-done situation? Or could we see you exploring potentially other such opportunities as well down the road?

Well, our goal here is to drive towards profitability, right? We kind of came out and said on the third quarter earnings call, we're going to lay out a time line around that. We're doing a lot to kind of drive margins. We lowered our OpEx outlook for the year. So in a perfect world, we wouldn't have to raise additional capital, but never say never.

Yes. Got it. Got it. Okay. Chad, I mean, as you explored sort of conversations -- similar conversations with other partners as well. Can you just walk us through what drew you to OrbiMed and what were some of the pros comps in your mind around structuring a transaction like this? Because I think that would be helpful because -- life science investors, this is new territory for them, doing these kind of royalty deals. So just curious as to why you decided to go with OrbiMed beyond the obvious cost of capital serve considerations?

Yes. I mean, first of all, I think most folks in this room know OrbiMed play across -- from private to public equity, debt and have various alternative infrastructures, but really kind of well-known name in the healthcare field. And so we were thrilled to have the opportunity to do with it -- to partner with them. And then on top of that, we were kind of trying to optimize for structure. And coming -- and the ability to have kind of a really a fixed repayment cap with duration is great. I mean this isn't a deal that goes into perpetuity. So kind of once we repay that cap, we're out of a deal, and we have some opportunities to do that sooner at a lower cap as is all outlined in the 8-K. But it is, again, a pretty low cost of capital. What we didn't want to do is raise equity at these prices, and we didn't want to take on anything that had any type of kind of balloon payment. So there was a nice opportunity. Obviously, you see this more in the pharma world where you're kind of collateralizing kind of an asset. But this we were able to do that on a kind of a basket on our entire portfolio, which was able to drive down the cost of capital.

Got it. Maybe just switching to the MRD business, Chad. We often get questions on how clonoSEQ is differentiated from other methods for heme MRD such as flow or PCR. Can you just give us a quick overview of some of those alternatives? And what does penetration look like for each of these approaches today, including for clonoSEQ?

Yes, sure. It really depends on indication, but there are -- what we're really competing against is existing technologies. So in ALL and in CLL, you have -- and in multi myeloma, you have flow cytometry. In multi myeloma, you also have a blood-based test called the M protein test. You have other kind of PCR methodologies as well. The one -- the big -- there's a couple of main differences. The first is in really depth. So we are, by far, the most sensitive and more specific tests out there. You're way past 99% threshold both in terms of specificity and in terms of sensitivity. So what that means is if you're MRD-negative by flow cytometry, meaning you can't detect the cancer, you still have cancer in your body, and that can be picked up by clonoSEQ. So that's a very big deal. And so you talked about depth of prognosis. But there's also what -- what's really important is standardization. If you look at flow cytometry, it's much more of an art than a science. So it's localized, and you have an operator that is essentially looking at an analogue picture and making a call based on whether there's cancer still present. So I look -- I use the analogue versus digital analogy whereas in clonoSEQ, it's really a digital readout. It's a molecular readout that can tell you exactly how many cancer cells are present per million cells. So you're talking about kind of 1 x 10^6.

Got it.

You also asked -- you also ask penetration, so I will get to that right now. Right now, I'll just start -- penetration by flow is about 75% -- and -- but the fastest-growing kind of uptick in penetration is by next-generation sequencing and clonoSEQ is the dominant player in heme MRD. So we have an ALL penetration right now of about 12%. We have multiple myeloma about 6% and CLL, just kind of 1% to 2%. So these are kind of nascent but growing quickly in terms of our penetration rates.

Got it. And just following up on that stream side, I mean, obviously, you've got reimbursement in place. You've got guidelines support in place. Yet if you look at this adoption curve for, I don't know, like Guardant's liquid biopsy approach for solid tumors, that's sort of been growing at a faster clip since their launch. So is it something to do with just the cost disparity for clonoSEQ versus some of these flow-based methods? Is it sort of the fact that the physician inertia, are there sort of economic considerations when sending the sample to you versus doing it in-house? What is it that you're sort of looking to grapple with? Because to your point, I mean, clearly, it's a better test. So walk us through that sort of dynamic?

Yes. Some of it is just a practical thing, whereas if you've been -- if you're a doctor and you've been doing a test a certain way for a long period. That -- I guess that's to your inertia point, getting them to switch over and say, "Hey, don't use your kind of analogue camera anymore, use an iPhone" right? You've got to kind of get them to get over that hump. And that is starting to happen right now. That's kind of one of the -- I think, the biggest factor is just kind of physician education and inertia. And the second is just a need for MRD testing, right? So -- and that follows the efficacy of drugs. So a great example, like it started in multi myeloma with DARZALEX, about 2015 approval. You don't need to measure MRD unless there's some -- there's anything you can do about it, unless you have effectiveness of the drugs. And so now you're seeing that, what's following the curve in venetoclax in CLL. And the clinical testing is a couple of years behind those therapies making it to market and patients living longer with the disease and then a need to test the cancer burden in that patient. And you're seeing different kind of use cases. Let's go to multi myeloma, 2 use cases that are emerging that are increasing our penetration rate is, one is this -- the decision to take a treatment holiday. All patients who have multi myeloma essentially take REVLIMID and other treatments in perpetuity. Well, it turns out that if you're MRD-negative, using a high -- a really deep test like clonoSEQ a couple of years in a row, the progression-free survival is the same, you can essentially go off of REVLIMID. And the other -- and that's a trial called the MASTER trial. And then there's another trial called the DETERMINATION trial, which says if you're MRD-negative, you may not benefit from a transplant. So these are really, really big life-changing decisions that help really patients manage their disease.

Got it. You recently announced sort of Medicare coverage for clonoSEQ in DLBCL. So just walk us through the market opportunity and how often do you think MRD will be monitored in this indication?

Yes. The market opportunity is about between $300 million and $400 million a year. Right now, DLBCL is being kind of essentially measured for MRD using PET or CT scans or essentially the disease is being monitored that way. So -- and that's done twice a year. So at a very minimum, you can consider clonoSEQ will be a less invasive -- because there's toxicity with kind of radiation from doing scans. It's also pretty expensive at least twice the cost. So at least twice a year is kind of what we're looking at in terms of the frequency of testing. And it isn't going to be a blood-based test.

Got it. You talked about the Streck tube assay that's expected later this year. Could you just elaborate on what needs to be worked out on the assay to move from whole blood to plasma? Is this an easy tweak? Or is it something that takes a little bit more work?

Yes. No, actually, it is an easy tweak. And it should be in place by the end of the year. Just a little background on this. It's a workflow issue. Right now, we actually have a DLBCL test in place right now, but we're asking the doctor to essentially get the plasma out of the whole blood, extracted from the whole blood and send this for plasma. Well, it turns out that in workflow of clinical practice, they just go in and take blood. So we're saying, send us the whole blood, we'll take it to plasma and do it from there. So right now, it's just a matter of our CLIA validations and the analytical validation to get up in CLIA and that will be done by the end of this year.

Got it. How important is FDA approval for traction of clonoSEQ in clinical trials? And is that something you're contemplating for DLBCL as well?

Yes, it is. It is something that we will put in place for DLBCL. It is important. So if you look at we're already FDA approved in myeloma, CLL and ALL. And if you look at kind of our uptake within pharma. I mean, we have kind of 49% of the market right now in clinical trials and in multi myeloma. It's less in ALL and CLL, but it's a growing part of our business, and it's quite a nice kind of profitable piece of the business as well. And so we believe that once you kind of have that validation by the FDA that pharmaceutical companies are much more likely to incorporate you as an endpoint in your trials.

Got it. And given that guidelines are often important to begin to see traction as well as you need commercial payer coverage as well. When do you anticipate DLBCL could get into guidelines? And do you feel that you've generated sufficient data at this point? Or is there more work to be done?

I think we've generated some really nice data in the CAR-T space. But where we're in relapsed/refractory, which is really a land and expand. We've been pretty good at this. We've been pretty good at getting in the guidelines. It's very political. You kind of -- I use the -- you guys see like any Mafia shows where you have other people in the mob that are kind of all the pictures -- that's what we do for like the guidelines committee people. And you got to really understand where each person is coming from, whether we've got kind of vested interest in other technologies, it's -- but we've been pretty good at getting into guidelines, and it's all about the evidence. It's combined with, unfortunately, the politics. But it's going to take a little bit of time to get into guidance. It's going to probably take a couple of years, and we're looking at it as a land and expand strategy, where as you get into guidelines for one particular use case, in the patient care continuum at that time point, and then you start expanding it along that. And by the way, also I should mention in guidelines, clonoSEQ doesn't get into the guidelines. It will be NGS MRD that gets into the guidelines. But because clonoSEQ is really -- at least if not the only, but certainly the dominant leader in NGS MRD -- really, we work on it and it really points to our technology, and we try to write the guidelines that points to kind of the depth of specificity and sensitivity that only clonoSEQ can deliver.

Got it. And as you've launched the blood-based assay, are you starting to see an inflection in penetration for ALL, multiple myeloma and CLL as well now?

Yes, we are. We are. Absolutely. Actually, the largest growth in kind of blood-based testing last quarter was in myeloma and now kind of 10% of myeloma tests are done in blood, 35% right now is done in ALL. So we're -- and almost all tests for CLL, it was approved as a blood-based test is done in the blood. And this is -- you talked about some of the other companies that are working on kind of liquid biopsy, MRD is -- the blood-based MRD test is a liquid biopsy test. We don't go around necessarily and say liquid biopsy, but that's exactly what it is. And where we're going to grow the market. If you look at kind of the -- a patient would obviously much ready to get a blood test than have a bone marrow drawn. So the frequency of testing that blood-based testing kind of allows is really going to continue to increase our penetration rate.

Got it. You've talked about sort of single-digit growth in ASPs for clonoSEQ, Chad, from roughly $1,000 today, going to about -- I think it was $1,300 over the next couple of years. Can you just walk us through the puts and takes in sort of underlying that assumption?

Sure. Tycho?

Yes. I mean, it's a few things. It's finalizing pricing with additional payers, including some large Medicaid plans. We can probably do a better job on collections, expanded indications, right, the DLBCL being one. And then the fourth would be pricing. We're kind of exploring ways we can start to push pricing a little bit more, too.

Got it. And Chad, any updates on hospital staffing shortages and where things stand today versus your second quarter?

Yes. I mean you they're continuing to come back. I mean we -- our reps are looking at -- continue to look at creative ways to be able to penetrate the folks that they need to talk to. But it's not -- I wouldn't say full penetration back, but I think as COVID tends to become more normalized, we've certainly been able to access accounts at a more frequent clip.

Got it. And then switching to the pharma side for MRD. Can you just remind us how many agreements you have in place for the business? And which of these are particularly meaningful to you over the next couple of years?

Yes. So we have -- well, first of all, there's about $355 million in milestones, of which about half of those are available to us through 57 active trials. Our penetration, right, as I said, right now with multi myeloma is about 49%. And we're looking at kind of about 20% in ALL and then much less in CLL kind of about 10%. So we -- in terms of the coming years, we're going to -- of those -- about -- we've got 4 that are active in terms of primary endpoint and the rest of those are secondary endpoint. Not all of those will come into fruition. But overall, for pharma, I just -- maybe you should start with this is I don't actually -- I have to quantify the number of actual agreements, but there isn't a major pharma company developing a heme malignancy drug that doesn't incorporate clonoSEQ right now into their trials. It is by far the gold standard in pharma trials and MRD NGS is becoming really incorporated into almost every trial certainly in myeloma. And what we're trying to do is now expand that usage into kind of the DLBCL -- in the non-Hodgkin's lymphoma kind of space kind of more broadly to bring that from 10% up to kind of 50%, 60% over the next few years as well like we did, like we had the success in multi myeloma.

Got it. And just a point of clarification there, that $335 million in milestones, what's the split between the one side to primary versus secondary endpoints?

Yes. Tycho, do you want to...

It's 2/3 primary, 1/3 secondary.

I see. And what's the latest on how the FDA is sort of thinking about accepting MRDs as an endpoint in clinical trials?

Yes. We've been successful in certain areas. Like we said, we kind of have kind of 4 that are incorporated in primary right now. It is -- there's a call to action kind of white paper that's been out there and there's the drumbeat is getting louder and louder. So I do think that you're going to see a much broader acceptance of MRD as a primary endpoint, particularly in the myeloma space within the next -- it's hard to put on time lines when you're dealing with the government, but certainly in the next 12 to 18 months is my guess.

Got it. And Chad, talk to us about the OUS strategy. I know you talked in the past about sort of tech transfer collaborations in certain markets. Is the OUS sort of effort, a relatively low priority given everything else you have going on at this stage?

Yes. I mean, look, there's enough runway here in the U.S. around kind of further penetrating the heme market. We do have a pretty steady, stable international business, but that's not the real growth driver right now. So...

Got it. And then switching to immune medicine. You announced that you're delaying the commercialization of T-Detect until you have a signal in multiple sort of disease types. Walk us through the rationale for launching indication, -- not launching, I guess, indication by indication and what is the advantage of doing it together at a later date. Is that a trade-off that we should be thinking about in terms of just physician payer patient education?

Well, let me take a step back. So first of all, let me say the vision for T-Detect that you can take a single blood test and deliver multiple results is absolutely intact, and it's something that we're driving towards. What we recognize, though, is that there's perhaps a smarter way to get there. So we have the opportunity because of the kind of hundreds of pharma partners that we already discussed -- to do deals with pharma, where essentially they're paying for R&D and signal generation able to get there. So what we said was once we have enough data, strong enough signal, whether it be a panel or an individual indication, that it was able to change clinical behavior and have a clear path to reimbursement, then we'll launch the test. And so in the meantime, though, what we're going to do is really kind of focus on really moving up the value chain with pharma from mapping T cell receptors to antigens that pharma can use that data for patient response, targeted therapy selection kind of -- on kind of the lower end. But as we build the map, we're also looking at potentially target discovery opportunities where -- particularly in the autoimmune space, where there really blunt instruments, no targeted therapy. We have the opportunity to really uncovered kind of druggable targets for these companies. And they're paying -- they're essentially paying for it and then also giving us -- will be giving us diagnostic data rights from it. So it's a really kind of smart, efficient way to be able to do this. And in terms of kind of what drove the decision, there's I think a couple of things came together here. One is when capital was extremely cheap, we were kind of growth at all costs, right? Now we're saying, hey, with Tycho coming on board and with a focus on profitability and getting kind of long-range plan in place, we really have to focus our efforts and say, where are we getting the highest ROI per product and what's the smartest way to develop these products. Don't get me wrong, I don't want to kind of come with the implication that we're being idiots, and we weren't thinking about things in a smart way, but it really sharpened the focus to say, "Hey, we got to be -- have a real strong methodology in place disease by disease, product by product, and is there a new way to get there?" The other thing is we had learnings from our MRD business. We had all these pharma companies in place. So if you look at the -- like -- I'll just give you a gentle we've got the profitability of the MRD clinical business versus the MRD pharma business and how long it takes to get there in a diagnostic. Well, we've got all those pharma relationships now in place. We can have a really nice cash-generating business and get the data while getting to this longer-term vision. So it was really kind of this confluence of kind of learnings and events that refocus us on our priorities and strategy.

Is there -- is there any sort of implications of this shift in strategy, chat to -- in terms of pricing? I mean does this like protect you from getting benchmark to a single assay, for example, because now you're doing this sort of multi-indication panel approach?

Yes. I mean, I wouldn't say that was a primary driver because in addition, Tycho kind of mentioned a few things, but we're really trying to drive down the cost of the assays. So I would say, yes, potentially in the infectious disease category. But even like what Medicare recognized in terms of the COVID payment of $770 a test, if we decided to kind of move forward on that. We could have a significantly profitable test once we drive down with the operating leverage and the margin profile there as well. So that was perhaps one factor, but I wouldn't say it was a driving factor.

Got it. Fair enough. And then in terms of that early panel, right, that's going to be focused on GI indications, Crohn's, Celiac, et cetera. Not -- you won't always find 3 or 4 indications that you can lump together on a panel, right -- beyond sort of GI or perhaps like some other like autoimmune conditions. So as you think about sort of the first 2 versus sort of the follow-on indications that you'll add, how are you thinking about sort of perhaps being open to a test that this goes after a single indication.

Yes. No, we're certainly open to it. And I think if you have a strong enough signal in a disease that has a really solid total addressable market opportunity, where our information is going to change how a doctor treats a patient and is going to get reimbursed. We absolutely look to launch a single indication test. So it doesn't necessarily have to be in a panel. Over time, it's just an algorithm to add that on, by the way, as you go and get -- that's kind of the long-term vision. It's the same test, right? -- you could say, "Oh, and by the way, you want to check off whether or not this early detection of multiple sclerosis when you're doing a GI panel. Oh, by the way, do you have COVID, we've already done Lyme. Do you have Lyme." You can check all those things off just by implementing the algorithm. And by the way, the science and all that's working, and we're starting -- we're improved -- we've already generated signals. We're improving the signals in all those diseases. So I want to be kind of clear that all that's working. It's just -- it's really a matter of what's the best kind of bang for our buck in terms of commercialization.

Got it. Turning to the Genentech partnership, can you just remind us of the near-term time lines for shared and private product candidates? And then -- any color on near-term expectations for milestones over the next 12 months or so?

Yes. Well, the good news, I said it's a little bit tongue in cheek is the shared product and private products are actually compressing in terms of the time line, meaning the private product isn't that far behind the shared product. I say that because as we all know, it's taken us a little bit longer to get there than we would have liked on the shared product. But we delivered earlier this year -- sorry, we're delivering 2 additional data package on top of the selected PCR that Genentech took kind of earlier this year. And we've talked about kind of the first half of next year, having kind of the first milestone on the shared product where we get a milestone based on an IND filing. And the idea, though, Tejas, and this is what's kind of coming is to going to successfully build a stack milestones over the next few years where we have shared product 1, 2, 3, 4, 5 coming and then private product laying on top of that. And we are building towards that. I can tell you, there's a tremendous amount of excitement from both sides the data we're seeing. I know there's some frustration because we don't control the time lines from Adaptive on filings, but the data is looking good, and we're moving forward.

Got it. One on guidance philosophy, Tycho, as you think about 2023, -- how are you thinking about incorporating MRD or perhaps like some of the Genentech milestones into your outlook? Could we see you consider sort of only guiding to essentially non-milestone revenue and asking investors to make a placeholder assumption to lump milestones in the fourth quarter?

Yes. We're still kind of formulating that. But what we have publicly said as we're going to be a lot more conservative as to how we guide around milestones. We don't want to rely on them to hit the quarter. So yes, as we kind of think about next year, we'll be kind of probability adjusting them a little bit more. And that will get factored -- and by the way, there's nothing in guidance for this year for Genentech and milestones, yes.

Got it. Yes. And then in terms of gross margins, how are you thinking about margins once that upfront amortization from Genentech sort of washes out of the P&L. Are there any near-term initiatives that you're focused on, either in terms of sequencing costs or perhaps like data storage or cloud expenses where you can get sort of meaningful expansion in gross margin?

Yes. I mean we're already benefiting from some of the sequencing developments, right? I mean, obviously, [indiscernible] commitment with Grail is to lower cost by 35%. We moved over to their GMP reagents. That's helping us we're doing some additional stuff around workflow. So yes, if we kind of think about the businesses, I mean, on the clonoSEQ side, if you look at some of the comps, I mean, -- they're all kind of 70-plus percent gross margin. I think at scale, we can probably get there. And then at a corporate level, the Street's got us around 70% now and getting to mid-70s over time, and that's reasonable given kind of the mix we have today.

Got it. And any sort of like near-term initiatives that you have ongoing to optimize your cost structure?

Yes. So I mean you touched on some them, cloud compute, real estate. We're looking at our entire footprint and looking at some opportunities there. And then, yes, workflow would be the other kind of big bucket.

Got it. In terms of the RIF, Chad, I mean, has the dust settled in terms of just reallocation of responsibilities? How are you thinking about sort of targeted hires for key functions over the next 12 months or so?

Yes. I would say that the dust has settled. Look, I mean we were one of the first companies in our space to kind of proactively get out in front of it. I think it's been a lot more common since we announced our RIF, I think March was it? And I think in large part, kind of we're-- it's business as usual, right? I mean, all those positions been absorbed, reallocated. We've got a -- frankly, it was really healthy for our organization barring kind of markets aside and everything else. We're just operating at a much more kind of efficient, lean and mean level. I would also say, yes, I mean, we continue to hire in key targeted areas. I mean the RIF was meant to kind of do just that, right, really clean up and make us more efficient. But that doesn't mean that we're -- we're continuing to grow growing on the top line. And we are being kind of more efficient as kind of Tycho mentioned in terms of kind of getting to profitability, which we'll be outlining soon, where there's a lot of efficiencies and really an eye on cost, but we will continue to hire in key areas to grow the business.

Got it. This is a fantastic interview. We covered a lot of ground. So thank you both for doing this.

Thanks, Tejas. It's awesome. Appreciate it.