Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

All right. Good afternoon. I hope everybody is enjoying the conference so far. Welcome to day 1 afternoon of the JPMorgan Healthcare Conference. I'm Julia Cheng. I cover life science tools and diagnostics at JPMorgan. And it's my great pleasure to introduce you to our next company presentation today by Adaptive. So with that, I'll turn it over to Chad.

Thank you, Julia. I'm Chad Robins, I'm the CEO of Adaptive Biotechnologies. I want to wish everyone a happy new year for those in the room and those listening in by webcast. Momentum in Adaptive Biotechnologies is building. We're driving revenue growth. We're advancing our pipeline, and we're managing our operating expenses with a very strong cash position. I want to remind you today, I will be making forward-looking statements both in the presentation and in the question-and-answer session afterwards. The mission of Adaptive is and always has been to translate the genetics of T cell and B cell receptors to develop clinical products. We use our immune system as source code to develop diagnostics and to develop drugs. Last year, in 2022, we sharpened our focus in 2 key strategic and operating areas. The first, we focused into 2 business segments with clear and distinct deliverables. The first business segment is in MRD and it's an execution play to increase penetration. The second is an Immune Medicine where we can unlock the value of our pipeline to deliver drugs. Secondly, we fortified our balance sheet, we had a capital infusion that will drive us to profitability and at the same time, we're effectively managing our burn and our operating expenses. Taking a deeper look at our 2 business segments on Slide 5. In MRD, what is MRD? Minimal residual disease or what I'll call MRD, it's a highly sensitive NGS-based assessment of MRD and heme malignancies, certain lymphoproliferative disorders. But what that effectively means is that we can count cancer cells. And there are 2 primary sources of revenue for the MRD business. The first is the clonoSEQ test offered to clinicians. And the second is the clonoSEQ assay offered to pharmaceutical companies. In Immune Medicine, we also have 2 sources of opportunities, the first is in our pharma services business, which uses the immunoSEQ assay to deliver rich immune receptor data to pharmaceutical companies in their clinical trials, and the second is using our own data to develop therapeutics using immune receptors. We'll get started with MRD. I want to bring to life a real-world patient story so you can understand how minimum residual disease is used in the real world. Karen Thomas is an extraordinary one. She was diagnosed with multiple myeloma 12 years ago. She was put on a course of chemotherapy -- after a transplant she was put on chemotherapy and maintenance therapy for 10 years. This had debilitating side effects in particular, really bad gastrointestinal issues. After her doctor was convinced that her MRD -- that her cancer was gone, he gave her the clonoSEQ test to determine her MRD status. At a molecular level, the clonoSEQ MRD test determined that she no longer had cancer remaining in her body. Using this information, her clinician had the confidence to take her off maintenance therapy. And she is leading a very full and active life. In fact, right before the break, she just came to Adaptive and did a fireside chat, hugged every single employee in our company essentially, there wasn't a [indiscernible] in the room. It was pretty impactful. ClonoSEQ is at the epicenter of transforming care for lymphoid cancer. From a pharma perspective, pharmaceutical companies are using the clonoSEQ assay to expedite drugs in development using MRD status to get drugs approved quicker. From a provider standpoint, as I just mentioned, clinicians are using the information to make informed treatment decisions at each point along a patient's care continuum. This also has a benefit to payers. In the case that I just mentioned with Karen's story, she was on a course of maintenance therapy that costs $130,000 a year, not only did the payers benefit from taking her off that therapy, we're also no longer treating the side effects. But how does the test work? MRD is a very sensitive assessment of a patient's tumor burden. We track the disease-specific DNA sequences that are associated with each cancer cell. So effectively, we can count cancer cells after treatment. And we can monitor those changes in tumor burden at each point along the patient's care journey. It is highly prognostic of outcome. It is widely recognized as the gold standard in MRD and heme malignancies. It is highly sensitive to 10 to the minus 6. What that means in real-world terms is that we can track 1 malignant cancer cell in every 1 million healthy cells. This is the only FDA-approved test in MRD in heme malignancies. It is one of the most widely clinically validated diagnostic test in history. There are over 150 publications and currently there are over 100 active trials going on using clonoSEQ. It's also paid for by insurance. We have 260 million covered lives. It is in all the NCCN guidelines and the NCCN Cancer Centers, 33 out of 33 are using clonoSEQ in their centers. Importantly, as I mentioned, it is the test of choice for pharmaceutical companies that are developing heme malignancy drugs that our test applies to. We have over 60 pharma partners and are in close to 200 active clinical trials. This business is growing. We have revenue growth quarter after quarter, year after year, but there is a long ramp of growth ahead of us. We're only 5% penetrated in cancer patients in the United States on a clinical testing basis. We're only 21% penetrated on an overall pharma basis. I had the opportunity to do a 3-hour meeting with our Head of MRD and our field team -- field team leadership on Friday, who outlined the strategies. We have a very good team in place. And -- but remember, we just doubled the size of the field team last year. So we -- the setup is good for us to be able to penetrate this long ramp ahead of us. How we're going to do it is a 3-pronged strategy. The first is, we're going to increase blood-based testing. The second is we're going to expand into the recently launched category of non-Hodgkin's lymphoma. The third is, we're going to increase the number of tests done per patient by demonstrating clinical utility in multiple studies. In parallel, there's a lot of blocking and tackling that we need to do. We need to enhance the user experience. We're doing this through an EPIC integration. We need to increase our average selling price. We need to expand our coverage so that we have more covered lives under contract, and we need to optimize our sales force. I want to double-click on each one of these initiatives. First, blood-based testing. Only 30% of clonoSEQ test today are done in the blood. Why is this so important to do blood-based testing. #1, obviously, it's more convenient to get a blood test and also it's a lot less painful to patients, much less invasive. The second reason that's really important is if you look at one of the biggest growth areas for Adaptive, it's in the community setting. And in the community, they're not set up to do bone marrow. They're set up to do blood tests, like everyone else is. In order to do this, we have 9 ongoing studies and a couple of them will read out just this year. Second, increase and expand in non-Hodgkin's lymphoma, 50% of patients that our clonoSEQ test applies to are in the category of this broad basket called non-Hodgkin's lymphoma. Of that 50%, 30% of them are in diffuse large B-cell lymphoma, or DLBCL. It's worth noting that we already have launched a test in a CLIA setting, and it's also worth noting that we received Medicare coverage for DLBCL last year. We are going to pursue FDA approval, it's not necessary that we do this for CLIA test, but we are going to do this, this year. We're going to submit. The reason for that is twofold. One, we think it will help with guideline inclusion. The second, as I mentioned, our pharmaceutical partners who we become a very trusted partner, they want an FDA-approved test. So that's why we're going to move into the FDA. The third area is increasing the number of time points tested per patient through continuing to generate the clinical evidence. I'm going to highlight a study that I think is interesting because it really shows kind of 2 sides of the coin of how MRD is used in a real-world practice setting. This is a study done at UCSF investigator-sponsored trial by Martinez Lopez. It was published in the Journal of Hematology & Oncology. On the left side, in the graph that you see, what it shows that if a patient is MRD positive, meaning we can detect an increasing tumor burden in that patient and the clinician escalates therapy, mean we give a higher dose of therapy. It leads to a better outcome as measured by progression-free survival. On the right side, this is the case that we highlighted with Karen Thomas, this is therapy discontinuation. What this shows, if a patient is MRD negative, meaning we can't detect the patient at a very sensitive molecular level. They are MRD negative, no cancer left. We pull -- the doctor pulls a patient off of maintenance therapy, there is no difference in progression-free survival. My belief, and I think we're going to see that actually, the progression-free survival is actually going to be better because they no longer have debilitating side effects, which we mentioned. So I'm not going to walk through these one by one. But there are a lot of key milestones and readouts coming in 2023. I guess I'll highlight again, the EPIC integration, I think it's going to be very, very important for a doctor to be able to order directly from the EHR to order a clonoSEQ test. I'll also highlight in the blood-based readouts in multi myeloma, I think, will be really important as well. So now that I've covered MRD, I'd like to turn our focus over to the Immune Medicine segment of the business. Our Immune Medicine platform, sequences, maps, pairs and characterizes immune receptors at scale to deliver rich information to pharmaceutical companies in clinical trials and for Adaptive to use for drug development. I'm going to briefly touch on our Pharma Services business, and then I'll spend the bulk of my time in Immune Medicine talking about our drug discovery efforts. In Pharma Services, it's worth noting that this business is growing 20% year-over-year, and we believe has a sustainable growth profile in front of us. What we do is, we deliver data to pharma companies to inform biomarkers of response, both from early research and development all the way up through regulated studies. And this is across autoimmune disorders, infectious diseases, oncology and neurological disorders. So basically, any drug that's being in developed, if you want to look at the immune repertoire, the T cell receptor or B-cell receptor profile and how the changes are and how their drug is impacting a patient in their trial, they would use this immunoSEQ profiling service to be able to do that. Second, our efforts in drug discovery, I believe, represents one of the largest growth opportunities for Adaptive. And it's actually really simple. We have the unique ability to validate novel disease-specific drug targets using our platform. And then once we find these unique and differentiated disease-specific targets we can find immune receptors as therapeutics against those targets, both T cell receptors and antibodies. Our drug discovery efforts are focused in 2 areas: in cancer and in autoimmune disorders. Let's get started with cancer in which we have really our marquee partnership with Genentech. It's an exclusive partnership in cell therapy directed against neoantigens in solid tumors. There's 2 strategies that we're primarily focused on. One is a shared product strategy, and the second is a private product strategy. Once we identify, validate and characterize these very specific targets, we can then find and validate T cell receptors against -- in the shared program against neoantigens that are shared amongst patients. Second, in our private product program, we can find T cell receptors against tumor-specific mutations for each patient and develop a truly personalized therapeutic. The partnership with Genentech is progressing well. We are on track to deliver 3 fully characterized data packages on the shared program this year. Genentech has already -- sorry, last year, they've been delivered. Genentech has selected the first to move forward to an IND, so that we can speed to the clinic. In the private product program, we have shown that we can find patient-specific T cell receptors now in a 100 patients against patient-specific tumor mutations. And we've developed a full end-to-end prototype to be able to deliver these T cell receptors over to Genentech when their job then, both in the sharing and private program is to take these T cell receptors, manufacture them, expand them, and deliver them back to the patient. Not only are we excited about this, Genentech is talking about it as well. So this just came out Thursday in advance of JPMorgan. They published an article called New Frontiers of Cell Therapy and highlighted T-cell therapies targeting neoantigens on tumor cells. Specifically, and we've been talking about this, Genentech used Adaptive as the anchor to build their entire cell therapy program, and it says working with Adaptive -- on Readers, working with Adaptive Biotechnology to advance personalized cell therapies for cancer through pioneering technology that decodes the immune system at unprecedented scale. So this is moving along great. The second area of focus where we're going to leverage our platform technology is in the autoimmune space. More specifically, we're focused on 2 disease areas of multiple sclerosis and irritable bowel disease, or IBD. The problem, as you know, with autoimmune disease disorders is there really aren't targeted therapies, right? Most of the -- and some of the highest selling drugs in the world are really blunt instruments right? And it's really interesting because we believe that we have a unique ability to discover disease-specific targets. More importantly, once we have identified these targets -- we have 2 platforms. One is the T cell platform, which I just mentioned with Genentech. And the other is an antibody platform that we developed during COVID to develop clinically validated assets against these targets. And whether we partner on these or move them further along ourselves. It depends on the data, it depends on the target, it depends on the mechanism of action. But this is an area that we are very focused on. And we expect to have some preclinical data later this year to make some really interesting go/no-go decisions. Again, in Immune Medicine, just to kind of wrap up the category. We're focused on 2 areas: our Genentech collaboration, which we can -- we're looking to speed to the clinic with our lead shared product candidate, and we're looking to complete our private product prototype so that we can transition to IND readiness for the private product. In the autoimmune pipeline, I think we're going to be able to be in a position to deliver some really interesting proof points over the course of the year to say that we can do what we said and really uncover disease-specific targets and then find assets against them. I will again reiterate that it's a really nice kind of business that our Pharma Services is able to kind of [ play ] this with a 20% year-over-year growth. Before I turn it back over to Julia for our Q&A, I do want to highlight the very strong financial position that Adaptive is in. We're on track to deliver a revenue CAGR between 2022 and 2027 between 20% and 30%. At the same time, we're managing our operating expenses, we're reducing them. So that means our lines are going to cross with an adjusted EBITDA positivity in 2025 and a cash flow breakeven in 2026. Importantly, though, we have the cash through the non-dilutive fundraising that we did to be able to get there and bridge to profitability without raising additional equity capital. So with that, I'm going to leave you with 3 key takeaways. The first, we are the gold standard in MRD testing, and there is a long path ahead of us for growth. #2, we have differentiated capabilities to use our platform to discover and develop immune receptors as therapeutics against novel disease targets. And #3, we are well capitalized with a clear path to profitability to truly lead in this category of Immune Medicine. So I appreciate your time today. Look forward to the Q&A. I'd like to invite my team up for Q&A.

All right. Thank you, Chad, for the great presentation. I can get a startup, but for the audience, if you have a question, feel free to raise your hand. There's a mic in the room, and you can also submit it through the digital conference book. So I can get us started. Maybe you guys can, any qualitative comments update you can share regarding cloud clinical volume trended in 4Q and speak to your level of confidence in delivering that 50% clinical volume growth in this year?

Yes. Yes. I mean I think a quick introduction. This is Nitin who is head of our MRD business.

Yes, we haven't released our Q4 numbers. But I think overall, the business is looking really good for the MRD platform. Yes, I'm feeling really bullish also about 2023, I think we expect about 50% growth in 2023 in volumes. And then we also expect ASP growth here in the single-digit range in '23. And there's lots of catalysts. So you heard Chad talk about them, increased penetration in the community, increased usage in blood and then expansion into new indications like DLBCL.

Great. So you mentioned a few drivers, DLBCL, EPIC integration, continued penetration in community setting and increased utilization per physician. Curious, among all these different drivers, which one is the biggest that's currently embedded in your '23 outlook? And what can represent upside to your outlook?

Yes. I think the biggest driver overall for the business is our penetration overall is pretty low, both in the academic setting and the community setting. Even in the academic setting where you have 32 worlds, 32 NCCN cancer centers use clonoSEQ, we have about sort of 12%, 13% penetration. So there's a lot of room for us to grow in the academic setting. And in the community setting, our penetration is sub-5%. This year, we launched -- we were able to activate 180 new community accounts. So the combination of those 2 will drive growth.

We've got a lot of you guys out there as well.

I was trying to stay away from it.

Now go right into that. Okay. testing.

Yes. So I think the single biggest driver is just increasing penetration using our sales team to execute both on the community side as well as on the academic side.

Great. Now thinking about MRD pharma, there is a great opportunity to use clonoSEQ more as primary endpoints in those clinical trials. How should we think about the progress and the pipeline of your efforts in pushing for that more primary end adoption?

Yes. I think first, we have 6 trials going on right now where we're the primary endpoint. One of those trials is likely to read out this year. So that will be a very solid demonstration that MRD or clonoSEQ being used as a primary endpoint can be used for successful approval of a drug program. And alongside with that, a lot of things are going on right now. A lot of our physicians are using the evidence that we have generated across these 150 published studies to encourage the FDA to support the use of clonoSEQ as a primary end point. Pharma companies are talking to the FDA. And we have 100 other studies that will really demonstrate how clonoSEQ is prognostic or indicative of the status of the disease. So all of those combined will really drive more and more usage of NGS MRD and clonoSEQ as a primary endpoint in lymphoid cancers. And then there's also a market trend that's going on that's helping us, the multiple myeloma drug space is highly competitive. There's a lot of new drugs that are under development. And these drugs are very efficacious and using OS or another endpoint to get drug approval is going to take multiple years. So drug companies want to come off the drug fast, clonoSEQ is very solid option for them.

Great. Sticking with MRD. In terms of competition, curious, other than traditional flow cytometry that you're looking to displace, what about the competitive landscape in terms of maybe other emerging players that also offer MRD testing based on ctDNA. What do you think differentiates Adaptive's technology versus them? And how confident are you in continuing to build your market share from here?

Yes. So I think we're very confident about our technology. First of all, starting with sensitivity, we are the most sensitive test we can detect 1 cancer cell in the background of 1 million normal cells, which is unmatched, including by ctDNA companies. And then on top of that, we have an incredible lead both in terms of reimbursement and clinical evidence demonstrating clinical utility -- and many of these studies take multiple years. So we have a multiyear lead. And then lastly, I would say, we're embedded in the clinical pathways of many -- of all these major cancer centers. And then finally, I would say one more point, actually, we're also the product of choice in pharma companies. So a lot of new drugs are being approved using clonoSEQ as an evidence. So a combination of all of that makes me pretty confident that we're ahead in terms of competition. I think there is some emerging competition in DLBCL on the ctDNA side. But again, there, we have a lot of evidence, and we're the only ctDNA test in DLBCL that has insurance covered [ maybe ] Medicare coverage. So very strong position competitively.

Excellent. Any questions from the audience on MRD before we move on to Immune Medicine. All right. Let's move on to Immune Medicine, which is -- I know you're excited about the long-term potential of the franchise. So the current use of TCR is mostly in RUO settings. And you've noted that more validation is kind of the key hurdle you need to overcome for it to be utilized in more larger-scale studies. So help us think through the underlying progress you guys are making? What kind of bars or near-term milestones can we watch out for over the near term?

Sharon Benzeno, who leads Adaptive Immune Medicine business.

Yes, thanks for the question. So I would answer in 2 ways. I think there's a lot of room for continued growth and penetration in the research use only given, as Chad highlighted, the rich immune receptor data we deliver that helps inform biomarker clinical trials across really 4 major therapeutic areas: oncology, infectious disease, autoimmunity as well as neurodegenerative disease that's growing. In addition to that and on top of it, what we're aiming to do is absolutely, increased validation of specific application of the T cell assay, for example, in the cell therapy space. So last year, in March, the FDA issued guidance that explicitly indicated using TCR sequencing. We are the preferred partner to more than 200 pharma biotech companies. And in the cell therapy space alone, there's 2,000 programs ongoing. So we're really looking to maximize in that area. As one area to validate and penetrate further into regulated clinical programs.

Awesome. How about your progress in expanding TCR adoption for more indications beyond oncology? What are kind of some of the progresses you can highlight?

Yes. So -- we have a lot of also runway to go. In oncology, we're the most penetrated. Our portfolio is made up of about 35% oncology clinical programs. And we are mostly penetrated in Phase II -- Phase I and Phase II trials. So about 40% of the portfolio is Phase II, Phase III smaller penetration in Phase III trials. And so we're looking to scale into autoimmune disorders, which is very much in line with our focus on the drug discovery side, as well as we see a lot of growth in the infectious disease programs, RSV. We had mentioned and announced our program with Janssen that continues to grow in the Phase III pivotal trials, as well as neurodegenerative diseases like MS, IBD, Celiac programs, et cetera.