Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good day and thank you for standing by, and welcome to the Fourth Quarter and Full Year 2022 Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Karina Calzadilla. You may go ahead.

Thank you, Justin, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies fourth quarter and full year 2022 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of '22. The press release is available at www.Adaptivebiotech.com. We are conducting a live webcast of this call and we'll be referencing to a slide presentation that has been posted to the investor section in our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. Actual results may differ materially from today's forward-looking statements, depending on a number of factors, which are set forth in our public filings with the SEC and listed in this presentation. In addition, non-GAAP financial measures will be discussed during this call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-founder; and Tycho Peterson, our Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-founder; Nitin Sood, Head of the MRD business; and Sharon Benzeno, Head of the Immune Medicine business will be available for Q&A. With that, I'll turn the call over to Chad Robins. Chad?

Thanks, Karina. Good afternoon, everybody, and thank you for joining us on our 2022 fourth quarter and full year earnings call. As always, I want to thank all of our Adaptive employees for their dedication and strong execution throughout the year. As you can see on Slide 3, 2022 was a year of key decisions and achievements for Adaptive. We started with the reorganization of the company around 2 business areas, MRD and Immune Medicine. We established clear strategic goals for each of these 2 business areas and executed against these goals by hitting key deliverables throughout the year. Following the restructuring, we shared our long-range financial plan to achieve sustainable revenue growth while reaching adjusted EBITDA profitability in 2025. We also strengthened our cash position with a nondilutive royalty financing agreement. Importantly, given our 2022 ending cash position of $498 million, we do not anticipate the need to raise additional capital to achieve our profitability targets. Both of our business areas achieved significant progress and finished the year strong. In MRD, clonoSEQ clinical volumes grew 51% versus fiscal year 2021, supported by our fully trained sales team, which we nearly doubled during the year. In addition, we launched clonoSEQ and DLBCL and signed an agreement with EPIC for EMR integration, both are key milestones that are fundamental to the growth of our MRD business. In Immune Medicine, we made the strategic decision to focus our commercial and development efforts around pharma services and drug discovery. Pharma services had substantial growth of 67% versus 2021. In drug discovery, our partnership with Genentech had significant progress in both of our cell therapy programs. We are optimistic about the potential of Genentech advancing the first candidate into the clinic. In addition to Genentech, we are focused on leveraging our capabilities to develop our internal programs in autoimmune disorders. We finished the year with a strong fourth quarter of $55.2 million in total revenue, representing a significant growth of 46% versus prior year. And our fiscal year 2022 revenue of $185.3 million reflects a 20% growth versus 2021. We're off to a great start in 2023. Momentum is building. We are growing revenue, advancing our pipeline, and we're managing our operating expenses. And importantly, we had the capital to fuel sustainable growth and execute on our long-range plan. I'm going to start with MRD on Slide 4. clonoSEQ is the gold standard for MRD in blood cancers. Over the last decade, we have built strong moats around clonoSEQ that provide significant competitive advantages, including best-in-class sensitivity, broad coverage, clinical evidence, guideline inclusion, and pharma use as a surrogate endpoint in clinical trials. Now, having nearly doubled our sales force, expanded into DLBCL, and with the forthcoming EPIC integration, it is about execution and driving penetration. As shown on the graph, clonoSEQ test volumes are growing consistently. Fourth quarter volume grew 9% from third quarter to 10,526 tests delivered. Ordering health care providers and ordering accounts experienced significant growth of 56% and 47%, respectively, versus prior year, and unique patients tested grew 63%. ASP is nearly $1,100 per test, and we expect it to continue to grow annually in the mid-single digits as we finalize pricing agreements with noncontracted payers and improved collection performance. Our revenue from MRD pharma partnerships, which is a key component of our MRD business, is also growing. Quarterly revenue, excluding regulatory milestones from these partnerships, grew 52% versus prior year and 41% versus prior quarter. This quarter we recognized $2 million milestones from the approval of another multiple myeloma therapy which uses our clonoSEQ assay as a secondary endpoint. We are off to a great start this year with clinical clonoSEQ orders at a record high for us in the past month. To further increase clonoSEQ penetration, we are focused on a 3-pronged strategy shown on Slide 5. First, increased blood-based testing. Blood-based testing will be a catalyst to drive penetration in the community and increase frequency of testing for patients. clonoSEQ is validated and reimbursed in blood in ALL, multiple myeloma, CLL and diffuse large B-cell lymphoma and overall usage of blood in the fourth quarter currently accounts for approximately one-third of all clonoSEQ MRD tests. In addition, as we increase penetration in CLL and DLBCL, which are primarily blood-based, the overall usage in blood will continue to increase and will catalyze penetration in the community, which now represents 15% of volume versus 12% just last quarter. Second, drive growth in DLBCL. We launched clonoSEQ in DLBCL during the ASH Conference in December. DLBCL represents 30% of patients with non-Hodgkin's lymphoma and is an aggressive disease with a high relapse rate. We anticipate DLBCL to be a meaningful contributor in the second half of 2023. Expanding access to clonoSEQ allows physicians to detect relapse sooner and create a more precise treatment plan for each patient. We expect to generate additional data in DLBCL and file with the FDA to support clinical adoption and increase pharma usage. Third, expand clinical use cases by further demonstrating clinical utility at multiple points along the patient care continuum. You can see on Slide 6, a snapshot of the relevance of MRD testing in patients with blood cancers recently featured at ASH. More than 30 clonoSEQ-related abstracts and multiple presentations reinforce clonoSEQ's ability to provide valuable insights for treatment surveillance, clinical decision making, and continued demonstration of the value that clonoSEQ offers to drug developers. A rich set of evidence has driven specific use cases that clinicians are incorporating into clinical practice today. Particularly the MASTER trial demonstrates that 90% of standard risk multiple myeloma patients who have 2 consecutive MRD negative results with clonoSEQ can stop treatment and remain cancer free after 2 years. This is an outstanding outcome for patients who can find relief from treatment side effects and also enable substantial savings for the healthcare system. As more studies read out, there will be greater adoption of MRD in the clinic resulting in more patients benefiting from clonoSEQ at multiple time points along their treatment journey. The setup for MRD business is strong, and we are confident that we will achieve significant growth this year. Now turning to Immune Medicine business on Slide 7. Our Immune Medicine business leverages our platform's proprietary ability to sequence, map, and characterize T cell and B cell receptors at scale to drive opportunities in major indications. Growth in Immune Medicine is driven by 2 main areas, pharma services and drug discovery. Through pharma services, we deliver rich and valuable immune receptor data to our biopharma customers that informs biomarkers of response and accelerates their drug development programs. In drug discovery, we are focused on cancer and autoimmune disorders with the goal to advance therapeutics either on our own or with potential partners. As shown on Slide 8, our strategy in drug discovery is to use our proprietary and differentiated capabilities to discover new drug targets and then develop T cell receptor or antibody therapeutic candidates against those targets. We're already doing this in oncology with our partner Genentech in cell therapy. As shown on Slide 9, we're making good progress with Genentech on 2 cell therapy programs. For both cell therapy products in development under this collaboration, Adaptive validates specific cancer neoantigen targets and then identifies and characterizes potent therapeutic-grade TCRs to those targets. For the first shared TCR candidate selected by Genentech, we are focused on speed to the clinic. In addition, we delivered 2 additional shared TCR data packages for Genentech's consideration. On the fully personalized program, having established our prototype with more than 60 patients, we successfully identified and characterized T cell receptors to patient-specific tumor mutations. We also completed end-to-end process runs to start to define early product development. This year, we are focused on standardizing and optimizing our process towards future clinical readiness. In addition to our partnered programs which Genentech in cancer, Slide 10 highlights our internal efforts in autoimmune disorders. In this therapeutic area, disease-specific antigens are not well known. We are leveraging our unique capabilities to identify druggable targets in multiple sclerosis and IBD, among others. Next steps are to generate data that validate those targets so we can make progress towards developing therapeutic assets using our TCR and antibody discovery capabilities. We believe drug discovery is another major value driver at Adaptive, and we are excited by the strides we're making with Genentech and our internal programs. I'll now pass it over to Tycho for a financial update.

Thanks, Chad. Starting on Slide 11 with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was $55.2 million with 51% from MRD and 49% from Immune Medicine, representing a 46% increase from the same period last year. MRD revenue of $28.1 million grew 70% from a year ago with clinical testing and MRD pharma partnerships each driving approximately 41% of the growth along with a $2 million increase in MRD regulatory milestones. clonoSEQ test volume, including international, increased by 54% to 10,526 tests delivered from 6,850 tests in the same period last year. Immune Medicine revenue was $27.1 million, up 27% from a year ago. This change was driven by a $5.2 million increase from pharma and academic customers, as well as a $2.1 million increase in Genentech amortization, partially offset by a $1.6 million decrease from T-Detect COVID. Total 2022 full year revenue was $185.3 million, representing a 20% year-over-year increase. Looking closer at the full year, MRD revenue was $87.1 million, up 32% from a year ago, driven by a $15.8 million increase in clonoSEQ clinical testing and $10 million increase in MRD pharma, partially offset by a $4 million decrease in MRD regulatory milestones. Immune Medicine revenue grew to $98.2 million, up 11% versus the prior year, driven by a $13.6 million increase from pharma services, partially offset by a $4.4 million decrease from T-Detect COVID. Now moving on to operating expenses on Slide 12. We continue to place a strong emphasis on leveraging our OpEx. Total operating expenses for the fourth quarter were $94.4 million, representing a 5% decrease from $99.5 million in the same period last year. Cost of revenue was $16.6 million compared to $14.4 million last year, representing a 16% increase. R&D expenses were $31.2 million compared to $34.7 million last year, representing a 10% decrease. Sales and marketing expenses were $23.7 million compared to $26.7 million last year, representing an 11% decrease largely due to reduced clonoSEQ and T-Detect marketing activities. General and administrative expenses for the quarter were $22.4 million compared to $23.3 million a year ago, representing a 4% decrease. Lastly, interest expense from a royalty financing agreement with OrbiMed was $3.6 million. Net loss for the quarter was $40.2 million compared to $61.4 million last year. For the full year, total operating expenses were $385.5 million compared to $363.3 million in 2021, with the 6% increase primarily driven by higher G&A and cost of revenue. Importantly, the 6% increase represents a significant reduction in our OpEx growth of 45% from the prior year while still achieving meaningful revenue growth from our core revenue segments. Full year 2022 net loss was $200.4 million compared to $207.3 million in 2021, while adjusted EBITDA was a loss of $121.6 million compared to a loss of $151.7 million in 2021. We ended the year with approximately $498 million in cash, equivalents, and marketable securities, giving us over 3 years of cushion on the balance sheet. As Chad noted before, we expect this will carry us through to profitability without having to raise additional capital. Now turning to our outlook for 2023 on Slide 13. We expect full year revenue to be in the range of $205 million to $215 million. At the midpoint, we anticipate the contribution from our businesses to be approximately 55% from MRD and 45% from Immune Medicine, with a lower contribution from Immune Medicine mainly driven by significantly lower amortization from the Genentech upfront versus prior years. Our MRD business estimates include over 50% growth in clonoSEQ test volumes and a continued ASP increase in the mid-single-digit range. In addition, we anticipate MRD milestones in the mid-to-high single-digit millions. With respect to trends over the year, we expect revenue to be back-half weighted and Q1 to be the lowest of the year. This is due to several factors, including normal seasonality reflected in the low first quarter and high fourth quarter; uptake in MRD from the clonoSEQ DLBCL launch and EPIC integration which are expected in the back half of the year; and milestones in both Immune Medicine and MRD, which are expected by year-end. Regarding operating expenses, we expect 2023 OpEx, including cost of revenue to be slightly below our 2022 OpEx of $385.5 million. This reflects our ongoing efforts to drive operating efficiencies while investing behind the projects to support our growth profile with higher returns. We're continuing to be thoughtful about our cash deployment and expect our burn to be an average of $40 million per quarter. We had solid performance in 2022. We are growing revenues, managing our operating expenses, and we have a strong capital position to fuel growth and execute on our goals. With that, I'll hand it back over to Chad.

Thanks, Tycho. As highlighted during the call and shown on Slide 14, we have several key milestones for 2023. We're off to a running start, and I'm confident in our ability to accelerate clonoSEQ penetration in our MRD business and to demonstrate our drug discovery capabilities in Immune Medicine. With that, I'd like to turn the call back over to the operator and open up for questions.

[Operator Instructions] And our first question comes from Derik De Bruin from Bank of America.

So can you talk a little bit about revenue pacing? Obviously, you've got DCBCL (sic) [ DLBCL ] coming in the back half. How should we think about -- I realize Q1 is going to be your lowest due to seasonality and other things, but just some quarter-to-quarter progression if you've got on revenues and volumes, it would be helpful.

Yes. As you noted, first quarter will be the low. The DLBCL launch and the EPIC integration are back half drivers for sure. And then if you look at the range we laid out, there are some variables in there, which maybe I'll spend a minute on. On the MRD side, we guided conservatively on milestones, so that could be a swing factor as we go through the year. It could drive things to the high or low end of the range, depending on the magnitude of the milestones. We've got roughly $370 million in future milestones, as we've talked about in the past, line of sight to about half of those. And we risk adjust those in our guidance with about a 30% to 50% probability of success. So that's one swing factor. The IND acceptance for Immune Medicine, obviously, a big swing factor towards the end of the year. And that's the biggest swing factor in the fourth quarter. And as a reminder, on Genentech, we recognized $7 million of the $10 million upfront on the acceptance of that milestone. So that gives you -- we're not going to give quarterly guidance, but that gives you some flavor as to the drivers in the back half of the year that are going to lead to accelerating growth as we progress through the year.

Great. That's helpful. And on the greater than 50% volume growth in clonoSEQ, it's a little bit below what we were looking for. Just some commentary on trends and basically any residuals like headwinds in the market, patient access -- not patient access, the doc access. Just any sort of commentary on trends -- volume trends.

No. Actually, Derik, as I had mentioned, we're seeing record volumes to start the year. And so we wanted people to be conservative in putting that out. Greater than 50% leaves a lot of room on the upside too. So we're putting that out there. It's a watermark to hit. We feel very confident that we're going to be able to achieve that number and believe that another swing factor that there could be some upside there.

And our next question comes from David Westenberg from Piper Sandler.

I'm actually at the other side of Derik here because one of the battlegrounds we get is in that 50% volume here. Can you maybe talk about -- same kind of concept. Can you talk about, you're now on a mid-50s comp here in terms of growth rate. So you do have a tough comp on the volume growth coming in, in 2023. I think EPIC and DLBCL are happening in the back half. So give us maybe a little bit more conceptualization of beating that tough comp. And really what does EPIC and DLBCL contribute from an incremental standpoint because I do think it means that they do help you overcome that comp.

Sure. David, I'm going to turn this over to Nitin Sood, who runs our MRD business and calling in from San Francisco.

Yes. I think, first of all, I just want to remind everyone that our current penetration is about 5%. So there's a lot of room for us to grow. As Chad mentioned, 2023 is off to a very strong start. And I'm very confident that we grow volumes at greater than 50% off a larger base business this year. And that combined with ASP increase, which we are seeing steadily, we'll see revenue increase by 60%. A few things I want to point out, as you know our focus and growth strategy has been in the U.S. twofold, to drive deeper penetration and to increase business in the community. Over the last few quarters, we've seen our orders per account and institutional accounts increase by 30%. Our community business has grown from 8% of our total business to 15%, and I expect that to be 20% of our 2023 business. And all leading indicators are looking favorable. New HCPs accounts grew by 50%, unique patients tested grew by 60%. Multiple myeloma, which is a key growth driver for us, continues to deliver. And we've had some very significant data readouts this year, MASTER, DETERMINATION. And then finally, the increased reach and effectiveness of our sales team is coming into play, and we'll fully deliver in 2023. So over and above DLBCL and EPIC, there's a lot of growth catalysts, and I expect our growth -- very confidently that we'll grow above 50% in this year and even beyond.

Got it. I noticed you have 10 analysts here, so I'm just going to ask one more since you probably have a lot more questions here. You did keep burn rate or expenses I think you said were flat. I respect that you're probably going to grow revenue, which basically means you are going to have to have sales -- compensation for sales people that are hitting their numbers, bonuses, just the natural cost of goods sold that are associated with higher revenue here. So can you give us a little sense on where you have cuts remaining in 2023 given the fact that I think that you will grow in the year and you're holding OpEx steady?

Sure. So, a couple things. Yes, the cash burn guidance is $40 million on average for the year. Q1 will be higher due to the bonus payouts. We had a pretty low quarter in the fourth quarter. There was favorable working capital, low CapEx spending, and high investment income. So we're coming off a low burn on the fourth quarter, but 1Q will be a pretty significant step up. If we look at total OpEx overall, we spent just over $385 million, including cost of revenue last year. Some of the areas we've talked about in prior calls, workflow enhancement, leveraging lower sequencing costs, DNA extraction costs, cloud compute, real estate, these are all ongoing initiatives. We've done a lot of work around R&D as well. We've mapped projects to revenue or margin enhancement opportunities, and there's some leverage there that we've seen similarly with G&A. And then we're doing a lot of work on gross margins now. We'll have more to say on that at some point in the future, but this is an area where we do see significant potential as we scale. So the important thing about OpEx is it's not coming from a single area. It's all parts of the company. There's been a real cultural shift underway here at Adaptive and really there are no sacred cows. So we continue to look for opportunities to get more efficient and better as a company going forward, but it's across all parts of the business.

And our next question comes from Daniel Brennan from Cowen.

Maybe just the first one would just be, as we think about the '23 guide, the immunoSEQ academic and pharma, and then as well on what's implied for MRD pharma. Just give us a sense of -- obviously, these are fast-growing businesses, but hard for us to see underneath the hood. Obviously, there's a lot happening. So just what's implied in '23? And what's the visibility on that outlook?

Yes, Tycho, you want to take it?

Yes. We're not going to give specific guidance around immunoSEQ or academic or some of the subsegments. Sharon, is there anything specifically you want to say on immune for your part of the business, then maybe we'll put it over to Nitin as well. But we're not going to guide specifically on subsegments.

Yes, happy to expand. Again, it's about execution. As we said, our strategy is to increase penetration with our portfolio of pharma companies and biotechs in later and larger stage clinical trials in really 4 major indications. And so we're head down, focused on doing that to generate revenue, meet our guidance.

And just so -- again, at the midpoint of the range here, Immune Medicine is about 45%, so that implies $95 million. The Genentech amortization is a big headwind for that business, right? It's $30 million, $35 million this year versus north of $60 million last year. So that's something that has to be factored in. And at pharma services, we've publicly talked about that business growing at a 20%-plus CAGR in the long run. So that gives you some sense of how we're thinking about it. And then there's a milestone we talked about earlier with Genentech towards the end of the year. MRD 55% is the range at the midpoint. That implies about $115 million. We talked earlier about volume growth of 50% for clonoSEQ and mid-single-digit ASP growth. Milestones there, I mentioned earlier, are going to be in the mid-to-high millions. And then you've got the MRD pharma sequences business around $45 million, growth of about 10% at the midpoint. Nitin, anything you'd add to that?

No, I think I'll just only point out that this is for the first time our clinical diagnostics business is a key growth driver, and it's going to be larger than our pharma business in MRD. So it's a pretty exciting year for us in 2023.

And maybe one quick follow-up. Just in terms of the clinical trials and the adoption in blood, what's the -- are there any important milestones -- not milestones in terms of dollar milestones, but in terms of events in these trials such that it would lead to maybe a more meaningful proven impact such that you could see a greater ability to market it to doctors. I know that we spoke to a few doctors and they're looking for continued data to mature over time. So will any of that be happening in '23 or it's just an ongoing basis?

Go ahead, Nitin.

Yes. So I think first, I just want to remind everyone that we are selling in blood today. 30% of all MRD tests are in blood. DLBCL and CLL are blood tests primarily. 26% of all ALL tests are in blood. Multiple myeloma used to be primarily a bone marrow test; however, now 12% of all tests in multiple myeloma are in blood, and this is increasing. And the use case for blood is simple in the case of multiple myeloma. When the test is positive in blood, your cancer is there. Treat the patient, make it negative in blood, and then verify annually in bone marrow. On top of this, we're conducting additional studies in blood to strengthen our evidence and to demonstrate that we're better than other biomarkers in blood. We expect to have data for multiple myeloma readout at the International Myeloma Society in September and ASH in December. And then we have data also for CLL and DLBCL reading out. DLBCL we have a major conference coming up in June. So we're executing commercially, and we'll have additional data, and I expect blood volumes to go up.

And our next question comes from Julia Qin from Cowen (sic) [ JPMorgan ].

It's Julia from JPMorgan. So looks like in this 4Q, your clonoSEQ ASP of $1,100 ramped up faster than what we were modeling. So could you maybe give us an update on your private payer conversation so far? And why is it not possible for us to see ASP accretion above that mid-single-digit growth that you're guiding to?

Go ahead, Nitin.

Yes. I think we've seen a steady ASP growth for clonoSEQ over the past couple of years, and we anticipate that growth to continue in the mid-single-digit range over the next 2 to 3 years and trend towards $1,700 per test, which we have as the contracted rate with private payers. We continue to invest in getting additional pricing agreements with noncontracted payers, including large Medicaid plans where we've seen a lot of usage of clonoSEQ recently. We're improving our collection performance. So we're going to invest in that area this year. And then we are also going after some of the expanded coverage for new indications like DLBCL. DLBCL we have Medicare coverage only, but this year we expect to expand that into private payer coverage. And then we have minor indications like MCR and CTCL that we need coverage on. So a lot of things are happening, and we expect ASP to grow steadily towards $1,700 in the next few years.

Great. And then on the Immune Medicine side for Genentech, you mentioned that your focus for this year on the first candidate is speed to clinic. Can you elaborate on what can Adaptive do to speed up that process and what kind of timeline we should be thinking about? And then for those 2 additional TCR data packages, what's the timeline for Genentech making a decision on those?

So for Genentech, they control the timing of the filing and, obviously, interactions directly with FDA when they do file. And so that's ongoing. We're very optimistic and are working closely to support it along the way. As it relates to the 2 additional TCR data packages that we completed and delivered at the end of last year, those are being reviewed together jointly by the working teams. And obviously, we will update in terms of any progress to advance those as potential therapeutic product candidates.