Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good afternoon, everyone. Welcome to Bank of America's 2023 Healthcare Conference coming to you live from the fabulous Encore Hotel in Las Vegas. I'm Derik De Bruin, the Senior Life Sciences, Diagnostics and Tools Analyst for Bank of America. And it is my great pleasure to introduce our next company, Adaptive Biotechnologies. And with us is Chad Robins, Co-Founder and CEO and Chairman; and Tycho Peterson, CFO. So, welcome, gentlemen. Thanks for being here. Thanks for schlepping out to Las Vegas.

Big news this morning. You want to just get straight to that. And talk about the Genentech news and in terms of -- along with it or not. I mean we can...

Yes. I'm happy to talk about that, Derik. And first of all, thank you, and thank you to BofA for having us out again at the BofA Healthcare Conference. Yes. So, a really exciting news today. Genentech, we announced that our partnership with Genentech had the first IND acceptance in our cell therapy partnership in oncology. And this has been a long time coming, but tremendously exciting for us in that this program has got squarely on track and make no mistake about it. I mean we're trying to treat cancer in an entirely new way using patients with T cells and to attack solid tumors. And we couldn't be more excited to activate this side of the business in immune medicine.

The financial impact, I mean, this is -- I mean, you had some milestones that were strengthened. I think -- this was I thought this was coming to 4Q and then it's in 2Q. So, how does the milestone math work?

Yes, we want to kind of moving up. This wasn't this year's guidance. We want moving it up 2 quarters. It is squarely within guidance, but it's nice to see kind of that derisking event happening earlier.

And what's the next steps for this then?

Well, the next steps, if you recall, there's 2 programs associated with the partnership. The first is what we call the shared program and the shared is going after kind of shared cancer antigens with defined T cell receptors that have certain properties that make them great targeting molecules for therapeutic use. And we've already delivered to Genentech 2 additional shared cancer antigen packages, which we're evaluating for that part of the program. At the same time, in parallel, we have what we call a fully personalized cell therapy approach. And the next step for that is an IND filing. We haven't yet given guidance around timing. But the good news is there's been some compression, understanding that the first shared product took a little bit longer than expected, but we've been working in parallel and the data is looking really, really, really good on the private program and we're excited about it.

Then let's move on to some of the things. So, I want to ask a big picture question to start. You reported Q1 results last week, which was solid. Nothing stood out, pit numbers, guide was fine, yet the stock basically, you got kicked in the teeth. I'm just sort of curious as to what -- I know the markets are tough for early-stage stocks, but what do you think happened? And what do you -- I guess, what do you think needs to happen as we get investors more improving on Adaptive?

So, I don't know -- I think what happened kind of related to this quarter was kind of a transitory kind of margin compression. And I'll hand over to Tycho in a minute to discuss that. But kind of bigger picture, there's a few different things that need to happen. The first is solid execution around MRD. Quarter-over-quarter growth we discussed and outlined a path to over 50% test delivered growth in 2023. The second, which happened today is we need to show that the immune medicine side of the business really is a valuable component of the business. And that started with the first acceptance of an IND. And also, we're working on kind of several internal programs with novel targets in autoimmune disorders and we need to show progress on that front. The third is operational efficiencies. We have a very concerted effort to very -- manage our capital allocation and very, very carefully look at how we can extract costs from the business in a very, very efficient, meaningful and smart way. And then the fourth, it should be noted, I mean, we have a $440 million cash balance on our balance sheet. And we're being very smart about how we deploy that cash between very discrete objectives in both the MRD business and in the immune medicine business. But Tycho, can you maybe kind of give some color around margins for the quarter?

So, we went from about 66% a year ago to 50% this quarter and that drop off was partly due -- almost entirely due to 2 factors. One, the Genentech amortization, which you know, as we talked about at the beginning of the year, is effectively going to be half of what it was last year, just over $30 million. And that tends to be close to 100% margin. And then royalties, we didn't have any MRD, sorry, milestones this quarter, and that's 100% [ margin ] and we have milestones. So, the fear is that coming out of the quarter, there's a lot of concern that our underlying margins are going to be kind of baselining at 50%. A couple of things I'd highlight here. First of all, there were some other noise around margins and we had a scrap write-off. We were moving our lab. We were moving and then higher volume through our production lab, which tends to be lower margin. So, there were some kind of transitory stuff as well. There's always going to be mixed dynamics around margins in any given quarter. What we're kind of highlighting here going forward is we have a huge initiative around COGS right now. And as we started to kind of get in there, there's a lot of low-hanging fruit. If you kind of look at workflow, there's a lot we can do around extraction that we're looking at upgrading to the newer Illumina sequencers. We're running everything off 10-year-old NextSeqs at this point. And so as we kind of looked at the lab ops part of it, overhead is about half our COGS in the lab. We see a very clear path for margin improvement going forward. No reason that at scale, we can't be kind of a 70-plus percent margin business, maybe closer to mid-70s [ at that time ]. So, there's nothing structural around our margins. It just historically hasn't been as much of a priority given our growth initiatives. But we're going to be very clear about our expectations on margins going forward. Hopefully, we'll be able to guide around that at some point in the future.

So with -- that obviously means is sort of thinking about rejiggering the margin math now that you've got the milestone early, so it will be big...

Yes. So, 2Q…

That means 4Q. Yes, so that will be, so things will just shift around a bit.

Yes, and then the other side of it is ASPs, right? We're doing a lot of work around ASPs and obviously, that will lift too.

So, remind us on your cash runway, I mean, you said $400 million and some odd. What's your cash burn and how are you managing that and sort of like...

Yes. So, we had -- first quarter is always the biggest quarter for cash burn, so it's 56. And then what we've said is it's going to average 40 per quarter going forward for the remainder of the year. And then next year, it should be less. I mean this is a priority. And so, we'll continue to kind of bring that burn down until we're profitable.

In terms of the cash runway, though, I mean, we've got over...

Over 10 quarters...

Over 3 years of cash and a little more than 3 years of cash on hand. And we've talked about kind of EBITDA profitability by 2025 and cash flow breakeven by 2026. So again, I never want to say never, but it's likely that we won't have to raise equity capital again before we get to kind of cash flow breakeven.

So, can we talk a little bit about the clonoSEQ business and you're looking at volumes growing 50% this year. How do we sort of see that growth rate flattening out? And it goes through also -- or how is that growth rate trajectory from here? And can we also talk a little bit about the size of that market opportunity and how penetrated you are in some of these indications and sort of like what the outlook is for that business?

Yes, sure. Just talking about 2023, we've committed to over 50% volume growth in tests delivered and I can reaffirm that commitment today. We haven't yet given guidance yet moving forward beyond 2023. But I can tell you that we expect to have robust growth going forward. We are just kind of -- at the tip of the iceberg of kind of cracking the penetration. Overall, our penetration is 5% of the cancer patients who are eligible for clonoSEQ test. However, within that, by indication, there's a pretty significant variation. If you look at kind of our ALL penetration, it's close to 20%, whereas our multiple myeloma is about 7%. And we're just starting out in diffuse large B-cell lymphoma, which is around 2% or 3% as a CLL. So, we've got kind of a pretty significant growth ramp ahead of us and we paved the way kind of laid the foundational elements with kind of reimbursement with FDA approval where appropriate. I think it's really important that we're embedded in almost every pharmaceutical trial that is looking at a heme malignancy drug that is lymphoproliferative or where our test applies to that trial. So -- and this is perhaps most important, it is by far the most sensitive and specific test to monitor MRD in heme. So, our physician in kind of heme MRD, now it's just really an execution story. With all that, all those kind of competitive moats, we have to -- there's a couple of things that we're doing with related to kind of workflow and Epic integration. There's -- Epic integration is really important. Our first kind of beta testing is going to happen kind of next quarter. And then by the end of the year, we'll roll out and kind of call it 6 to 10 sites. So, you won't see a major lift in terms of penetration this year. But in 2024, you were expecting kind of that Epic integration along with other workflow enhancements to be a big part of the strategy as well.

And going along, you mentioned clonoSEQ being the most sensitive and out there. So, like what else -- I mean, you hear a lot on MRD, although it's in solid tumors though it's probably cancer recurrence as opposed to MRD if you want to get technical with it. But how should -- but what about the companies moving to heme malignancies and how are they booking out? So basically, what's the competitive moat? Are you worried about other competition coming into this market? I mean how big of a commercial barrier have you built around this area.

Again, within hematologic MRD, heme MRD, there's a very significant competitive barrier in moat that we've built that it consists of payer coverage, your pharma penetration, the -- basically, having all the evidence. I mean, we have over 150 publications that reference clonoSEQ. It's the clinical utility evidence. There's just a tremendous amount of -- to get into this business now and to be able to penetrate the sensitivity and specificity of the underlying technology is really hard. So, our true competition is replacing -- well, I'm going to put in quotes, standard of care assays right now. So, the tests that doctors are using to look at minimal residual disease or other tests to be able to kind of monitor when -- what the kind of burden of cancer is. So as an example, when we look at ALL, they're using -- we're replacing flow cytometry, okay? When we look at multi myeloma, it's the m-protein test. In diffuse large B-cell lymphoma, which is lymphoma, they were looking at a blood test to replace PET scans. So, there's -- that is really our competition. That being said, there are certain pockets where companies are upstarts and/or existing companies that have some efforts to try to either look at MRD in certain indications. And we keep a very close eye on them and kind of monitor the competitive landscape.

So, interesting -- so flow and m-protein and PET scans. I mean these are all things that -- in hospital labs. So, are you finding any resistance from hospitals not wanting to send out revenues to you?

So yes, it is interesting, but we've been fighting this battle with academic kind of medical centers for years. And what happens is it's driven by the HemOnc, right? The clinician and the clinician band together and say, look, this technology is that much better. We can't afford to be sending our samples to the basement to look at an analog picture on a flow cytometer versus a digital readout that counts cancer cells because just to be very clear, what our technology does is able to very accurately to 1x10^6 to be able to count one cancer cell in every 1 million healthy cells. And so it's a tool that the clinicians are clamoring for. And yes, over time, it's been a battle, but we've kind of done that hand-to-hand combat and won time and time again. I'll give you a great example. Memorial Sloan Kettering is kind of one of the last holdouts, and we've -- we're just at the point now where we've cracked that institution, but it's been a long battle with the pathologists in the institution.

Yes. I spent 6 years there. So yes, I understand completely what you're talking about. So, how should we think about -- do you have enough salespeople that are out there? And just like do you need to put more feet on the street to sort of drive this? Or is it just a matter of the data coming through? It's like what else -- what else can you do to sort of accelerate the...

And maybe a couple of things I left out. I mean we do have -- we've got the data, we have guidelines inclusion. Right now, we're good, Derik. And we have about 70 sales people. Those are broken up between kind of 40 being what we call DHS, is Dedicated Hematology Specialists that target the community oncologists, which is kind of our fastest-growing segment and then 30% focused on our academic medical centers, which their job is to kind of drive volume within big cancer centers within established accounts. But in terms of coverage, we're always looking at kind of sales force productivity, geographical kind of productivity. But right now, I think from an absolute number of people, right -- unlike solid tumors like the HemOnc market can be covered, we've got a very, very professional experienced sales force. And then you can really cover the market with that for now.

What's your new position adds on any given quarter? Like how many -- what's your new to Adaptive versus repeat customers?

Just in terms of kind of percentage or on a nominal basis?

Just percentage is fine.

On a percentage basis, we're probably adding, on a physician basis, it's 8% or 9% on a quarterly basis.

So, can we talk a little bit about the T-Detect franchise? I think people have been sort of waiting for how that's going to expand. And you started to do some things in line, you pulled back and start to do some stuff. Can we sort of talk about how that's going to evolve from here? And when do we -- the platform has always intrigued me because it's got the opportunity to see so many different diseases in one sample. So, when we sort of like get to that first real product that's out?

So just recall, last year, we made the strategic decision that we were pausing on the commercialization of T-Detect as a clinical diagnostic for now. But we weren't pausing on mapping T cell receptors to clinically relevant antigens. You may ask why we're doing that. And I'll give you the answer, which is that data is incredibly valuable if you look at a patient stratification or enrichment strategy in a clinical trial. An example of that is we publicly announced we're working -- our first 2 autoimmune kind of target discovery is around multiple sclerosis and inflammatory bowel disease. So in MS, if you're able to enrich for patient population by knowing the responders or the potential responders based on this biomarker, then your probability of success in a clinical trial goes way up. I mean this is -- this was kind of the page out of Prometheus' playbook. Obviously, congratulations to them on a very significant recent acquisition. But they were a diagnostic company for many years and then kind of synergy pivoted to therapeutics. They didn't toss their diagnostic data, but they used it to enrich for that patient population and had really a beautiful Phase IIb data in the IBD space. So, that is exactly what we're doing. And we're doing that essentially indication by indication. At the same time, that underlying data is going to be, I think, incredibly valuable down the road for diagnostic purposes as a clinical diagnostic. And if you look at all that's going on in kind of the AI space, that data to be able to train models has, I think, a tremendous amount of value.

So just bouncing back, I meant to cover some questions on coverage and of clonoSEQ and sort of where are you or are you fully covered and...