Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. Thanks for joining us. I'm Salveen Richter, biotechnology analyst at Goldman Sachs, and we're really pleased to have the Adaptive team with us. We have Chad Robins, CEO, Co-Founder and Chairman; and Tycho Peterson, CFO. Thank you, guys, for joining us.

Thanks, Salveen and Goldman, for having us. Appreciate it.

Yes. So maybe to start here, Tycho, you recently completed your first year as CFO of Adaptive and joining Chad. And Chad, you've kind of implemented, in conjunction with Tycho, this change in strategy here. So when we take a snapshot of where we are today versus last year and your outlook for the forward, with regard to the changes that you've taken, where are you from an implementation stage at this point? And are there any more changes left to be had with strategy?

Sure. Maybe I'll start and then pass it over to Tycho and just say, yes, we've made some changes and there's a lot left to go. The first thing we did is we segmented the business into MRD and Immune Medicine, and each one of those business segments has very distinct and key deliverables. And I'm sure we'll get to what those are in a minute. But just at a high level, MRD is an execution strategy, it's a penetration strategy. And Immune Medicine is all about essentially unlock the value of immune receptor data, both for our pharmaceutical clients and for our own programs. And the second thing we did from a financial standpoint is shore up the balance sheet, and I'll kind of pass it over to Tycho to talk about that.

Yes. So we did a royalty deal with OrbiMed last summer, $250 million. That gets recorded as an interest expense. Interestingly enough, our interest income more than offsets that. So it's actually very attractive from a cost of capital perspective. Still haven't seen another royalty deal in the diagnostics space. We were kind of the first ones to do it. But feel really good having done that. We only drew down half of it. And what we said when we laid out our path to profitability in the third quarter of last year is that will get us to profitable so we don't need to draw down the additional $125 million. We can do it if we want, but we don't need it. And then we're doing a lot around OpEx. I'm sure we'll get into it over the course of this discussion, but we're heavily focused on driving margins. We've got that whole COGS initiative now and then really just kind of looking at OpEx overall as well. And you've seen over the last couple of quarters year-over-year OpEx leverage, and that will continue.

Great. What do you think as we sit here now with the changes that you've made and this path to profitability that investors may be overlooking with the story? Because it seems like you have very bifurcated investors that value one business or the other. But like how do you get them to understand the holistic situation here?

Yes. I think that's pretty relatively true. I think the MRD business is well understood. It's really about execution, penetration, indication by indication, ASPs kind of driving margin, driving coverage over time. So I think that's understood. I think what's overlooked or not really well understood is the platform that we've built around really understanding the immune system, not only understanding immune receptors but the antigens that they bind to and the multitude of opportunities that, that can unlock. And it's somewhat early days. And yes, we had a little bit of a pivot -- a big pivot in the strategy from looking at that as a diagnostic plan, T-Detect. And although the kind of signal generation is working really well there, we're pivoting that data to kind of stratification for our own trials and really looking at that immune receptor data to unlock opportunities in drug discovery and in therapeutics.

Right. Maybe we could start there on the therapeutic side or the cell therapy approach here. So last month, you announced that the FDA accepted and IND application submitted by Roche Genentech on your TCR for solid tumors. Can you just help frame what this milestone means for your drug discovery vertical and when we should expect clarity on the target and the indication and development plan here?

Yes. So first, we're thrilled that really that whole kind of side of the business has been activated. I'll say reactivated publicly, but we've been working on it for quite some time, but it was great to see the first IND filed. And it really shows our strength in characterizing therapeutic-grade TCRs. I mean what we can do, if you think about a funnel is go -- really work at scale to find naturally occurring T cell receptors for cell therapy and then characterize them exquisitely to find properties of how well they bind, how well they kill and really the safety profile, so they're not cross-reacting to some and to anything else. Then kind of moving to from CAR T to TCR allows us to kind of hopefully penetrate efficacy in solid tumors. And so that's why it's a big deal. But it's really a validation of our approach in characterizing immune receptors more broadly. And we'll talk more about it as we look at our own programs. So that's the first thing. As far as being able -- it's a little bit unfortunate, there's not a lot we can say because we don't control the news flow and the commercialization. It's always going to be Roche Genentech. When it will hit clinicaltrials.gov as to when we go into humans, and this will -- you'll see kind of what the target is and the indications and what we're going after the different tumor types. But I should also mention that as this is our first in the shared product, there's 2 other programs that we're working on, where we've delivered fully characterized TCR packages against kind of shared tumor types or shared antigens that impact several different solid tumors. And at the same time, we're progressing on the private products as well. And I'll talk more about that in a minute.

When you -- this target, which we don't know yet, should we assume that it's a validated target? And so therefore, when we look at the first data sets that you're really validating your platform through that, like how did we think -- like how did you pick these targets when you gave the first...

What we have said is the neoantigen target. It's a validated target, so you will have heard of the target before. We also think of it in 2 ways, as a product in its own right, but there's a ton of kind of training and learning that we're going to get to, that were learned from as we get to the private product, where we're essentially looking at patient-specific TCRs against patient-specific mutations. So getting all the knock-ins and knockouts as putting a T cell receptor in a T cell and putting it back into a patient in a compressed time frame, our goal is to have kind of a 30-day vein-to-vein turnaround on the private product. And the shared product in itself is there's a lot of learnings that are going to help us get there.

Have you -- so when you think -- so the personalized product ends up being more complicated, right, because you have to use some kind of prediction on what these neoantigens are and then create a cassette or a drug or render? I'm just trying to understand...

Salveen, it's actually cool that you mentioned that, the answer actually right now is no, but that is actually where we are hoping to go. So we actually physically have an assay called MIRA, which mask T cells to antigens that, essentially, we're doing a closed-loop experiment on one -- on each patient. We're sequencing a patient's mutations in their tumor, at the same time, look at their blood and mapping those T cell we can find from each patient. Now every single -- almost every single patient, we're finding T cell receptors that map specifically to that patient's kind of tumor antigens, and we're finding more and more of them. And then we'll hand those over to Genentech. They'll grow them up and put them back in the patient. Where we're going with this is an AI-driven approach where exactly what you're talking about that you can essentially do this in silico and be able to kind of map using very sophisticated AI and ML based on data inputs that we've built up over, like, really the past 9 to 10 years in mapping kind of T-cell receptance to tumor antigens in multiple different tumor types to be able to go without having to do kind of the physical experiment, which should take a lot of time out of the -- and cost out of the process.

Would the AI or ML capabilities be coming from Microsoft in the context of the mapping?

Certainly, they've assisted in some of that work. And again, when we talk about the kind of what was commercially T-Detect as a diagnostic, a lot of that work in terms of mapping and signal validation and verification validation kind of has gone into what ultimately will be a product here.

Got it. And how far is that from implementation?

I'm not sure yet is the honest answer because -- but I will say this, the acceleration of AI in the past 9 months and kind of what my brother is -- I mean, he's very, very excited because we've just seen massive increases in leaps in this. I think it will probably still start when we roll out the product as we've built an end-to-end facility in South San Francisco. And the original idea was that if -- I want to say when -- but if this works clinically and there shows efficacy, that we would kind of stamp out these kind of factories throughout the world, where we'd be responsible for kind of doing the mini MIRAs closer to the patient. We are hopeful, along with our partners at Roche Genentech, we are hopeful by the time that we get to that point that we can actually go away with those kind of mini factories, if you will, and go right to in silico. So I think we're probably 3 to 4 years away from being able to do that and be able to compute it, impute it, if you will, rather than physically have to do kind of the chemistry.

How aligned are you with Roche Genentech? I know you give them these assets. But when you first did this partnership and they laid out time lines, like are they working and in a timely fashion with regard to this portfolio?

I'm going to separate that question, a, because, one, from a timing perspective, let's be real, we thought we would get our IND filed sooner than we did. That being said, I think we've made in the background progress on the private product, and it's not like a linear where you work on one and work on the other. So the private product is now a lot closer to kind of the first filing of the IND. But as far as the relationship goes, it's tighter than ever. We have a joint research committee, a joint development committee. We spend hours and hours with them every week and then have kind of management committees that really formalize committees that are meeting on a quarterly basis, but our teams are together every week. So I would say the relationship is really good. But time lines, I mean this is -- let's just be clear, this is hard. A, it's cell therapy. Second, it's TCR-based cell therapy. It hasn't been done before. I mean the reason -- just the mechanism of and the biology of why, theoretically, they should work better is that T cells -- or T cell receptors have the ability to see intracellular pathogens, which means they can see what's going on inside of a cell. So that's why. I mean, CAR T in general has been challenged to work in solid tumors where we believe, based on the biology that kind of a TCR-based approach has a much greater chance of efficacy in solid tumors, which is why we're doing it. Cell therapy is expensive, right? And ultimately, whether it will be kind of a -- I think cell therapy will probably morph into something else with T cell receptors being the targeting molecule, but it's a really great start. It's expensive. But if the efficacy and hard-to-treat tumors that have really never been cracked before, I think it's going to be pretty special.

Just jumping over to clonoSEQ here. So we recently presented some data sets at ASCO, assessing the clinical significance of MRD testing. Can you just remind us of what was presented and the importance of this data set?

Yes. Let's -- there's a few different studies that came -- there's a bunch, but I'll highlight 3 and 3 different indications. I think that would probably be most useful. The first in myeloma, a continuation of data presented in the MASTER trial, which showed that with quadruplicate therapy that patients over a 3-year period that were MRD negative had no decrease in progression-free survival. What the significance of that is -- means that if you're on maintenance therapy and if you are MRD negative, you can go out maintenance therapy. That means to the patient -- I mean patients on these therapies have pretty significant side effects, so being able to go on a treatment holiday is awesome for the patient. It's also really great for the payer community who's paying -- some of these drugs granted are coming off patent, but it's still a pretty significant expense. So you really have that dual benefit. So that's the MASTER trial, and that's been ongoing. The data keeps getting better and better and better, saying the significance of MRD matters in this particular setting. Then in diffuse large B-cell lymphoma after R-CHOP therapy, what it's set forth in conjunction with imaging, if you use MRD and showing kind of subsequent MRD negativity, led to a better progression-free survival as well. So that was a diagnosis in an older population. So that's the significance in DLBCL. And then in ALL, there was just another set of studies that just showed the comparison of MRD by clonoSEQ or NGS versus flow cytometry, there's been so many publications, but just another set that came out that said essentially 25% of patients that had cancer were missed by flow that were kind of definite screaming MRD-positive by clonoSEQ and just goes to show sensitivity matters. These patients have cancer. You can inform their treatment decisions using NGS. There's no reason that you should be using kind of antiquated technology when NGS is available.

And remind us of the levers you're using here to increase use in these various approved indications here?

The levers we're using, so there's really multiple levers we're using to show clinical utility. We continue to have additional studies and sponsor different ISTs. We have a real-world data project called the Watch Registry. We have a health economics group that works with payer companies. And then on the sales force side, it's just driving kind of utility in the community hospital setting. It's moving to blood-based testing. It's clearly the -- if you look at overall sales force productivity, increasing the number kind of sales per each rep and then driving payer coverage. I mean there's not kind of only one thing. Oh, I should also mention Epic integration, which we're rolling out doing our beta testing on this quarter. So multiple different factors that really drive kind of penetration in utility.

And you're on track for this 50% test volume growth you've talked about this year?

We are. We are. Yes. So we've talked about growing 50% in our volumes this year, and we are on track to hit that number.

Just going back to this Epic integration setup. So when do you think that, that will help contribute to growth? Is it more like a 2024 and beyond situation?

Yes. We've always talked about it as 2024. I mean just to frame up, you've got to work on all the order sets. I mean Epic is challenging. On our side, on the software kind of implementation, you get all the orders as done, then you -- then we have beta customer sites over the third quarter kind of work out the kinks, then we'll roll them out, call it, 5 to 10 sites in the fourth quarter. And then you really have to turn them on one by one. You need the attention to the IT department in each of these. It's mostly academic medical centers that are and some of the community that are kind of using Epic. So we've talked about it in terms of really kind of inflecting as a 2024 event.

When you speak to the pharma partners with regard to using your product here, where, if any, do you get pushback on them integrating or using MRD testing?

It's a good question. I mean, overall, as you've seen, most pharma companies that are developing hemologic malignancy therapies are using clonoSEQ, and we've kind of moved up the value chain from originally being used as research to being used as a surrogate endpoint and now in some cases, being written in the contract as a primary endpoint, which we can get to in a minute. But if someone is to push back on some of the newer indications, for example, in DLBCL, really the necessity for a ctDNA assay that has greater sensitivity, and we've been developing that as well. let's see -- but that's -- I would say that's really the area that we're getting pushed back. But other than that, I think our pharma business is pretty -- there's some pretty strong moats around it. Just the quality -- the amount of audits we've been through, the ability to generate in a very highly structured laboratory environment, good, clean, essentially collated data in exactly the format they want with integrity has been a good differentiator for us.

If you look at the next 2 to 5 years, where do you see this business kind of grow? Like where do you see this -- like how do you see the growth playing out over that period?

In the pharma business, in the MRD?

Overall with the pharma business and with MRD as a testing...

Yes. I mean, there's good growth right now in AML. I mentioned DLBCL, we'll crack that nut. There's continued growth in multiple myeloma as well. But it's really -- I mean, AML, DLBCL and continued -- and CLL as well. There's a lot of therapies about being developed for CLL. So there's -- and one of the things we've done is we've -- for a lot of these companies, like Takeda is the most recent one. We've announced these 10 portfolio agreements where any of the hemologic drugs that these companies are working on. It's just essentially a new work order, a new project. We're the vendor of choice, if you will. I hate to use the word vendor. We're the partner of choice for these clinical trials. So yes, we've got some good growth. And we also have a pretty nice milestone portfolio. with most of these trials also have a milestone associated when the drug gets approved using our assay. And that -- of the $400 million that are on our balance sheet right now, your $200 million of those are available to us now and then another half of those open up when the FDA allows for the asset to be used as a primary endpoint, which yes, we'll see when it's government, but we're working on it.

You touched on the immune medicine vertical earlier. Could you just briefly describe what's encapsulated within that vertical?

Sure. Yes, there are 2 main kind of business lines within that vertical. The one is pharma services. So we just talked about MRD Pharma. Anything not captured in MRD Pharma, this is looking essentially at immune response to therapies where pharma uses us and academics use us for any research that they're doing on any type of immune mediated disease, which you can imagine as many different diseases. We're probably most penetrated in cancer, but now the kind of the growth areas are in kind of autoimmune disorders, infectious diseases, et cetera. And that's essentially a kind of a -- mostly a fee-for-service base business that has revenue associated with it. So that's one side. And then probably the most exciting side and the biggest upside potentially is in what we call our drug discovery business. So Genentech is housed in there, which we've already talked about. Genentech, I'm happy to answer further questions about that. But then the -- really the kind of the really -- we've got a bunch of exciting things happen in drug discovery. One is kind of target discovery around autoimmune disorders. We've got to public disclosed, we're working on multiple sclerosis and IBD, but there are several other autoimmune disorders we're working on, too, where we can -- we believe we can use our technology to discover novel targets. Once we have those targets, we have -- we've already mentioned we have a T cell platform, and we also have an antibody platform that we originally stood up during COVID, right? So the idea is if you have a target, depending on what the target is, is how you hit that, whether with an antibody or potentially with a T cell, whether that's cellular or whether it's soluble working on. But what's interesting is that provides us a lot of optionality. Whether we -- what will most likely happen is we'll probably partner out some of those. And as we kind of mature and learn more, we may take some of those assets kind of in-house down the road.

If you were to use the T cell approach in here, would you -- would it fall under the Roche-Genentech agreement? Or that's kind of carved out the whole...

It would not. So just to be like very specific, the Roche-Genentech agreement is in cell therapy in cancer only. So we can do anything -- actually, we can do a lot outside of cancer as long as it's not cell therapy. And we also can do cell therapy outside of cancer as well. So there's a lot that we can do that's a very small piece of the world. And that's -- if you went back -- I'll go back to your first question, Salveen, like what's underappreciated is like Roche-Genentech is a pretty big deal. Granted it has taken some time, but we're now starting to kind of hopefully prove that out. But there's all these other areas where this kind of deep understanding of immunology and uncovering kind of mechanisms and targets and then having developed these platforms to kind of essentially target having immune molecules that are kind of targeting these assets that are hitting these targets is where we kind of see a lot of the action and the upside.

Have you discovered the targets already or we're waiting for the targets to be disclosed? Just remind us of...

We haven't. We haven't. We're -- I would say we'll be close. We're -- I'll say there's a level of excitement on a couple of targets, novel targets in some of the autoimmune spaces that we've been discussing.

And you'll disclose it to the Street when you're ready or you'll decide the strategy?

Yes, we'll disclose that when we have something, yes, because we've -- I think we've publicly said that we will have a target in autoimmune disorder in this fiscal year. So we've got 6 months, but we're zeroing in.

So when we look at your -- when we look at the company right now, most of your revenue is driven from this testing kind of clonoSEQ situation, but you've got a lot of potential in immune medicine. So how are you thinking about capital allocation to these 2 business? How are you thinking about kind of -- if you fast forward 4 years, like who is Adaptive?

Do you want to take capital allocation? No, but yes...

We began the year fighting a $30 million headwind from the amortization of Genentech, right? So everything we do to grow this year is against that. We went through a very rigorous process on our 3- to 5-year long-range plan last fall, and we're in the process of updating that now. And as part of that, we went through every R&D project, and there's a lot of stuff that dropped out. If it didn't match revenue or margin or have big potential, we kind of deemphasized it. So you've seen that in the R&D leverage over the last couple of quarters. Overall, we're doing a lot operationally to get more efficient, right, on this path to profitability. We've laid out EBITDA positive in '25, cash flow breakeven in '26. We're doing a lot around COGS right now, so separate kind of the capital allocation. We're looking at our input cost on COGS. There's a lot we can do around workflow about how we access the samples in the lab, how we do the DNA extraction and then also what sequence will we run. We're running everything on these are 40-year-old 40-, 10-year-old NextSeqs, so we're doing an evaluation of the [ IllumiX ] now. And so we do have a real path forward on margins overall. So yes, capital allocation is something we think about a lot. We ended last quarter with $441 million in cash. We don't want to raise additional capital. We have the rest of the OrbiMed deal to draw down if we need to, but we don't envision having to do that on the path to profitability. So...

On these autoimmune targets, let's just say, you have these amazing novel targets, right? Do you have the capability to at least do development in-house to a certain inflection point and then you decide, "Hey, we could partner that or we could do a co-commercialization, co-development type situation?" Like how do you kind of retain that value is what I'm trying to understand, like as you progress and you play -- get a bigger part of the economics?

Yes. We certainly have the capabilities to get through preclinical validation, and we're building up the capabilities to kind of move further into Phase I. Do we have the capabilities right now to fully commercialize therapeutic? No. And that's where I said we'd probably look at doing some partnering early on. And a lot of it also depends on kind of what the indication is as well, but probably partner with some early on. And then as we learn and continue to get better capitalized, we will look -- and frankly -- and this is a little bit of kind of your last question, what the kind of appetite is to kind of fully fund and the risk appetite to fully fund kind of therapeutic program through different phases that we would look to essentially kind of what's the best way to kind of unlock shareholder value and match up kind of that set of shareholders with the risk appetite to going to be able to fund those therapeutic programs. But yes, it's certainly something we're building up the capabilities for.

Any questions from the audience? I think we have a question up front.

I just wanted to see what's kind of driving your confidence in making such a large investment and kind of putting a lot of capital towards that cell therapy plan and just the overall kind of efforts there?

Yes. So a lot of it, if you look at the upfront payment that Genentech paid us, a lot of it was to build an end-to-end prototype. So we spend that capital and what's giving us the confidence to kind of move forward. One, contractually, that's what we're obligated to do. But two is the data that we're seeing. So we now have the confidence that almost every single patient that goes through that end-to-end pipeline that we are finding patient-specific T cell receptors against patient-specific tumor antigens. Not only that, we're finding more per patient. So the data is getting better, cleaner and more robust over time. And at the same time, Genentech is spending billions of dollars, standing up kind of manufacturing facilities, the first one being in Oregon, to be able to support this program. So it's not just the investment in Adaptive, but they've also made investments in other aspects of really the entire pipeline to be able to deliver a cell therapy product. So if you look at iPSCs, they did a deal with Adaptimmune. They've got deals around -- preferably with BioNTech. It's not just the targeting molecules. So they've continued to invest billions of dollars to be able to do this and do this in the right way.

What are you each the most excited about within the business?

Why don't you go first?

I mean there's -- yes, we've got a lot of big shots on goal, right? I mean if the personalized product works with Genentech, you've effectively cured cancer, right? I mean we're not supposed to use the cure word, but we -- I mean, that's huge, right? That's the front page of the journal and every other paper. Look, I think MRD is a scale-up business. It's a scale-up story right now. We're doing all the right things to really kind of drive continued growth. And this 50% volume growth should be pretty durable over the next couple of years. And the penetration by the way, is like 5%. I mean we have a long road to go there in terms of additional penetration, along with higher ASPs. So 2 different businesses at different ages of the revolution. And then back to Immune Medicine, everything we're doing in autoimmune, it's earlier, but these are big unmet needs in the market. There aren't targeted therapies right now for MS and some of these autoimmune disorders. And then there's diagnostic potential further down the road, too. So yes, I mean, all 3 of those, Genentech, autoimmune and then MRD are really interesting.

Well, I'm going to -- I'll put the ying to the yang. Usually, we play the opposite side of this answer, but he has everything. He said the big exciting things about where we're going on the Immune Medicine side, certainly where I think a lot of the action is. But I'm excited that we're -- I'll use kind of we're growing up as a company, right, learning how to execute, hard decisions kind of doing the portfolio allocation, figuring out how to improve margins. So that's not the sexy stuff, but ultimately, like I think it allows you to do more sexy stuff when you have -- when you get to cash flow positivity, your options open up as to how much you can allocate to different shots on goal, which again, we're still doing a lot because at the end of the day, I want to make sure that we still have these super high-risk high-reward projects in the portfolio as we execute on the MRD business. But there's been, I would just say -- and a long way to go. I want to be clear, but we -- there's just a focus on these really 2 opportunities that's crystal clear. We know where we have to go. And now we're starting to execute on that, but there's some way to go, but I know we're going to get there.

Maybe one last question. As you build out Immune Medicine in a bigger way, how has it been to kind of bring in talent for that vertical?

It's -- we've always punched above our weight in talent. I think the true science folks -- I'm going to take it from a science perspective and then from a commercial perspective. From a science perspective, people recognize that we kind of essentially have the goods on the assays and the chemistry. But from a computational biology, bioinformatics standpoint, my brother came out of the hatch, he was -- ran a social comp bio there. And from that, we've had this expertise in computational biology. This is before like AI and ML and all stuff even became like in the lexicon, right, that we've really built up kind of the best -- some of the best data scientists, if you want to use that term, in the world. So there -- I think there are pockets -- I would just -- answering this truly, I think there are pockets that we're really, really good at on the talent side, and then there are gaps. We have gaps. So -- and you asked before, like are you ready to take it further? I mean, we don't yet have clin dev, a great clin dev like expertise, some of the regulatory requirements. I think we have really good on the diagnostics side, haven't yet built that up on the therapeutic side. But overall -- and a lot of that also, I just have to say it has to do with our culture. I've been a huge champion of creating a phenomenal environment where people can bring their whole self to work and work with really smart people on complex problems that are supported in a really strong way. And so if you look at our kind of management team and permeating throughout the company, it's a good vibe. And by the way, it's been tough, right, over the last 2 years, attracting, retaining talent in a down market. It's gotten a little bit easier as the job market has loosened up over the past kind of 6 to 9 months, but it was really challenging where coming out of COVID, just for everybody, right? But just coming out of COVID, where you had a lot of fluidity and you could go anywhere and our programmers, you could go -- like retaining your software folks when they can go literally walk out the door and make triple. We're in Seattle, right? And you go on and that didn't even matter anymore either. So a lot of that had to do with culture as to why people stay and why people come. But net-net, we've got a great team excited about the future and excited about the kind of the team we've put in place.

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

Thank you, Salveen. I appreciate it.