Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Perfect. Good afternoon, everyone. This is Rachel Vatnsdal with the life science tools and diagnostics team at JPMorgan. I'm joined by the Adaptive team up here on stage. This is going to be a 40-minute session, roughly 20, 25 minutes of presentation followed by Q&A. For any of you in the room have questions, feel free to either submit them via the app or you can ping me directly. With that, I will pass it off to Chad.

Awesome. Thank you, Rachel. I appreciate the opportunity to present once again at JPMorgan, I want to wish you a Happy New Year. I want to welcome everyone in the room and those of you who are also listening by webcast. For those of you who are new to the company, Adaptive's mission is to translate the genetics of the adaptive immune system to create clinical products to both detect and treat disease. Throughout the last decade, we've pioneered two exciting new fields of medicine. The first is in heme MRD with a product called clonoSEQ, which is widely recognized as the gold standard. The second is in immune receptor discovery. And we're using that technology for T cell receptor-based cell therapy and for precision autoimmunity. Together, those make up our Immune Medicine business. With that, I want to remind you that we'll be making forward-looking statements today, both during the presentation and in our Q&A. Though the aforementioned businesses share the same foundational technology. They're very different in their application space and their stage of maturity. MRD is a commercial-stage diagnostic business and the Immune Medicine business as a target and drug discovery business, essentially a therapeutic business. They have different value drivers, different catalysts and milestones, different capital needs and essentially different investor bases. And with that, we embarked on a strategic review process that we announced towards the end of last year with the goal of maximizing the value of each of these respective businesses. That process is going really well together with our partners at Goldman Sachs. We are reviewing several different opportunities, and we will hope to come out with a structure this quarter that will essentially tell us how we're going to move forward with each of these businesses. With that, we're going to take a deep dive into both MRD and then into Immune Medicine. MRD is widely established as the gold standard in blood cancer MRD. This slide speaks for itself, but I'm going to walk through it. There are significant competitive moats around the business and our progress over the last several years is evident. We've been growing volumes over 50% year-to-year. And to date, we've treated over 50,000 unique patients. We have widespread payer coverage with over 300 million lives under contract. We are also the test of choice for pharma companies that are incorporating MRD into their trials with over 160 active trials. Of note, half of those studies, we are listed as a primary or secondary endpoint on, and this is very, very significant. We are, by far, the most sensitive next-generation sequencing MRD test in blood cancers on the market. We have hundreds of studies, which have backed this up and they continue to be published. We have an intellectual property portfolio that has a dominant IP position. For those of you who are new to Adaptive, I just want to take a quick minute to tell you how clonoSEQ works. We're able to use DNA sequence to both quantify, detect and track the cancer over time. Essentially, what we're doing is counting cancer cells, that's the easiest way to think about it, and we can do that throughout a patient's life cycle. At each point during the care continuum, we get a sample in and a doctor can make a treatment decision on a patient based on that information. There are really two pillars of the clonoSEQ business. The first I just talked about, it's a clinical testing business where doctors use information to make treatment decisions on patients. And the second is our pharma business, where biopharma companies use the assay in clinical trials to accelerate drug approvals. These businesses are absolutely 100% synergistic. The more the assay is used in pharma trials that supports life cycle expansion for new disease states or indications. Correspondingly, the more that doctors use this information in the clinic, pharma companies are apt to use this as the test of choice and the gold standard in their pharma trials. It's worth noting that both of these businesses have significant room for growth and are still -- although there's been significant traction, they're in their early stages. If we -- let's take a look first at the clinical business. We are most penetrated in the indications where we have the most clinical evidence, also where the pharmaceutical landscape where the drugs are showing the most efficacy. And this is in ALL in multi myeloma. The blue line represents ALL, which were penetrated at 20%, and the yellow line represents multiple myeloma. In addition to the expanded growth profile in these two indications, we are also working to expand into a very large category called non-Hodgkin lymphoma, of which diffuse large B-cell lymphoma represents the largest percentage of that category of NHL. In addition to the clinical business, there's also significant room for growth in our biopharma business. Right now, clonoSEQ MRD assay is considered the gold standard in multi myeloma trials, where we're penetrated at 40%. We're looking to replicate the success in CLL and non-Hodgkin's lymphoma. In particular, in diffuse large B-cell lymphoma, again, a category of NHL, we've updated our assay to a circulating tumor DNA assay that allows for at the end of treatment for us to be able to detect first -- at the end of first-line treatment for us to be able to detect at a very, very sensitive level, MRD levels. And this is very, very important for our pharma partners. The second thing that could potentially provide a tailwind for the business is we're in very significant discussions now with the FDA, and there is a lot of chatter that the FDA is finally willing to accept MRD as a primary surrogate endpoint in multi myeloma. The priorities for the clonoSEQ business are clear. They are to increase penetration, so we can continue our robust volume growth, and there are to improve our margin profiles so we can get to profitability by the second half of 2025. Now first, I'm going to talk about our efforts to increase our penetration. And then I'll come back to our efforts to improve our margin profile. To increase penetration, we are focused on four strategic initiatives. The first is to increase blood-based testing. Right now, 39% of all tests are done in the blood. We aim to increase this number to 50% in the next few years. Why this is so important is that blood-based testing in addition to being noninvasive to the patient, it's also much more readily available in the community hospital setting, where clinicians don't have easy access to bone marrow pulse. The second is expanding into newer indications. So in addition to the launches which we've had over the last 1.5 years in CLL and diffuse large B-cell lymphoma, there are two other categories, which I'll touch on more in a minute, and NHL which are mantle cell lymphoma and cutaneous T-cell lymphoma. The third area is to expand patient use case, both in our marketed indications now and the indications that are upcoming. Why this is so important is MRD as a test that's done multiple times for each patient at every stage along a cancer patient's journey, we can get a sample and we can essentially tell what the tumor burden is. We can count the cancer cells, and we can tell whether level of cancer is going up or down and provide that as information. The more data that we have for each point that tells the doctor how they might use a test to inform treatment decisions, the more a doctor is going to order our test. And the fourth is continuing to integrate our tests into the doctor's workflow. We are in the midst of an EMR integration with Epic. We've already done 5 installs and this year, we're slated to do another 15 to 20. In addition to that, we're looking at other EMR providers to integrate with. I'll just take a minute to put this slide up and have it kind of marinate for a second because MRD has arrived in heme. I mean, the amount of data coming out of ASH, the American Society of Hematology meeting last month in December in San Diego was staggering. Over 41 abstracts use clonoSEQ in a variety of different capacities. I'll just name a few, and then I'll highlight a few studies. Over 12 pharma company studies used multi myeloma as an endpoint in their trial. Over 6 investigator studies uses MRD as directed therapy. And what was really important this year that we saw kind of emerging for the first time as the utility of MRD in non-Hodgkin's lymphoma in other areas, which we haven't seen before. This is really important for us for our business. It's also -- it's important because NHL is not yet currently in the guidelines. We have some Medicare coverage on DLBCL. But as we look to expand our coverage, as we look to expand and get into guidelines, this is what's going to provide the foundation for us to be able to grow the business. So again, just two studies that I want to highlight, and I'm going to do these for very specific reasons as to why I chose these two studies. The first is a study that was done out of the University of Chicago, it's called the ATLAS study. And this is a study of using MRD of multi myeloma in the blood, and I'm going to stress in the blood. What this study said is that very early on into the treatment course, 4 months into a 12-month treatment regimen. MRD was prognostic of outcome. It was a great predictor of how -- that inherently makes sense, right? Like if by a very sensitive accurate molecular level, we can't detect cancer, that means the patient is going to do better, right? But what's interesting is that this is really one of the first studies that said we can actually detect it in the blood. See multi-myeloma is a disease in the bone marrow. So the sensitivity, the specificity of our test to be able to pick that up in the blood, but not only pick it up -- be able to pick it up very early on in treatment is incredibly important. The other thing that's important of it is and it's not listed in this slide, but I will tell you anecdotally, the data showed that MRD was a much more accurate -- I'll just say more accurate, more accurate blood-based measure than any other conventional blood-based test. So again, one of those pillars that I was talking about to increase blood-based testing. If you look at studies like this, they underpin that ability for us to grow the business in blood. The second -- the second study is a study that we did that the University of Wisconsin did in a new category that MRD is kind of being the uptick in MRD in mantle cell lymphoma. And this is an interesting study too, because it has a lot of similarity to a very large study that we did in multi myeloma called the MASTER trial, where patients were taken off of maintenance therapy and then we kind of -- we were able to see how they did. And what's interesting about this and getting similar results is, very early in treatment, we showed that patients who are MRD-negative, who avoided maintenance therapy had the same progression-free survival. Okay, what is so important there? Well, it turns out, if you're on maintenance therapy and some of these -- with many of these drugs, patients don't like to be on it. There's a -- you're taking these drugs, a side effect profile that isn't particularly pretty. And they're always asking when can I get off the drug. So if we can have a molecular measure that says, hey, we can't detect any cancer by a very specific, very accurate test, we can take you off of maintenance therapy. And this is a category, again, in mantle cell, in diffuse large B-cell and CLL, these are areas that we're looking to grow where we're seeing the same thing in MRD over, and over, and over again from ALL to multi myeloma to these new categories, which are being tested now. So and speaking of NHL, I'll just hit on the three categories which were specifically focused. The first is diffuse large B-cell lymphoma. I already mentioned that we had tech dev to enhance the assay for available for pharma companies. And the second point I want to make there is we are submitting to the FDA by the end of this year on that enhanced assay. For mantle cell lymphoma, we've already submitted the dossier to MolDx for Medicare reimbursement. We hope to have that and be able to launch this as a commercial product by mid this year. Similarly, there's some technology development, some final stages that are going in on our CTCL assay. It's a T cell-based assay, and this will be submitted, call it, around kind of mid to third quarter with the hopes that we can launch this commercially by the end of this year. Now when I touched about kind of the opportunity to improve our margins. I'm going to talk about our relentless focus on improving our margin opportunities. We've improved volumes, but now we also got to focus on, number one, how do we get -- how do we continue to increase our ASPs? And number two, how do we continue to drive down the cost per test that we deliver. The ASP initiatives are focused on three different areas. The first is to reduce out-of-policy claims. Out of policy claims, I just talked about two of them, mantle-cell lymphoma and CTCL. Those are two areas. The other is we got to close some policy gaps in CLL and diffuse large B cell lymphoma, which is approved by Medicare, but not by private payers. The second is we need to reduce noncontracted claims. So there's a couple of large national payer gaps, although we have 300 million covered lives, we need to get Centene, and we need to get Anthem under contract. And the other area for that is to reduce Medicaid as a percentage of the overall test mix. This doesn't mean that we're not going to take kids with ALL that have Medicaid with low price points. What it means is inherently, as we have more and more volume from the other indications, that are Medicare covered that Medicaid as a percentage will go down if that makes any sense. And then the third is rev cycle management. It's blocking and tackling. It's collections, it's prior authorizations. It's really getting cash in the door quicker. All these initiatives together will lead to an increase in ASP of $200 in the next 2 years. But what I'm pleased to let you know as these initiatives are working. We noticed kind of -- well, I think we all noticed that we had -- our ASPs went down 1 quarter. And we noticed that we needed to have a higher focus on this particular area. And so we made the right investments and we've seen those -- we've seen our ASPs go up and we look to continue that trajectory. The other side of the coin is OpEx leverage. We need to reduce the cost that we deliver each test. We're doing that through production lab efficiencies, essentially, our direct labor workforce is getting more efficient. We're also have different workflow optimization that we're putting into place. And third, by the end of this year, we're looking at making a significant switch in sequencing platforms from the NextSeq to the NovaSeq X. There's also work that's going on for commercial economies of scale, both in the selling, general and administrative functions. All of this taken together with the volume increases and ASP increases and the cost reductions lead to an extremely healthy business with a very nice margin profile that will get to profitability by the second half of 2025. Our team is fired up. We have Susan here today who leads the MRD business. You'll hear from her during the Q&A. But I'll tell you, our team is fired up about the MRD business. we feel like we're kind of really hitting our stride especially coming out of ASH, the groundswell of enthusiasm for this business, along with really kind of hard work we're doing on the cost side is leading to a very, very productive business for MRD. So with that said, I'm going to switch focus now to the Immune Medicine business. The Immune Medicine business, it starts with the data. We have amassed a treasure troth of data over the last decade, which is by far the most amount of data on the immune system out there. I'm going to give you just one stat. We have paired over 500,000 fully paired T cell receptors against their clinically relevant antigen, right? This is more than 10x the data in all of the literature and all of the public databases out there combined. We're using this data along with our partner, Microsoft to develop machine learning and AI models for target and drug discovery, both in the cancer space and in the autoimmune space. AI is a tool, right? At the end of the day, it's a very, very powerful tool. But the tool gets better with quantity of data and quality of data. And we have the most data and we have the highest quality data in a specific area that's going to allow us to advance the fields in cancer and what we call precision immunology. So I'm going to just first kind of frame the problem kind of what we're doing. And then, I'll jump into kind of our partner program with Genentech and the efforts we're doing in autoimmunity. First, in cancer, the antigens are relatively well known. We started this years ago in finding very high potent therapeutic-grade clinical TCRs against cancer antigens. And this program is working very well. I'll describe it in our Genentech deal in a minute. But there's another problem in autoimmunity, which is not only are the T cell receptors not known that are attacking cell antigen, but the antigen itself isn't known. So the target isn't known as well. And we have a variety of techniques that combined chemistry, informatics, AI, machine learning to be able to essentially start to solve this problem. And I'm going to show you the first example of that. So just touching on our Genentech deal. Why -- and maybe just to frame why TCR-based therapy, why we're going after that in the first place? T cell receptors see inside the cells, technically intracellular pathogens. The field of cellular therapy to date has only worked in blood cancers. We believe that finding therapeutic-grade T cell receptors against antigens will allow us to essentially move the field forward from working in blood cancers to working in solid tumors. To do this, we have two strategies. The first is what we call our shared product strategy. This is finding T cell receptors that have exceptional properties of binding and killing against known cancer antigens. Fortunately, our first IND was accepted last year, and we look to with our partner, Genentech, who is responsible for the development and commercialization, enter the clinic and be first time entering the clinic later this year. Following on the heels of the shared program, we have what we call our personalized program in cancer. This is a first-of-its-kind strategy where we are looking to treat each cancer patient as an individual. It's the same concept, but we're doing it in real time. We're able to sequence cancer patients mutations in their tumor and at the same time, find the T cell receptors that are reacting to that tumor. And then we can hand them over to Genentech, they can grow them up and they can put those T cell receptors back into a T cell back into the patient in hopefully a very short time frame. So this is very interesting, and it's going really well. We developed a underregulated conditions in our South San Francisco lab, a GLP end-to-end system to be able to test that this is working. And we look to further validate it over the course of 2024 with getting into the clinic on the heels of the shared program, I can't yet specify a time line, but it's going very well. Okay. I'm going to shift from cancer to autoimmunity. And I'm going to put this out there, and hopefully, this will come together at the end. But essentially, what we're doing is unlocking the new biology in autoimmune disorders. We're starting with our initial indication in multiple sclerosis. So first, about multiple sclerosis. Multiple sclerosis is widely known as a T-cell-mediated disease. However, the treatments on market for multiple sclerosis are general blunt instruments against the immune system. They're immunosuppressive. There are B-cell depleting -- they prevent T cell trafficking. The problem is they don't work very well. And not only do they not work very well. They also have a pretty poor side effect profile. So what we're doing is finding essentially a very specific target in multiple sclerosis. The idea is precision immunology and instead of having some blunt instrument, if we can find exactly what the T cells are attacking, then we can have a very precise drug target to go after. So I'm going to tell you a little bit how we're going to do this. And then I've got Sharon here. I've got my brother, who's a CSO. If we want to get deeper in the Q&A, we can get into it. But remember, when I said referencing back that both the T cell receptors and the antigenic targets are unknown in autoimmune disorders. So here's what we did. We sequenced a lot of patients with -- that had MS, and we did a bunch of controls. And what we found was very interestingly, in patients with MS, there were public shared T-cell receptors in those patients. And not only that, those T cell receptors were clustered. What that means is those cluster T cell receptors are seeing the same antigen. And so we've got some very unique proprietary technology computational methods, and this is where all the data comes in as well for us to reverse engineer from going from the T cell receptor to finding what that antigenic target is. And that antigenic target makes a great drug target, we believe. And that's what we're doing. So now what's next? S we're doing both in in-vitro and in-vivo models to essentially further validate the target. The in-vivo models, what we're doing is we're essentially inducing a T cell response against an antigen, which we make in a mouse to see if we can basically replicate MS-like neurological symptoms. Okay. And at the same time, and here's where it comes all together. We developed an antibody platform during COVID that is exceptional. And -- but we haven't been able to use it yet. And so now that essentially is going to be the assay. That's going to be the assay against the target, right? And interestingly, we've got a great antibody team that's finding antibodies against Class 2. And this is a hard thing to do, but it's something that our team has done and is very excited about. So when I say unlocking the biology, where that target is, and I can't go -- I'm not going to disclose exactly, but where that target is and where we found it, we believe relates to other autoimmune disorders as well. And so it's a platform technology. And not only are we working on MS, we're working on type 1 diabetes, rheumatoid arthritis and IBD. And so these are other immune systems that have kind of some similar properties and mechanisms that we believe we're finding the target in a very similar place. So very, very interesting. This is something that the team is exploring further in these other disease states. So -- just if you take IM, we're well positioned and just to kind of wrap up on the IM, well positioned over the next couple of years to deliver on the -- on three key priorities. The first is to support Genentech's development of cancer cell therapy products. Even though they're responsible for the development and commercialization, we get milestones and we get royalties as these drugs go through different stages and when they're approved on market and selling on market. The second, very focused on designating the therapeutic candidate in multiple sclerosis and entering into the clinic when ready. The third, which I just touched on, is we are scaling this target discovery engine in multiple autoimmune disorders, and I only listed two that we're working on right now. I think it's important to note, though, that we're being prudent about our capital allocation here. We're gating our R&D investments based on key milestones and catalysts so that we can preserve our cash flow for what's working. I'm going to leave you with three key takeaways from Adaptive. The first, MRD, hopefully, I convince you today, it's the gold standard in hematologic malignancies with clonoSEQ. And clonoSEQ has a great growth profile ahead of it, and we're getting to profitability. The second, we're making very good progress in our Immune Medicine business as well, not only in our partner program with Genentech, but unlocking the biology of novel targets in autoimmune disorders and then finding assets against those targets is what we are focused on. And third, I think you can tell by how different of presentations I gave for MRD and Immune Medicine. These are inherently different businesses. We're under a strategic review to figure out the best structure, which we'll be unveiling during this quarter. So with that, I want to thank you guys for your attention today and open it up to the Q&A. Rachel?

Perfect. Thank you, Chad. Maybe just first up on that strategic evaluation. You mentioned that you're going to communicate the outcome by the end of 1Q. So can you just give us an update on how discussions have gone in terms of interest of each business. And then also, is there a scenario where following the strategic review, you could end up keeping things the way they are and really keeping these businesses together?

Yes. So first, discussions are going great. It's -- and they're really interesting discussion because there's a variety of kind of different alternatives that we have in front of us and some really interesting decisions to make, and we're working hard with our partners to kind of sort through those and figure out essentially what's going to maximize the value for our shareholders. In terms of doing nothing, again, I think we recognize this issue. As we do our one-on-ones and talk to investors, you really see that your investor base skews to being very interested in diagnostic business, life science tools and diagnostics business, obviously, which you cover, or a therapeutic business, a drug and target discovery business. And they're different. So I think we've got to figure that out. So to say, we burned all these calories and are going to do nothing, is I think we'll do something, but we're not yet in a position to say what those is. Whether -- and obviously -- I mean, this is no secret. I mean, the spectrum of things that we're looking at kind of we may operate these businesses as kind of independent businesses because we think there's a lot of value creation left in both of these businesses. We may do something else. But we want to make sure that whatever we do is fully valuing each of the businesses. And that's -- I think that's all I can say on it right now.

Perfect. That's helpful. Maybe just shifting over to MRD then. So looking at 2024, you've pointed towards sustainable, high single-digit volume growth. You've also talked about ASPs improving. Consensus is assuming 38% growth in the MRD business in 2024. That's a little bit above your long-term CAGR of 20 to 30. So I guess, can you just kind of walk us through the puts and takes here, given some of the comp dynamics? And then how comfortable are you really with where the Street is that on top line for MRD?

Sure, Tycho, do you want to take that?

Yes. I mean, look, we've got a number of initiatives on ASP. Maybe I'll pull Susan in to talk about that. Obviously, we'll give official guidance with the fourth quarter. But -- as we said, the volumes are continuing to inflect. We've got the DLBCL ramp. Obviously, a lot of data coming out of ASH that will be supportive of it. We continue to drive more blood testing, more frequency of testing, pushing into the community setting. So we've got a lot of drivers that will lead to sustainability in that business. But Susan runs it. So why don't you talk a little bit about it?

Yes, I'm confident in the opportunity to continue to drive significant growth in this year and beyond. There's a high ceiling for us to tap into, and we're doing things not only the things that Tycho mentioned, but also customer-focused initiatives, particularly integration with EMR that I think are going to make this test easier to order and more accessible to more patients. Additionally, we'll be launching, we expect in at least one additional indication this year, which will give us access to a new patient population that we'll be able to develop this test to bring value to clinical care in more spaces.

Just on your question on guidance, as Tycho said, we're not going to guide until February. But I will say we're going to be cautiously prudent on how we guide this year given -- given where we are right now, I think it's a smart thing to do.

Yes. Helpful. Maybe just on profitability then for the MRD business, you pointed towards becoming profitable in MRD in 2025. So can you just clarify that for us? Is that the full year? Will that be exiting the year at profitable? And then in terms of 2024, can you talk about how you're reducing the cash burn on that MRD business as well?

Yes, sure. I can start and feel free to weigh in. Yes, we are talking about crossing the line. In the back half of 2024. We're not talking about a full year profitability in '24. If you look at -- I don't need to go back to it, but there is a chart that shows that the line starts to cross in the back half of 2025, although it's more -- it's illustrative. And then in terms of reducing the cost burden, every -- we're turning over every rock. I mean, there's everything from kind of workflow optimization, we're putting a new lens in, which I think will have a very nice impact on our direct labor force. We're looking at other workflow optimization initiatives. As I mentioned, I think you're going to get a nice cost reduction when we switch sequencing platforms over to kind of higher throughput sequencers. And then again, G&A. I mean, there -- when I say every rock, I mean, there are areas that, I'll just to be honest with you, we -- there's opportunities there, and we're focused on them, and we know we got to do it, and we are doing it.

Helpful. Then in terms of some of the initiatives that you've highlighted, whether that's expanding coverage with some of the private payers or some of the EMR integration that you touched on. Can you just talk about your strategy with each of those and how that should really contribute to some of this volume growth as well?