Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

Good day, and thank you for standing by, and welcome to Adaptive Biotechnologies Business Update Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Karina Calzadilla, Vice President, Investor Relations. Please go ahead.

Thanks, [indiscernible]. Good afternoon, everyone, and welcome. Today, we're joined by Chad Robins, our Chief Executive Officer and Co-Founder, who will address the session from the strategic review; and Tycho Peterson, our Chief Financial Officer, who will share his thoughts on [indiscernible] next chapter outside of Adaptive; Harlan Robins, Chief Scientific Officer and Co-Founder, will also be available for Q&A. Please note that during the call, management will make projections and other forward-looking statements within the meanings of federal securities laws regarding future events and the future financial performance of the company. 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. I will now pass it over to Chad. Chad?

Thanks, Karina, and welcome, everyone. As previously communicated, we underwent a strategic review of our business portfolio, including the MRD and immune medicine businesses. We did this because the MRD and IM businesses are at different stages of maturity with different investment requirements and talent needs. In conjunction with our strategic advisers from Goldman Sachs, we looked at a wide range of scenarios, including spinning, splitting and M&A. The management team and our Board concluded that the best outcome to maximize value today is to keep both businesses internally within Adaptive and to restructure with dedicated resources and separate segment reporting. This will provide each business with the autonomy to execute against their respective strategies and achieve inflection points to unlock their full potential. So let me share what led to this conclusion. First, for the MRD business, which is the best-in-class leader in heme, we entertained multiple offers from key strategic players. However, with our 4 advisers and our Board, we concluded that these offers underestimate the current and future value of the clonoSEQ business. We have the cash, talent and strategy in place to grow the business and achieve positive adjusted EBITDA in the second half of 2025 and cash flow breakeven in the first half of 2026. In fact, we're off to a great start this year with the MRD business. As preannounced earlier today, MRD revenue for the quarter is expected between $31 million and $32 million, exceeding our plan. Second, the potential value creation from our immune medicine business with our cell therapy partnership in cancer and our autoimmune programs was validated in various discussions with external parties during their review. Given our efforts are at early stage of discovery, further validation of the science and asset development should yield tremendous upside as a new category in targeted autoimmune therapy. And third, under this structure, we continue to preserve our strong capital position, which enables us to bridge the MRD business to profitability and support targeted investments in immune medicine. Also, we maintain our access to additional non-dilutive capital, if needed, through an existing financing agreement. So what are we doing differently? One, to provide more accountability and visibility on the execution and progress of the business, we have already started restructuring our workforce to align dedicated resources in most functions to MRD and IM. As such, starting on our next earnings call in May, we will provide segment reporting for both businesses, including their dedicated operating expenses and respective adjusted EBITDA; two, as a result of this restructuring and sharpened focus, we continue to rationalize our operating expenses, and we'll provide updated guidance on the earnings call; and three, to provide more visibility into the IM business performance, we are outlining 3 main proof points over the next 12 to 18 months. The first is to continue to support Genentech with the goal to enter the clinic with the first candidate following the acceptance of the IND last year. The second is to further validate the MS target in known disease models and the third is to develop antibody assets for selected autoimmune diseases. In summary, we've come out of this review more focused and aligned as a management team, and we remain very excited for what Adaptive is going to deliver over the next 12 months and in the longer term. Now let's touch on the first quarter revenue results we preannounced earlier today. Total revenue for the first quarter of 2024 is expected between $41 million and $43 million. This includes MRD revenue between $31 million and $32 million, which represents approximately 47% growth versus the first quarter of the prior year. The clinical business is performing well, and the overall MRD business further benefited from the recognition of milestones in the quarter. I look forward to providing additional details during our earnings call coming up in May. Now to the bittersweet part of the call. Earlier today, we also announced that Tycho Peterson, our Chief Financial Officer, is leaving Adaptive to pursue another opportunity. Tycho has made great contributions to Adaptive, including our operations and culture, and it's hard to part ways with a valuable colleague and a dear friend. At the same time, we have a strong finance team in place, and Tycho is leading to pursue an opportunity where I know he will thrive. I'll pass it to him to provide you with more color, and then I'll make some closing remarks to wrap it up. Tycho?

Thanks, Chad. I want to start by echoing every word that Chad said related to our businesses. There is a lot of value to be unlocked at Adaptive, and I'm incredibly optimistic about the future of the company. Our energy business is doing everything it needs to drive meaningful growth and reach profitability. And after recently attending our national sales meeting and seeing the energy, commitment and passion firsthand, it is clear we have the right team for the job. We're also just beginning to unlock the potential of immune medicine and build to be one of the most significant therapeutic companies over the next several years. Adaptive [indiscernible], and I can think of no better opportunities than those that we have in cellular therapy for oncology with Genentech and our own in-house developed portfolio of autoimmune targets. With all honesty, I wish I could have had the time to see to more of Adaptive's progress and success that I know is ahead. But I received an opportunity I could not refuse and I'm going back to my roots in the job that I know well. Adaptive has a deep bench, and I'm leaving with a strong finance team in place. I'm incredibly excited by Kyle Piskel, who's been at the company for nearly a decade, will be stepping into the full-time CFO role. Kyle is absolutely the CFO that the company needs right now. He has the business knowledge to operate and execute with rigorous guardrails, and he will be supported by the rest of our exceptional finance team. So with mixed emotions that I leave Adaptive, when I first arrived 2 years ago, I knew I would be joining the company with a bold vision and world-class science, but what I could not have fully anticipated at the time was the passion that Adaptive employees bring to work every single day. I have absolutely no doubt that Adaptive will reach its potential and deliver significant value to patients, employees and stakeholders over the next several years. Thank you to the Adaptive employees, our Board and our shareholders. Back to you, Chad.

Thanks, Tycho. As we have said, we believe MRD and immune medicine businesses will benefit from being independent of each other, and that thesis still holds. It's a timing issue. MRD needs to get further along the path to profitability and the new medicine business needs validated assets to maximize shareholder value. We're well down the path to achieving both of these objectives. We've reorganized and refocused the organization and are aligning the financial reporting to enhance the independence of each business. We've got the people, we've got the capital, and we have the strategy to make it happen. With that, thank you, and I'll open up the call to Q&A.

[Operator Instructions] And our first question comes from Dan Brennan from TD Cowen.

Great. Maybe first one just on the strategic assessment that you did, Chad, I think you discussed in the prepared remarks, MRD, you evaluated several offers that you had and you concluded kind of they weren't kind of worthy, I guess, of what you see [indiscernible] value of the business. Can you just provide any more color, obviously, the stock has been down a lot. It looks like it's undervalued on a sum of the parts, but just wondering if you can shed any insight on how the market views or some of the bids out there viewed the value of that business?

Yes. Thanks, Dan, for your question. I think what was clear coming out of the review and the offers received is that -- and what we were told by strategic partners is that the delta that we could get if we brought the business to profitability, it was quite significant. And given that we have the cash on hand and the strategy and that the business is performing well, it just made sense for us to operate, execute, put our heads down and get to profitability and then we can revisit.

Got it. And then maybe I know there'll be a bunch of questions on the immune medicine side on kind of some of the proof points there. Maybe just on the quarter itself then, if you don't mind. Could you just discuss any color you can provide on price for its volume on the MRD, clonoSEQ side of the business? And then I know you mentioned you had some milestones on the immune medicine side. Can you just share what those were?

Yes, Dan, we'll provide a lot more details during the quarter. What I can say, I'll just kind of echo what I said in my prepared remarks is the clinical business is performing as expected. Plus on top of that, we were able to receive some milestones from the pharma business that kind of got us over.

And our next question comes from Tejas Savant from Morgan Stanley.

Chad, maybe one on just the process here. I know you outlined sort of rejecting the busy receipt for the MRD asset as it was sort of undervaluing that part of the company a little bit. But can you outline sort of how the process went in the IM side of things? And then how did you come about the decision to rule out the possibility of 2 separately traded public companies? I know that was in the scheme of things as well back when you initiated the review?

Yes, Tejas, thanks for the question. So first of all, I think as we evaluate all the different opportunities, really was a multi-varied equation. One of the factors was the existing financing agreement that we have in place in the royalty financing agreement. And I do have to say we kept our partner, OrbiMed up-to-date every step along the way, and they've been a great partner to us in helping us evaluate opportunities. However, I think there's 2 things that kind of factored into this. Kind of one is it's not guaranteed that we would be able to kind of keep the capital and not have to repay capital if we split into 2 companies, one of the things that we were evaluating. And the second is we took a hard look at the market opportunity and looked at kind of where preclinical assets we're trading in the therapeutic space. And given, again, that we have enough capital to make, again, selective targeted investments in knowing exactly what we're trying to achieve in the autoimmune space and in the cancer space with our partner with Genentech, it made more sense to kind of essentially put heads down and execute and get to those proof points because the value creation and inflection, we believe would be kind of significantly higher.

Got it. That's helpful. And then a follow-up on the IM side as well, Chad. Can you just remind us how exactly you think about choosing out to hone in on the therapeutic candidates to go after, while simultaneously managing cash burn? I know you talked about the progress in MRD helping to subsidize some of those investments there in addition to, of course, the existing resources on the balance sheet. But just curious about the choice of target and whether thinking there as evolved at all beyond MS and so on.

Yes. Sure. I'll turn it over to Harlan to answer the question on the choice of targets in the IM business.

So we have to assess the choice of targets. Basically, from soup to nuts, we usually start backwards and have an assessment of what the potential market is, what a clinical trial might look like all the way through to what our probability of success on the technical side of hitting that target as well as whether we are fully convinced that hitting that target will have a clinical benefit. So -- and obviously, the unmet medical need. And then, of course, we're staggering the spend so that we can leverage our success as we go without giving up our future potential. So in other words, we can do a lot of the discovery work without massive investments. The larger investment comes downstream. And so we want to get successful proof points as we then meter out the spend as we go.

Got it. And then, Chad, final one for you. I mean beyond sort of the leadership structure in place for each of the 2 businesses, I mean, are there any other kind of like middle management changes that need to be made as well as you think about more separate though reporting structures for the 2 segments on a go-forward basis? And any anticipated hiring that you need to do to get there?

So not at this time, Tejas. We have the right people in place to do what we're trying to achieve at this time. I do think as the immune medicine business progresses to run clinical trials, there will be a series of hires that we need on the regulatory and clinical development front, but we want to be kind of judicious on that spend until we have a proof point in place that would essentially open up kind of that capital spend. Again, I think what you're hearing from us, and I hope is coming across loud and clear, we're being kind of very prudent on kind of the capital allocation between the businesses and trying to kind of meter it out as appropriate based on kind of milestones, catalysts and different proof points for the business.

And one moment for our next question. And our next question comes from Mark Massaro from BTIG.

This is [indiscernible] on for Mark. Today marks the conclusion of the formal strategic review. I have to imagine that might be an ongoing process should the right offer come to the table. So if the process is, in fact, continuing, should we think about the increased independence of MRD and immune medicine as being kind of an interim solution? And what steps do you think you might be able to take from here to take additional costs out of the business?

Thanks for your question. And I think it's an important one. I want to say the formal strategic review as of today has concluded. We as a company, and my job and the board's job, we will always look at corporate development opportunities, including M&A. But for right now, what we've determined through the course of a rigorous strategic review as the best path right now for shareholders to operate and execute the business. We have a very clear strategy in place, and we know what we have to do on both businesses to inflect value. So I would want to kind of remove the uncertainty and an ongoing process. We are concluded with the review, and that's what we're doing as of today. As I said, we are opportunistic. And if something comes in that we need to review and have the fiduciary duty to review, we absolutely will do that.

And our next question comes from Rachel Vatnsdal from JPM.

So first off, can you just spend a minute talking about the health of the balance sheet. You talked about some of the targets for cash flow breakeven. You also mentioned some access to non-dilutive capital. So can you walk us through how are you thinking about the potential need to access capital to fund both businesses in the near term here?

Yes. Thank you for your question, Rachel. We do believe that company is well capitalized to get the MRD business to profitability without having to raise additional capital and to make selected investments in the autoimmune program and our immune medicine business. Right now, we have over $300 million of cash on the balance sheet. We also have access through an existing financing agreement to an additional $75 million, and that's a royalty financing agreement that we struck with OrbiMed that should we need to access capital, that's how we would access capital. But I do want to be clear, we believe that we will -- that the existing cash on hand will get the MRD business to profitability.

And our next question comes from Sung Ji Nam from Scotiabank.

Just a couple of clarification questions. So I realize that you will be commenting more on the earnings call, but for the 2 reporting segments, you mentioned that you will be reporting them separately. But as far as revenue guidance is concerned, would you be resuming revenue guidance for immune medicine as well?

No. We will continue to guide only on revenue for the MRD business and the guidance with respect to IM will be on milestones, catalysts and proof points.

Okay. Got it. And then just on the operating synergies, I'm assuming you guys are currently leveraging operating synergies across the 2 businesses. And so would you be able to continue to do so in kind of this new reporting structure?

Yes, we would. We do have shared resources that will be allocated to each of the businesses, but there will be continued operating synergies, for example, in the kind of G&A function.

And our next question comes from Andrew Brackmann with William & Blair.

Maybe just one for me on the immune medicine side of things and sort of the optionality that you have in furthering some of that discovery work into the clinic. Can you maybe just sort of talk about how this decision might impact your decision to maybe partner with other entities going forward? Should we think that maybe you're more open to a partnership model versus doing some of that investment on your own? Or how does this decision kind of shift some of that from that thought process?

Yes. Thanks for the question, Andrew. Yes, we do continue to assess partnerships and that is certainly a viable strategy kind of moving forward. I think as the company matures and evolves and develops capabilities and talents kind of downstream as we kind of move assets to the clinic and frankly, learn more from our partners in Genentech and potential future partners, we will continue to look at how we can kind of move further upstream into clinical development. But certainly, partnerships are a viable path and strategy that we are in discussions and continue to analyze.

And our next question comes from Salveen Richter from Goldman Sachs.

So two here. One is post the strategic review, what would you be doing differently on the forward fundamentally with regard to running these businesses? And then secondly, with regard to the proof points for the IM business, maybe help us understand the time lines for achieving them?

Yes. Thanks, Salveen, for the question. First, on the go forward, a lot of it is internal organization that will lead to kind of the external kind of segment reporting. But internally, essentially, we've dedicated resources to both the IM and MRD businesses. And then we have very tight capital controls on allocations between those businesses. And then those capital controls will lead to kind of additional capital based on kind of proof points as the business matures in IM. As for proof points, I can kind of turn it over to Harlan to talk about some of the things that we're doing on IM and outlining.

So we're not going to give specific time lines. I think it's a little too early for that where we have to develop the set of tools, for example, where we have to generate a specific transgenic mouse model for our IM target because it's presented by human HLA. So -- so that is in progress now. We're parallel tracking that with the development of our antibody assets that we'll go after both the target as well as [indiscernible] T cells. So we have 2 different kind of parallel strategies almost, you'd say one is providing the sufficient evidence that our target and T cells are both the -- not just correlated but causative and therefore, I think were their viable targets to go after therapeutically. And at the same time, developing the assets to be able to have the therapeutics to -- for treatment to go through trials. So both of those are in place, but I don't want to quite give you time lines at this point, but we'll update as we progress.

And our final question comes from Dan Brennan from TD Cowen.

It's kind of related to Salveen's questions. I think the MRD business, clearly given the trajectory of kind of what you produced thus far, there's a lot of obvious eye to that business and maybe the immune medicine is kind of less so just given the volatility of the pharma business and the cost involved. So I guess the question I had is maybe what did you learn from the process on the immune medicine side? You shared some thoughts on the MRD side where the feedback was get to profitability, get the self-sustaining cash flow and that will drive a lot of value unlock. How about on the immune medicine side? I know you laid out these 3 criteria, these proof points, but maybe just to be specific, like what was the feedback? Like, what do you think maybe the market is missing? Just maybe a little bit more color on kind of what drives value on the immune medicine side.

Yes. Thanks for the follow-up, Dan. I think what drives value on the immune medicine side is assets in the clinic and development of assets. We have what we believe are kind of unlocking a new set of targets in the autoimmune space. And as Harlan mentioned, there's kind of 2 modalities there. One is going after kind of the energetic target. The other one is going after the T cells that go after the target. And we can do both of those with an antibody platform that we've already developed and we're in process of developing that right now in terms of the antibody assets. So it's very important. What we did learn is kind of preclinical companies, which this isn't rocket science, kind of known information out there, but kind of preclinical companies and I've got no information out there, but preclinical companies are trading at a below-cash in the market place. So what we recognize is that we have to get these assets developed into the clinic and/or strike partnership deals that provide, I'll say, "non-dilutive cash flow" into the company, both of which we're working on in parallel. Again, we think this is kind of a tremendous opportunity and upside for the company but also recognize that we are spending money on it. So we're going to be judicious and meter that spend based on kind of proof points that we see. THE WITNESSAnd as Harlan mentioned, while I'm not giving a specific time line, we will be coming out with more specifics on a time line. And we kind of -- as I outlined in the prepared remarks, we have kind of 1 12- to 18-month time frame to talk about kind of those 3 different proof points that we had mentioned, which was kind of being in the clinic on a partnership deal in cancer, advancing the MS target in [indiscernible] and then developing the antibody assets in parallel. So again, more specifics to come, but we're kind of dedicated to outlining and providing more clarity and transparency, both into what we're doing and the capital we're spending to achieve those goals.

And thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.