Adaptive Biotechnologies Corporation (ADPT) Earnings Call Transcript & Summary

[Audio Gap] website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep. So it's my pleasure this morning to host Adaptive Biotech. And speaking on behalf of the company, we have Chad Robins. CEO. So thank you so much for joining us, Chad. Appreciate it.

Maybe just to kick things off, it's been an eventful year for you guys. You have the strategic review, you have the FDA ODAC meeting, which we'll get to as well. What would you say are your key learnings this year? And do you feel better about Adaptive's prospects today than you did 12 months ago?

Well, lot there. But thank you, first of all, Tejas, for having us again at Morgan Stanley Healthcare Conference. Really appreciate it, and good to see you. Yes, I feel really good about Adaptive business and where we are. We've made a significant amount of changes and have done some heavy lifts. In particular, segment reporting, we have 2 businesses, one in MRD and the other in Immune Medicine. And just in terms of allocation of capital dedicated resources, a very crisp understanding of the catalysts and milestones in each of those businesses, the financial discipline that we've put into place and also the traction that we've made over the last 12 months. So I think there's a lot of momentum in the business right now. Culturally, people are feeling very, very inspired and feel like even though we've been through some challenging times and have had to make some tough decisions in terms of kind of reductions in workforce, in terms of reductions and really focus on programming, those -- those decisions have been well received and are starting to play out in a very positive manner.

Got it. I want to start with the MRD side on the clinical piece. Just to set the stage, can you talk about your current volume mix and penetration across multiple myeloma, ALL, DLBCL and CLL?

Yes, sure. Happy to do so. And that is exactly how we look at it. We look at penetration by indication. The area that we're most penetrated from is in ALL because this was a conversion strategy. Clinicians have been doing MRD testing in ALL for a long time, initially using flow cytometry. And now they've been converting over to NGS-based clonoSEQ testing, and we're about 20% penetrated. The fastest-growing area of our business is in multiple myeloma. And that business is 10% penetrated. And then you have kind of the CLL business, which is about kind of 4% to 5% penetration and then you have DLBCL, which is the largest category of non-Hodgkin's lymphoma represents about 35% of overall test mix, but we're penetrated in about 3%. And we can talk each of these indications and what the drivers of that penetration are as well, but that's your overall big picture on penetration.

Got it. So one of the questions we still get Chad is, why is clonoSEQ penetration where it is increased relatively slower versus liquid biopsy test for therapy selection? What's your perspective on that? Or is MRD penetration for solid tumors, the more appropriate benchmark in your mind?

Yes. I would say MRD penetration for solid tumors is probably the more appropriate benchmark. Remember, we've really developed the market in heme MRD, right? And it took a long time to generate the clinical evidence, meaning how does a clinician use this information to make a treatment decision on each one of my patients and in each of the indications. So broad picture, it started with the effectiveness of new therapies. A great -- I mean, let's pick multi myeloma, like starting in 2015, you had this -- a litany of new therapies that came on to the market. And these therapies were more effective, and they extended the life of a patient. Usually in the past where multi myeloma would be a death sentence for a patient, now patients are living along with the disease. What that means is you need to track effectiveness of therapy and then over the course of the patient care continuum, you need to look at the tumor burden and then how to essentially use this arsenal of new therapies to be able to treat the patients. And so with that, the MRD market has grown in conjunction with the new therapeutic options. And so like new indications, for example, DLBCL, you have new therapies that are in trials and coming to market now. And so the MRD market will develop in conjunction with those new therapeutic options.

Got it. What is the share of flow-based approaches versus clonoSEQ? And more recently, has there been an opportunity for you to gain share from Foresight Diagnostics following some of the legal challenges?

Well, a couple -- look, I want to tease that out a little bit. So first of all, flow -- flow cytometry as a replacement strategy was used in ALL. And so that conversion strategy of switching over to NGS-based testing now we're -- we're starting to really kind of capture that. So flow is still probably about 35%, 40% of the market. Second question kind of related to -- there are certain indications where flow -- where MRD testing was -- hadn't been done or wasn't done in the past. And it's truly a developing clonoSEQ as a method to test MRD. And so that would be, for example, in CLL and in markets like DLBCL. Now DLBCL is a -- whereas the other indications I'm talking about have been a cellular test. DLBCL is a CT, a circulating tumor DNA test. This is an area where -- the area where we do see a competitor, you mentioned Foresight Diagnostic. But I want to be very clear about Foresight, they don't have any presence in the clinic right now. They're competing with us in new pharma trials. And so that's an area where, essentially -- and those new pharma therapies that are coming to market in CAR-T and ultimately, in bispecific, et cetera, that's an area where -- but they don't -- they don't -- they're not in the clinic.

Got it. Got it. Coming back to the earlier comments you made, Chad, about multiple myeloma being the largest driver for clonoSEQ volume. Can you just dig a little bit deeper into the drivers of that growth? And how should we be thinking about growth in the other categories, DLBCL, et cetera?

Yes. Yes. So why -- again, I mentioned the therapy, but the other is blood-based testing and clinical utility of an evidence generation. So there are 2 trials that I'll point to. One is the master trial. And what the master trial says is we've 2 successive MRD negative time points that you can take a patient off of maintenance therapy and then over the course of 2 years later, that patient -- 85% of those patients are still disease-free. So -- and why that's so important is, if you have multi myeloma and you're getting maintenance therapy, there's a ton of side effects, and it's really challenging living with some of these side effects. So these patients are really thrilled to be able to have a negative MRD test and have the confidence. I mean doctors have the confidence to take these patients off of the therapy. There's another test called the MRD2STOP test, which is a trial out of the University of Chicago. It's a multimodal test, but clonoSEQ at 10-6 is one of the important components of the test also to take a patient off of maintenance therapy. So these are really, really important to continue to generate the clinical evidence.

Got it. That point you just made on blood-based testing, I think it's about 40% of your volume, it's been in steady increase for a while now. What timeframe do you see this essentially replacing all sort of bone marrow biopsies within your clinical volume? Or are there any sort of advantages marrow versus blood in certain settings?

Yes, particularly in -- well, the advantage in the community. If you look at about 60% -- 65% of patients are treated in the community and community for the most part, don't do bone marrow [ pulls ], they do blood draws. So being able to have that blood-based testing in the community is a huge component of that. And so the blood-based testing in the community really go hand-in-hand, and we're looking at really 3 initiatives on increasing penetration in the community. The first is around integration. We have Epic integration, which is mostly centered on academic medical centers, but we're also starting in the fourth quarter, OncoEMR, which is a Flatiron integration, which will hit by second half of next year. We'll do some piloting, but it will be hit about 200 community hospital centers. So really excited about that. The second is we're increasing. If you look at our kind of marketing and promotional spend, a lot of that increase is going into the community where we're having kind of that the KOL peer-to-peer going out and really focused on the community hospital settings. And the third is really more of a structural element where we've reorganized the sales force where we have these -- most of the -- the community practices are centered in these large community practice accounts where we want to focus our time. And in the past, we've had that done kind of by geography. But what we've recognized is how you sell into these large community council. Now we have a national strategic account group that kind of services the country. And we have this really dedicated playbook to say, here's how you go in and put kind of what we call peak AIs and how clinicians should implement throughout the different time points in a patient's continuum, how they can implement MRD testing. So it's a combination of workflow, peer-to-peer education and how it is that we're targeting and selling.

Got it. And just cutting the data in a slightly different way. In terms of advantages of blood versus marrow, are they universal across all heme malignancies? Or are there certain categories where marrow [ matter ]?

No. Yes, it's great. That's a good question. There are certain -- so -- there are certain indications where we only do it in blood and it's blood-based testing. So for example, CLL, DLBCL is only [ going to be ] blood test. There are certain indications like ALL, where you have 100% concordance data, meaning like we're sensitive and specific and the bone marrow is [indiscernible] we are in the blood. Then the outlier there is in multiple myeloma, which is a disease of the bone marrow. But our test is so much more sensitive than flow like that we were sometimes able to pick up in the blood what flow can't even pick up in the marrow. However, you have a set of clinicians who are used to -- they're always -- especially in academic medical centers, they're always going to take a bone marrow draw. And what we're saying is if you're in the community and you start with the blood -- start with the blood, if you can -- if you can get the ID sample, if you can find it in the blood, we can track it in the blood. If you can't find it in blood, then you can reflex to the marrow. So there's a whole kind of pathway as to how you treat patients, and it's a -- it is a good question because there is [ nuance ] that you're not going 100% replace marrow-based testing in multi myeloma, but we can get a long way there, and we can have a pathway to get there.

Got it. On that point, you talked about on the EMR front with the Flatiron Health rollout here. Are there any learnings from the Epic integration that you can leverage? Are there any notable differences in terms of the integration processes between Epic and OncoEMR?

Yes. I'm going to take this question in 2 parts. First, I'm going to talk about Epic to Epic and the learnings that we've had there. And then we'll talk about the differences between Epic and OncoEMR. Epic to Epic, so we've done now -- 6 as the last earning call, we did another one and have 2 to 3 scheduled by the end of this month. And we've got another 12 on the docket because we said, hey, we're hoping to get 20 by this year, which means that we've got a long way to go, and there's been a ton of learnings. I mean -- and by the way, my friend from Exact, who's on our board for a while, Kevin told me this to begin with is that it's kind of like this double-edged sword. It's really hard to get these -- all these institutions to implement Epic. But once you do, it's a hard -- it's a nice competitive advantage. It's another moat around your business because once you're in the accounts, the switching cost is high because you get used to using it and you -- et cetera. So getting IT resources, getting the clinical champion and getting everyone centered with kind of more of a productized, here's the Epic offering that we're doing and here's how to do it. That took -- there was some upfront work and then that takes kind of a while to kind of get that packaging down. So the last Epic integration we did went faster than any of the other ones that we've done to date. So we're getting faster at it. I should also say that we started with some of the smaller accounts because we didn't frankly want to screw it up. And so we piloted some of these accounts. We saw really nice kind of 40% plus really early growth in terms of volumes from those accounts. Now we are moving to doing our 2 largest accounts and that one will be done by the end of this year, one may be done in the first quarter. And when those are done, 25% of our overall volume will be kind of represented by those Epic integrations. Okay. So that's Epic learning a lot. I think they'll go faster moving forward, big competitive moats, but gosh, it's challenging tough. I'll be honest with you. What's easier, we think, or what we've been told is our goal -- and what -- but Epic has is -- you have to have this plug-in called Aura to be able to integrate with Epic. OncoEMR has a plug-in somewhat similar, but you can like -- you can have this diffuse turn on of all these events called MPI. And so we will do some piloting and some smaller accounts, make sure it gets up and running. That contract where it starts in the fourth quarter, we do all the build. And then second half of 2025 is when we're looking to turn on, and we'll have access to 200 accounts. So like -- one of the questions we ask is, "Hey, can you continue to grow it, I mean, this 30% volumes year-over-year?" And what we're looking at -- there's new things every year, and one of the big growth volumes is these -- as these integrations take hold, that's an important component of it.

Got it. How should we think about mapping accounts to volumes?

I'm not sure if I totally understand it. Yes.

Just in terms of like when we think of the fraction of your -- because not all accounts are equal, right? Some are going to be like higher volumes, some are going to be lower volume. So depending on the mix of the accounts, the transition over to these new -- get integrated on these EMRs. Just trying to get a sense of how material this could be for you 6 months out versus a couple of years out.

Yes. So obviously -- I'll just state for those kind of listening in. The advantages of integrating to Epic is workflow implementation. It's just as a doctor has a terminal sitting in front of him instead of going off of it and having to go to a portal and log into a special system, it just -- you have all the pre-populated data, et cetera. So that doctors who's already using clonoSEQ is going to order more tests. And then secondly, more of the clinicians in that practice will sign on because the ease of ordering not having to get set up and do a kind of a separate workflow is a big deal. Now what -- the number I just referenced that what we've seen so far is a 40% volume increase from some of this. But I want to be clear, these are smaller accounts and you're growing off of a smaller base. I think it's too early to tell what the volume increase will be because of Epic. But we had heard, and we have seen some big numbers from our peers. And again, we're not, at this point, changing -- I mean, this is part of the -- all of the projections that we put in place in terms of our long-range planning, Epic has already -- and Flatiron has been kind of part of that. But what we do say is that it's a derisking event to be able to support that double-digit growth profile that we have next year and into the future.

Got it. Quickly on mantle cell recent launch for you. Can you talk to us about the opportunity? And what is the magnitude of the tailwind that you expect over the balance of the year?

Yes. So when you say recent launch, we actually aren't promoting it yet. We haven't gotten Medicare coverage. We are expecting to -- well, you never can know with the government in Medicare. But we're hopeful that we get coverage in the second half of this year, and then we'll tactically be able to promote the test and go kind of full board. We are offering it as a test, as a non-covered indication right now. The magnitude of the potential. We look at it really like it's -- there's a lot of comparabilities to the ALL market. It's -- it's 5% of the NHL market right now and kind of -- obviously, we're not promoting it on penetrating now, but it's something that I think there will be active use among the clinical community and there's great, great -- some nice new therapeutic options to be able to treat it. So we do look at it that we should be able to -- over time, be able to achieve a 20% penetration of that market.

You guys got IVDR certification recently for clonoSEQ. Can you speak a little bit to what that means for you in terms of your OUS footprint?

Yes. We -- I would say it opens up the opportunity for the OUS footprint. Our focus -- and it's great. And by the way, it's, as you know, a requirement, one of which we checked off the box early. It really opens up the -- when we dedicate digital resources, it makes ex-U.S. opportunity available. We -- I think there's -- as we just talked about from a penetrate, there's a lot of work to be done in the United States right now. The other area that I think is really impactful is with pharma. Being able to run pharma trials on a global basis and knowing that you have that certification in place is -- I don't know if tailwinds right way, but it's a nice check the box for pharma companies as well. I would -- it's great that we have a -- great that we're kind of one of the early ones to get it -- and as we -- as we continue to grow our business and see opportunities. I do want to be clear. We do have some international business in terms of technology transfer agreements where we send kind of that reagents and then have -- we have 5 centers that then take those reagents and create a test out of it. And then we -- but we're paid for that bulk of reagents that we show kind of upfront. So that is part of -- it is a very -- it's a small part of our revenue profile.

Got it. I want to switch to pharma. On the ODAC approval of MRD is a primary end point. I think you were -- you talked about being in advanced discussions on 3 new studies, have those now converted into bookings? And more importantly, what does the order funnel look like, both in terms of the studies, the new ones as well as those upgrading to MRD as a primary end point?

Yes. So we've had 2 existing studies convert from secondary to primary. We're in discussions on an additional 3 converting to secondary and primary and the ODAC decision has catalyzed many, many discussions, both in the indication of multi myeloma where the decision was made, but also in other indications where -- where -- pharma companies are having to be [ thought ] forward to say eventually, this is going to come down, we better start thinking about our indication and being able to add in as a primary endpoint to that. So those are all good. Now from a financial profile what it means is, on average, for us, if -- the milestones that we get as a secondary endpoint are $1 million to $4 million and as a primary are $5 million to $9 million. So it's really a -- if you take a mean average, it's a doubling of the milestone potential. And then secondarily, what it means is, if the whole idea of using MRD as a primary endpoint is that therapies can be approved based on the MRD data, which means that you're not having to wait for progression-free or overall survival, which takes a lot longer, which means ultimately that therapies would be approved quicker and that we'll be able to access those milestones a lot sooner. So again, we're not in a position obviously yet to talk about next year's guidance and everything else. But if you look at milestones that are becoming more of a real component -- I mean, there have always been a real component, but more of a tangible component of how we look at the pharma business.

Got it. So will you include those in your top line outlook when you do provide presumably in January, given the usual uncertainty around time lines? And then second, as we think about the revenue ramp broadly across -- from the ODAC sort of uplift, if you will, multiple myeloma trials can take a long time to enroll and read out. So how do you think about this coming through to your top line over the next, say, 3 years or so?

Yes. So the answer is, yes and no. Yes, they will be included as some component of our revenue, but how we do it. We will continue to take a conservative approach to milestones. The reason is because we cannot predict timing of when the FDA is going to approve therapies. But what we can do is provide a risk-adjusted number to say we literally go in and look trial by trial and we talk to our pharma partners, and we try to understand and predict potential timing and then we can kind of put some level of probability and risk adjustment on that and then kind of add up all those numbers and use that number as a revenue milestone -- revenue associated with milestone payments in 2025. So there may be some upside to the numbers we provided based on that information, should things materialize either quicker or if they all happen, right? Those are the 2 kind of factors. It's probability and the associated timing.

Got it. Got it.

Sorry, what was the second question?

No, I think -- I think you covered it. So on the -- on the consortia that you talked about working with the FDA for use of MRD as a primary endpoint in CLL and DLBCL. Where do things stand on that effort? And do you expect this to be a tailwind that could materialize over the next year or 2? Or is it more of a longer-term thing?

It's more of a long-term thing. But -- so what I will say is, I don't think it will take 10 years. I mean I was mentioning this in some of our investor meetings earlier. I mean, I think the first paper that was written in the group that got together in International Myeloma Working Group in this whole consortia around multi myeloma was 2015 or '16. So this will take -- [ take a while ] and there was a -- we thought it would be like really, really soon. The data made sense, and it took 10 years. So I don't think the next DLBCL -- I think there's much more of an acceptance, much more of an understanding of MRD and it's used for -- in pharma trials right now broadly. So that times, they'll be accelerated, but I -- it would be foolish of me to come and say that I could predict that the FDA would approve the next one in a year or 2. I'd tell you, there's a whole -- there's a lot of momentum behind it and a lot of our clinical partners and our KOLs are pushing hard and starting to have those conversations. But we'll know -- I will -- let's just continue to keep abreast of the situation, but it will not be in our numbers for the next year or 2.

Got it. And what about the halo effect from the ODAC vote on the clinical business, Chad? How broad is the evidence of the uplift so far in your physician conversations?

How broad is the awareness of it you mean or...

Potential -- I mean is it starting to...

Yes. Yes. So I was -- so yes, no, I think what's been great is, it's -- the awareness is really, really high. Everyone who knows about it and what it's allowed us to do is -- certain clinicians who've been reluctant or haven't really adopted MRD into their practice, it's really catalyzed a new set of kind of discussions and opened up a ton of doors for us. Also, in the community setting where they're not as -- up on the newest set of tools being here -- being able to -- being over here and the ODAC decision has really kind of broadened that awareness. So certainly, getting a nice -- a nice tailwind from that decision. And that will play out over the next several years as well.

Got it. And then just on the portfolio reprioritizations we're hearing from -- from pharma. What's your take on the latest there? Any impacts to be thinking about versus what's contemplated in your guide on the MRD pharma business?

Yes. I mean it's a little bit of a balance. I mean, I think all pharma buzzers are being constrained and they're being asked to do more with less and kind of reduced budgets, et cetera. So that's on the negative side. But then on the positive side, you have ODAC and the importance of MRD and the acceleration of the potential approvals. So there's certainly a balance. But like look, I mean, it's always a balance going in and fighting for budget dollars. Fortunately, I think we have a test that is extremely well received and considered a critical -- of critical importance to their programs, where it may -- where we may have -- may be some trade-offs in the number of time -- the number of patients or the number of time points that you do for patient, things of that nature because they may have a fixed budget for MRD. But there -- we're certainly not seeing them cutting MRD from the program.

Got it. Switching to immune medicine.

Yes.

Maybe just a bigger picture question first. Since the restructuring of the business is a separate reporting segment, have you noticed any sort of improvement in the operating efficiency? How are you thinking about the allocation of resources between Immune Medicine and MRD?

Yes. So the answer is absolutely. I mean, it's just the strategic review and then really the segment reporting. The segment reporting is really a byproduct of how we're organizing the company, which is we have an Immune Medicine segment and an MRD segment. And from there, we have resources that are dedicated to each of those businesses and a very, very crisp focus on what programming we're doing in each one of those businesses. And then -- so for example, like even software, certain laboratory operations, all the way down the line, you've got a dedicated -- and then you've got a shared resource layer in G&A. And the allocation to your question is really 70% to MRD, 25% to Immune Medicine, then 5%, we've got a bucket of corporate unallocated. And it's -- it's really provided if you -- if you think about not only allocation of capital, but a -- focus on programming and people being energized about what it is, the goals and catalysts that they're trying to achieve in each one of those businesses, which is of critical importance. And then last, and I mentioned, but I'll come back, the financial discipline around it and having kind of understanding how much is being not only allocated but what the budgets are for each one of those businesses. And -- because if you look at it -- for example, we'll get into Immune Medicine, but really understanding that even though we're not -- even though we're not guiding and we don't think that revenue is a driver of value in that business, it is an important, for example, burn offset. There is revenue being generated that can say, "Hey, this is truly -- if you look at the IM business overall, like we're not spending that much money for what we think is a potential of very large upside." So that's just from a big picture of how we think about it and how we characterize it.

Got it. And then any updates on just when we can expect the next sort of catalyst to occur on the Genentech front and you work on TCR-based cell therapy products there?

Yes. So I just want to characterize the Genentech relationship. We're -- this year, we've been really focused on the personalized cell therapy. It started last year where we -- for 165 patients, we get kind of a full end-to-end characterization of those patients, understanding the T cell receptors that were -- specifically responded to that patients, tumor -- tumor mutations in that specific patients. And we've characterized those T cell receptors. And that this year, been really focused on turnaround time, like moving from trying to get to a 7- to 10-day turnaround time on our part. And then they've done a bunch of work to get -- to reduce the turnaround time on their part, too. That's important for 2 reasons. One is the product profile and to reduce the cost of goods sold. But the second is -- and I think probably most importantly is, you want to get that infused product, that personalized treatment back to the patient as soon as possible. In terms of timing, we -- and I know this is a frustration, but we don't control the timing or the ability to communicate externally. It is a Genentech under their control. So when they announce that will -- we'll know. I can tell you that both companies are extremely excited about the programs that we're developing.

And what about on the autoimmune side, I mean that's still sort of in your control as far as the target discovery process for type 1 diabetes? And same sort of question on MS. What's the latest there?

Yes. So let me -- I'll back up and then we can talk about those 2 and others because we're -- what we're -- basically, what happens is, we are focusing autoimmune for our own programs. And for autoimmune, what you have is T cells that are attacking self. And so what we've been good at identifying is that antigenic -- antigenic target that those T cells are attacking and the particular T cell receptors that are implicated in that disease. So we've kind of got a multimodal strategy where we're going after. We're developing antibody campaigns against both the target and the T cells. And we -- the goal in the 2 indications you mentioned, multiple sclerosis, T1D and another, we're looking at 3 different indications right now in the autoimmune space, and we're going to pick a lead candidate to go to preclinical work next year. But we have those immunization campaigns to develop antibodies against those in 3 different autoimmune disorders right now.

Got it. Just to wrap up, Chad, almost out of time. I wanted to pick your brains on what were your key learnings from the strategic review process. And also, I mean, conversations with prospective buyers of Immune Medicine or to the extent that you engage in the other side of the business. And following a few more quarters of stabilization, where is your head at in terms of revisiting that process?

Key learnings from the strategic review, the thesis that we had was that ultimately, having diagnostics and therapeutics companies under one roof is challenging. But we also recognize that it's -- it's early in the process and both businesses have opportunities to grow -- to grow and to inflect on their value and that really having the financial discipline and to be able to focus on that programming is going to be absolutely key to our success moving forward and to be able to generate those proof points and to be very, very clear for each one of those businesses, not only how much you're spending, but kind of what the catalysts and milestones are. In terms of revisiting as a management team, as a Board, it's our job and our fiduciary to continue to look at different opportunities to maximize value of the business. But right now, I would say the -- we're not under a review right now. We've -- we're -- we hedged down operating and executing as hopefully you can tell by the financial results of the last 2 quarters, and we've got to focus on continuing to do so.

Perfect. That's great. Thank you so much for spending the time with me, Chad. I appreciate it.

Great to see you, Tejas. Thank you.

Bye.

Bye-bye.