Earnings Call Transcript - ADPT Q3 2024

Operator, Operator

Good day, and welcome to Adaptive Biotechnologies Third Quarter Financial Results. As a reminder, this call may be recorded. I would now like to turn the call over to Karina Calzadilla, Head of Investor Relations. Please go ahead.

Karina Calzadilla, Head of Investor Relations

Thank you, Michelle. Good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies third quarter 2024 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the third quarter of '24. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and we'll be referencing a slide presentation that has been posted to the Investors section of our corporate website. During the call, management will make projections and other forward-looking statements within the meaning of federal securities laws regarding future events and the future financial performance of the company. These statements reflect management's current perspective of the business as of today. 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 and listed in this presentation. In addition, non-GAAP financial measures will be discussed during this call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release. Joining the call today are Chad Robins, our CEO and Co-Founder; and Kyle Piskel, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, I'll turn the call over to Chad. Chad?

Chad Robins, CEO

Thanks, Karina. Good afternoon. And thank you for joining us on our third quarter earnings call. As shown on Slide 3, results for the quarter are a clear testament of our continued strong execution on the top and bottom line. MRD revenue increased 52% year-over-year, driven by both clinical and pharma. This quarter, we reached two catalysts that will drive MRD revenue growth. One, Medicare set a new gapfill rate of $2,007 for our clonoSEQ test, which is a 17% increase from our previous rate under the episode structure. And two, we secured Medicare coverage for mantle cell lymphoma. Operating spend had another significant decline of 11% versus prior year and 5% sequentially, excluding one-time costs. Sequencing gross margin further increased by 6 percentage points compared to last quarter as we successfully executed efficiencies in workflow leading to lower per sample costs. And cash ended at approximately $267 million, which represents a burn reduction of 38% in the first nine months this year compared to the same period a year ago. Due to our strong year-to-date performance, we are raising the lower end of our previous MRD revenue guidance. We are reducing our full-year operating expenses and lowering our annual cash burn target. Kyle will share more in his detailed remarks. Now let's take a closer look at the MRD business on Slide 4. clonoSEQ clinical revenue grew 39% versus prior year. Tests delivered reached a new record representing 30% growth year-over-year and 6% sequentially, with growth observed across all marketed indications. Multiple myeloma continues to be the largest contributor at 41% of volume, followed by ALL at 34%, CLL at 10%, and DLBCL at 6%. Other clonoSEQ key indicators continue to trend positively. Blood-based testing represented 41% of tests, and we expect it to continue to increase as we generate additional data in blood and launch new blood-based indications such as MCL. Tests in the community grew by 11% sequentially, with overall steady contribution at about 25% of tests delivered. And ordering HCPs and ordering accounts grew by 39% and 60% versus prior year respectively. As mentioned, we achieved important catalysts for the business this quarter. First, new pricing for clonoSEQ. Recently, CMS published its updated gapfill determination for clonoSEQ of $2,007 per test. Accordingly, we're pleased to see that MolDX has updated the episode rate to $8,029 for our Medicare-covered indications. Based on the updated gapfill rate, we have executed new agreements with non-contracted commercial payers at this new price per test or higher, and we are seeing positive momentum with several other key non-contracted payers. Additionally, we are working with our contracted payers to accelerate negotiations to increase rates based on this information. As a result, coupled with our ongoing efforts to optimize revenue cycle management and reduce out-of-policy and non-contracted claims, we anticipate ASP will reach approximately $1,300 per test on average for fiscal year 2025. This represents an increase of $2.50 per test from fiscal year 2023. Second, the launch of clonoSEQ in mantle cell lymphoma (MCL). This morning, we announced that MolDX has expanded coverage of clonoSEQ for Medicare patients with MCL. MCL is an aggressive form of non-Hodgkin's lymphoma, accounting for about 6% of NHLs with most patients experiencing repeated relapses. We're pleased with MolDX's decision as it reaffirms clonoSEQ's role as a valuable tool for disease monitoring in another lymphoid malignancy. With this coverage now in place, we have initiated promotional activities in MCL. Of note, coverage follows the current episode structure and reflects the updated gapfill rate. Lastly, EMR integration continues to be a key focus to enhance customer experience and drive growth. This quarter, we successfully completed Epic integrations for six accounts, including our largest customer, MD Anderson. We are now live with a total of 11 accounts and have nine more integrations scheduled to be completed by year-end, representing about 20% of our projected volume in 2024. Beyond Epic, we have initiated our OncoEMR integration with Flatiron Health and have several other active EMR integration projects with large community practice networks with target launch dates throughout 2025. Now looking at MRD pharma on Slide 5. Our pharma business had another strong quarter with revenue growth of 73% versus prior year, which included $5 million in regulatory milestone revenue. We continue to experience significant momentum following the April ODAC recommendation in three main areas. First, new studies. We have seen increased investments from biopharma and have closed 16 new myeloma studies year-to-date. These new bookings will support future revenue growth. Second, regulatory endpoint. As expected, MRD is increasingly being used as a primary endpoint. We now have 10 multiple myeloma studies utilizing clonoSEQ as a primary endpoint, including two recently signed studies and three that were upgraded from secondary to primary. Some of these studies will yield high single-digit million-dollar milestone payments upon successful regulatory approval. And third, clinical impact. As mentioned, the pharma and clinical businesses are synergistic. Pharma companies are starting to highlight the clinical utility of MRD testing, educating both physicians and patients about its significance as a key measure of treatment response. New MRD-directed treatment regimens, if FDA approved, will further enhance adoption in the clinic. In summary, MRD is thriving on multiple fronts. The successes we have achieved throughout the year bolster our confidence in the long-term outlook for the business. Now let's turn to Immune Medicine on Slide 6. We are advancing R&D efforts to develop differentiated immune-based therapeutics in cancer and autoimmunity. In oncology, we continue working with Genentech to deliver high-impact TCR-based cell therapy to as many patients with solid tumors as possible. Our focus is to improve turnaround time and reduce cost, which will enhance the profile of our fully personalized cell therapy product. We will provide an update on our progress with Genentech at the appropriate time. In autoimmunity, we successfully identified a subset of autoreactive T-cell receptors that are likely causing disease in patients with multiple sclerosis, type 1 diabetes, and several other devastating autoimmune indications with high unmet medical need. As mentioned last quarter, we successfully completed several antibody mouse immunization campaigns. This quarter, we started making and functionally testing a subset of these antibodies that we selected because of their attractive properties. Our goal is to nominate a lead autoimmune indication by year-end and focus our antibody development efforts to build a robust preclinical data package in this first autoimmune program. Now, I'm going to pass it over to Kyle to walk through the financial results and guidance updates.

Kyle Piskel, CFO

Thanks, Chad. Let's start with revenue for the third quarter on Slide 7. Total revenue in the third quarter was $46.4 million with 81% from MRD and 19% from Immune Medicine, representing 22% growth from the same period last year. MRD revenue grew 52% versus prior year to $37.5 million with clinical and pharma contributions of 56% and 44% respectively. clonoSEQ test volume including international increased 30% to 19,600 tests delivered from 15,072 tests in the same period last year. ASP in the US grew 3% versus prior year despite a $1.8 million reserve charge we took this quarter related to aged claims from 2023. MRD pharma sequencing revenue grew 21% versus prior year, reflecting a healthy recovery from last year's biopharma industry pressures. Immune Medicine revenue was $9 million, down 32% from a year ago, driven by an anticipated 56% decrease in Genentech upfront amortization, partially offset by a 4% increase in Immune Medicine pharma and academic services. Moving down the P&L, I want to highlight that the sequencing margin, which excludes milestones in Genentech amortization, was 56% for the quarter. This represents a significant increase of 13 percentage points versus prior year and 6 percentage points sequentially. This improvement is mainly attributed to lower overhead costs from efficiencies in the production lab and direct labor leverage, which combined drove lower cost per sample. Total operating spend for the quarter inclusive of cost of revenue was $79.1 million, representing an 11% decrease from last year. This decrease continues to be mainly driven by our focus on driving leverage across functions, with R&D once again being the biggest contributor of this decline given more targeted investments in Immune Medicine. As you can see from the segment reporting table at the bottom of the slide, MRD adjusted EBITDA has improved sequentially throughout the year to a loss of $6.1 million this quarter, driven by both higher revenue and lower operating spend. Immune Medicine adjusted EBITDA loss also improved due to increased revenue and reductions in operating spend. Total company adjusted EBITDA was a loss of $14.3 million in the third quarter compared to $21.4 million in the third quarter of 2024 and $29.8 million a year ago. Finally, interest expense from our royalty financing agreement with OrbiMed was $2.9 million, which continues to be more than offset by interest income. Net loss for the quarter was $32.1 million. Now turning to our full-year guidance on Slide 8. Related to MRD revenue for the full year, we are increasing the bottom end of our previous range from $140 million to $145 million to now $143 million to $145 million. This is a result of our better-than-expected performance in the third quarter mainly attributed to the regulatory milestone realized. We expect total company operating spend for the full year to be between $335 million and $340 million excluding one-time restructuring and asset impairment charges. This compares to our prior range of $340 million to $350 million. Of this total spend, approximately 66% sits within the MRD business and approximately 25% within Immune Medicine. The remaining is due to unallocated corporate costs. In addition, we are lowering our expected annual cash burn. We now expect the burn to be approximately $105 million versus our previous estimates of $115 million, representing a 31% reduction over full year 2023. We expect approximately 47% of the burn this year to come from the MRD business and approximately 39% from the Immune Medicine business. The remaining is due to unallocated corporate costs. I am encouraged by the strides we are making to enhance our financial profile while supporting top line growth and managing our capital, and I look forward to a strong close of the year. With that, I'll hand it back over to Chad.

Chad Robins, CEO

Thanks, Kyle. We are delivering on the promises we've made. Our relentless focus on execution and disciplined capital allocation are driving growth in our MRD business with a clear path to profitability while we continue to advance our targeted Immune Medicine programs. With that, I'd like to turn it back over to the operator and open it up for questions.

Operator, Operator

Our first question comes from Dan Brennan with TD Cowen.

Dan Brennan, Analyst

Maybe the first one just on the final gapfill price. So in terms of the $1,300 realized price that now you're targeting for 2025, can you just give us a sense of kind of what you're assuming there? And maybe what's like a range of outcomes if you're more or less successful in converting some of these commercial contracts over to the higher price?

Chad Robins, CEO

I'll start with that and Kyle, feel free to jump in here. So first, I just want to say, we're extremely pleased to see close to a $300 increase in the gapfill price in terms of kind of what that means for the long-term margin profile of the business. This will take some time to kind of bleed in. And so let me just explain what that means. So of the fee-for-service Medicare, it's about 20%. 37% Medicare overall fee-for-service is about 20%. We'll see kind of that impact more immediately for new Medicare patients. For commercial payers, we expect to renegotiate with contracted payers at a higher rate and bring uncontracted patients on sooner, but some of that timing is more uncertain. But if you look at the 2023 average ASP of $1,050 and now increasing to an average price of $1,300 in 2025, this will obviously mean that at some point in 2025 we go above the $1,300 to average at $1,300. So $200 per test is driven by initiatives that we put in place to grow ASP this year, which includes the expansion of payer coverage, closure of contracts with some of the remaining large outstanding payers. There are a ton of operational enhancements that we are implementing right now. Additionally, we expect that at least $50 plus per test on average during 2025 will come from this new gapfill rate and how that works through the variety of different payers. So we do believe there is potential for upside, but we need to really assess the pace at which we can impact the remaining payers.

Dan Brennan, Analyst

And then maybe just as a follow-up, just on the MRD pharma, that's exciting as well. Just kind of what's baked in now for the guide for 2024 for MRD pharma, are you assuming any more milestones? And could you just walk through a little bit of your funnel activity in terms of studies and what that might portend for pharma growth as you look beyond ‘24?

Kyle Piskel, CFO

I mean, as it relates to the milestones in Q4, I'd just say we have a risk-adjusted assumption there. I wouldn't say there's a big dollar amount associated with it. Relating to the funnel, broadly we have roughly around $200 million in backlog and ODAC is going to continue to catalyze that backlog as well through new bookings. So I think we're pretty confident in the pharma profile. We're not explicitly ready to talk about 2025 guidance, but I think we can assume a decent growth rate into 2025 that's probably similar to what we achieved this year.

Operator, Operator

Our next question comes from Mark Massaro with BTIG.

Mark Massaro, Analyst

Maybe I'll start on the guidance. So you did beat by about $6 million in Q3 on revenue. You did not increase the upper end of the MRD guide. Can you maybe just walk me through some of the factors that might have contributed to that, recognizing that you are seeing strong growth in pharma? I just wanted to get your thoughts on either the philosophy of the guidance or any particulars that we should be aware of?

Kyle Piskel, CFO

Obviously, the MRD milestone happening in Q3 drove an increase and gave us confidence to kind of derisk the low end of the range. So we're comfortable moving up. I guess, why not taking it further? I mentioned the ASP charge we took in Q3, which we didn't previously forecast, so that's part of it. The rest of it is that pharma is challenging. I've mentioned this before, it’s probably a broken record, about the quarter-to-quarter volatility. One or two studies pushing out to the next period can hurt us pretty meaningfully in one quarter. The other thing is there's potential for some softness just given the hurricane impact, and we're still sorting through it. But we're confident in the guidance and the numbers we're putting out, and we want to be prudent given all that's going on so we can deliver and hit our guide.

Mark Massaro, Analyst

And do I have it right in terms of the numbers on MRD pharma? Did you say you now have 10 clinical trials in MM as a primary endpoint? And just to level set, I think there might be about 60 or so trials. So I'm just trying to get a sense for how many trials you think might move over to primary even if we look out, say, a year or two?

Chad Robins, CEO

We do now have kind of 10 multiple myeloma studies using clonoSEQ as a primary endpoint, including two that have recently been signed as new studies and three that were already converted and upgraded from secondary to primary. The trajectory is looking good. Of all the studies that we have in myeloma, we continue to push. It'd be hard to put a direct number on it and speculate, but we do see kind of great traction from the ODAC decision and we do really have three areas. One is kind of new studies where we've seen an increase in bookings, having closed on 16 new myeloma studies year to date, 11 of which were post-ODAC. Obviously, that's great to see in terms of future growth in starting new studies. The second area impacts milestones, where there’s an opportunity to accelerate some of these due to companies moving quickly to get their approvals based on the new accelerated approval pathway. The third area is, as mentioned in the remarks, there's a nice interplay between the pharma and clinical business. We see increased efforts from pharma companies to highlight the importance of MRD for clinical management and as a measure of treatment response. This bolsters our confidence in the clinical business. It’s not a direct answer, but we expect many more opportunities to convert and access a pool of milestones outstanding and new milestones we sign on new contracts.

Mark Massaro, Analyst

And if I can sneak one last one in, that's related to that. What are you hearing from pharma specifically about the move from secondary to primary? Maybe if you could provide any more granular details about the potential time savings, clinical trial enrichment, and/or the probability of success. What are some of the key things you're hearing about this interest in moving to the primary?

Susan Bobulsky, Analyst

I mean, first of all, it's important to note that each company needs to independently evaluate with the FDA whether their trials are eligible for accelerated approval and whether MRD can be utilized as a primary endpoint. So it will depend on the trial design and specifics of the therapy being evaluated. That said, companies are anticipating significant improvement in the time frame it takes to complete the study, potentially going from eight, nine, or ten years to get to a PFS endpoint to potentially three years to get to an MRD endpoint, depending on how it's defined. We've now seen the first two studies over the last year that have read out with MRD as a primary endpoint, and I think those studies have both been received very favorably by the clinical community. The feedback we're getting is that it's very uniformly of interest to evaluate whether a primary endpoint could be utilized. However, there are nuances to each individual development program and certainly distinctions in how much time can be saved depending on the setting and the treatment being applied.

Operator, Operator

Our next question comes from Matt Sykes with Goldman Sachs.

Matt Sykes, Analyst

Maybe just pivoting over to mantle cell and the coverage you got there. I realize it's a smaller market indication relative to some of the other markets that you're in. But just given the disease's aggressive and recurrent nature, how should we think about the frequency of testing there and the potential volume ramp, understanding it's one smaller market but with different characteristics?

Susan Bobulsky, Analyst

Thanks for the question and good insights underlying it. So mantle cell is indeed a bit smaller, with an annual incidence in the US around 4,200 patients, and maybe 20,000 prevalent patients. So it’s not dissimilar to ALL, which makes up 35% of our volume today. That said, it's also an aggressive disease. Patients are often monitored for long periods of time, and they will relapse multiple times over the course of years. So there are a number of testing opportunities over the course of a patient's lifetime. The treatment journey is somewhat similar to some of the other indications you’re familiar with for clonoSEQ, like myeloma or DLBCL, where there's an induction phase, consolidation therapy, maintenance therapy, and some patients are transplanted. At each of those time points, much like in other malignancies we test for, there's an opportunity for MRD to play a role. That said, guidelines have not yet been defined for mantle cell lymphoma like they have for myeloma, for example. So that is work that remains to be done. But there is currently a monitoring modality in place, which is imaging, and this is being done periodically for these patients at varying frequencies depending on their disease trajectory and treatment. We believe that over time there's significant opportunity both for response assessment and ongoing monitoring of disease recurrence.

Matt Sykes, Analyst

Kyle, you've made impressive progress on cost savings year-to-date. On Slide 7, it appears that G&A and R&D were key areas for these savings. Can you provide insight into these categories, including sales and marketing, G&A, and R&D? Where do you see room for improvement, and how long do you anticipate this runway will last?

Kyle Piskel, CFO

I think the improvement we've made – we've done a handful of restructurings throughout the year. I’d say sales and marketing, it's a leverage story. We have the investments we've made, with some targeted investments in reimbursement ops functions, but primarily looking at that as leverage. A bit similar story with G&A; we've flattened out the organization quite a bit to drive a lot of those savings. R&D is primarily a result of targeted investments in immune medicine. We do have some larger initiatives left in MRD, NovaSeq being one of them. As we continue to assess opportunities and look for areas for additional savings, we will identify them. However, we're not planning any further reductions in those areas. You didn't ask, but I'll also mention that in operations, we continue to drive additional leverage through a lot of initiatives to reduce overhead costs and flatten the organization. I think there’s still some leverage there we will continue to achieve, but again, no plans for targeted actions at this time.

Operator, Operator

Our next question comes from Andrew Brackmann with William Blair.

Maggie Boeye, Analyst

This is Maggie Boeye on for Andrew today. I want to ask one on EMR integration. It sounds like there was some nice progress in the quarter with Epic and expanding accounts there. Can you talk about some of the learnings now that you have 11 accounts live? And as you think about expanding your EMR integration work further with Flatiron, how do you expect this to impact volume growth altogether in 2025?

Susan Bobulsky, Analyst

So first, in terms of learning, I think over the course of the 11 integrations that we've completed, we've become substantially more efficient. We’ve understood how best to leverage the accounts' resources, which are often somewhat degree-limited to complete these integrations effectively and to ensure we can hit the ground running with those accounts, implementing tools that are helpful in standardizing testing moving forward. This has been a primary focus to leverage the tools already built into Epic to increase standardization of testing time points. With 11 accounts under our belt and six that have been in place for more than a quarter, we’re starting to understand the growth patterns in these accounts post-integration. For the six accounts that have been live since Q2, we saw quarter-over-quarter growth in Q3 of 13%. For four of those six accounts that have been live for a year, it's their third quarter post-integration and they're still growing at a pace faster than the rest of the business, which is great to see. For the five accounts that went live just in the past couple of months, we’re happy to see strong month-over-month growth in October, consistent with our prior experience of higher growth rates right out of the gate for new accounts. We’re getting a better consistent view of what growth looks like. We have several in-progress integrations currently. We expect to complete integrations in a total of about 20 accounts by the end of this year. By the end of '25, we’re targeting that about 50% of our total order volume will flow through an integrated platform, whether that’s Epic, Flatiron, or another highly utilized community EMR platform. We've kicked off the work with Flatiron and look forward to bringing that as well as several other community integrations live in 2025.

Maggie Boeye, Analyst

And then just on – I think, it was mentioned on one of the last questions, could you provide an update on the progression of the rollout of NovaSeq and how we should think about the opportunity for COGS reduction looking into 2025?

Chad Robins, CEO

We're making a lot of progress, a lot of headway. Our plans are still for it to launch in the third quarter of 2025, assuming everything goes well and everything is pointing in that direction currently. As it relates to the financial profile, depending on where volumes are at, we think annualized we can probably achieve a 5% to 8% improvement in margin profile in the first 12 months of that. As volumes continue to grow, we expect further margin profile expansion. I think this just reiterates our long-term trajectory that we believe we can get to a 70% gross margin profile for the MRD business.

Operator, Operator

Our next question comes from Sung Ji Nam with Scotiabank.

Corey Rosenbaum, Analyst

This is Corey Rosenbaum on for Sung Ji. Could you remind us how much of the Genentech amortization remains, if any, following this year?

Kyle Piskel, CFO

I believe we'll probably exit with around $50 million to $60 million.

Corey Rosenbaum, Analyst

And as we look to next year, and MRD continues to grow at a faster pace than Immune Medicine, is the best way to think about the total OpEx spend still around 70-25 between MRD and Immune Medicine for next year?

Chad Robins, CEO

We'll provide updated guidance in February. What I can say is we're looking to constrain the Immune Medicine spend, so it will be lower on a percentage basis.

Operator, Operator

Thank you. Our next question comes from Tejas Savant with Morgan Stanley.

Unidentified Analyst, Analyst

This is Jason on for Tejas. Thank you for taking our questions and congratulations on the quarter. So maybe just starting off, there was some recent news from a large player in the diagnostic space where United Health announced that they would no longer cover multi-gene panels for behavioral health. You have a different portfolio. But was just wondering how you think about the challenges some of these private payers have faced recently on spiraling costs weighing on their enthusiasm for genetic testing more broadly, perhaps due to more stringent prior authorization or just dragging their feet on biomarker build rollouts?

Chad Robins, CEO

No, I think it's a good question. Just for background, I sit on the Board for the Coalition for 21st Century Medicine. We spend a lot of our time as a Board looking at the payer landscape more broadly, both on the government side and the private payer side. I would just say this, and with respect to clonoSEQ, it's about the value of our test and what it brings for patients. We consistently focus on value. If you look at health economics and outcomes research and the overall savings to the health system as it relates to the pricing of the test, these factors play a crucial role in ensuring that your test is positioned effectively. I won’t comment on other tests or reimbursement profiles in general. I'm speaking directly about clonoSEQ and the value it brings, which has been recognized by both government entities in Medicare and by private payers across the board. One notable example is the expanding use case for us, which involves taking patients off maintenance therapy in multiple myeloma. The savings that this test provides, giving clinicians confidence to make treatment decisions, enables us to take patients off very expensive maintenance therapies, costing over $100 million per year. So when you’re discussing a test costing $2,000 per year to facilitate this, the value it brings to payers is something we continue to advocate. Being a CEO in a diagnostic business, challenges from the payer side regarding getting paid at high rates and ensuring cash collection remain significant issues. This highlights our strong emphasis and focus on reimbursement, both on the contracting side and in reimbursement operations. It's an area we're investing in, wanting to attract the best talent as we continue to progress.

Unidentified Analyst, Analyst

And then maybe just a quick follow-up. There was some news in September that Roche announced a 25% narrowing of their pipeline. After this announcement, have you seen any impact on your partnership with Genentech?

Chad Robins, CEO

As Roche also announced that they were reorganizing their oncology research division, they have assured us that this does not affect our partnership, and that's all I can comment on at this time.

Operator, Operator

Thank you. I'm showing no further questions at this time. This does conclude the program, and you may now disconnect. Everyone, good day.