Earnings Call Transcript - ADPT Q1 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Adaptive Biotechnologies First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to hand the conference over to your speaker today Karina Calzadilla, Head of Investor Relations. Please go ahead, ma'am.

Karina Calzadilla, Head of Investor Relations

Thank you, Alexandra, and good afternoon everyone. I would like to welcome you to Adaptive Biotechnologies first quarter 2022 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the first quarter of 2022. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and will 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. Joining the call today are Chad Robins, our CEO and Co-Founder; and Kyle Piskel, our Interim Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-Founder; Nitin Sood, our Head of our MRD business; and Sharon Benzeno, Head of the Immune Medicine business will be available for Q&A.

Chad Robins, CEO and Co-Founder

Thanks, Karina. Good afternoon, everybody, and thank you for joining us on our first quarter 2022 earnings call. As always, I want to thank all of our Adaptive employees for their dedication and for their solid execution during a quarter in which we completed a reorganization of our business. This strategic restructuring focuses Adaptive in two business areas: MRD and immune medicine. Along with our recent headcount reduction, these changes will result in a more streamlined organization to fuel growth as we navigate this turbulent market. We continue to hire talent strategically in key growth areas, such as our clonoSEQ sales team and our Cell Therapy Group in South San Francisco. We also look forward to formally welcoming our new CFO, Tycho Peterson, and leveraging his extensive expertise. Tycho will officially start on June 1st, following the completion of his garden leave. We reprioritized the product development efforts for each business area and the teams are in place to execute towards our 2022 goals. Slide three shows the respective key drivers of our MRD and immune medicine businesses. The value of our MRD business is a combination of the clonoSEQ test offered to clinicians and the clonoSEQ MRD assay offered to pharma partners, who integrate MRD status in their hematologic malignancy trials. Aligning these synergistic components of the MRD business under the same leadership at Adaptive will drive execution and enhanced visibility. The immune medicine business is comprised of pharma, clinical testing, and drug discovery, all of which are driven or informed by our T-cell receptor antigen map. As with our MRD business, within immune medicine, there is a synergistic value between the utility of the information for clinical diagnostics and to pharma partners in research and drug development. As shown on Slide four, our first quarter results reflect a solid start to the year with revenue of $38.6 million. Both business areas delivered key achievements and are set up for significant growth in 2022 and beyond. Within the MRD business, clonoSEQ test volume experienced strong growth of 45% versus the prior year. The clonoSEQ sales team of 70 representatives is now fully hired and trained and is being deployed to hit the field. Progress continued with payers, data generation, and guideline expansion. For our MRD pharma, we continue to grow our partnerships. This quarter we entered into an expanded MRD pan-portfolio partnership with a major pharma partner in multiple myeloma and CLL for the use of MRD as a clinical endpoint. Our immune medicine business also delivered on multiple fronts generating approximately $21 million this quarter. Revenue from pharma partners that use immunoSEQ and data generated from our TCR antigen map grew 100% versus the prior year. We are well positioned for continued growth as we expand the use of immunoSEQ in multiple therapeutic areas and secure additional key map deals beyond COVID. For example, this quarter we entered into a new collaboration with J&J to map T-cell responses to RSV for its vaccine program. The clinical diagnostic pipeline with the key detection is advancing in both infectious diseases and autoimmune disorders. In drug discovery, we continue to make good progress with our shared and private product programs under our Genentech collaboration. Moving onto the MRD business on Slide five. Tests delivered grew 12% to 7,698 tests versus the prior quarter, with double-digit growth observed in all three indications. Ordering healthcare professionals and ordering accounts experienced significant growth of 53% and 36% respectively versus the prior year, and unique patients tested also grew 59%. Growth in the community setting, although off a small base, was north of 60% during the quarter, demonstrating a strong start by our expanded sales force focused on increasing our reach beyond academic centers. In addition, about 30% of all MRD tests were delivered in blood, with multiple myeloma experiencing the highest uptake versus prior periods. As part of our strategy to cement our leadership in lymphoid malignancies, we plan to expand into non-Hodgkin's lymphoma using ctDNA, which is the best measure of relapse risk. We have submitted our application for DLBCL coverage to MolDX this quarter. We continue to enhance the overall customer experience by investing in the integration of clonoSEQ into customer ordering systems. This integration can positively impact both order volume and order pull-through. We're off to a great start and on track to accelerate our growth trajectory for the remainder of the year. I want to share on Slide six new data about using clonoSEQ in pediatric ALL patients. In this published study, 143 pediatric ALL patients receiving CAR-T were tested for MRD at multiple time points using flow and clonoSEQ. Data show that clonoSEQ detected disease in blood that flow missed in marrow. Furthermore, in bone marrow, the performance of clonoSEQ was very strong. clonoSEQ detected MRD in 100% of patients prior to relapse with a median lead time of 168 days versus 52 days using flow, giving the clinician significant lead time to inform treatment decisions. I look forward to sharing additional data readouts this year, further demonstrating the increasing utility of clonoSEQ MRD testing. As mentioned before, our MRD pharma partnerships are a key component of our MRD business. Slide seven shows our pharma portfolio, which is comprised of partnerships with over 60 companies that integrate clonoSEQ in their clinical trials. As the efficacy of blood cancer drugs continues to improve, pharma companies are looking for more sensitive ways to measure response. Of note, our clonoSEQ MRD assay was used as a clinical endpoint in support of regulatory approval of five drugs to date. Almost every major pharma company developing a blood cancer drug is using clonoSEQ in their trials as a clinical endpoint. From these partnerships, we have a portfolio of more than $330 million in future eligible milestones based on additional drug approvals from ongoing and future studies. We continue to grow and expand our pharma partnerships and look forward to seeing clonoSEQ data derived from these pharma trials to further drive clinical utility of the clonoSEQ test to clinicians. Now turning to our immune medicine business on Slide eight. The immune medicine business is comprised of three growth areas: pharma; clinical testing; and drug discovery. Each of these areas has multiple shots on goal to create value in the short, medium, and long-term. This value is predominantly driven by data that we generate through our TCR Antigen Map. The pharma research area, which includes over 100 companies using our immunoSEQ or T-MAP products, is expected to continue to grow significantly in the short and medium term. The clinical diagnostic area, or T-Detect, is in the early innings with its first indication launched last year, which also served to establish T-Detect as a new class of molecular T-Cell Diagnostics. We expect T-Detect to be a more meaningful contributor to revenue in the medium to long-term, as we generate and validate T-Cell signatures in multiple autoimmune disorders with high unmet need. And the drug discovery area, which is currently focused on our cell therapy collaboration with Genentech, is in early stages of development and is expected to be a significant growth contributor in the mid to long-term. We aim to secure additional collaborations beyond cancer cell therapy that could further accelerate our growth. Let's take a closer look on Slide nine at the immune medicine business performance this quarter. Pharma was the biggest contributor of revenue growth in the quarter and represented 30% of the immune medicine business. Our immunoSEQ T-MAP product is gaining traction with additional COVID studies and a new RSV program, which I mentioned. We expect to expand the use of existing and future T-MAPs in more disease areas as we continue to generate data from our TCR Antigen Map. As for T-Detect COVID, this quarter orders decreased versus last quarter as we are seeing the virus move from a pandemic to an endemic state. We continue to offer the test to consumers with modest promotional activities to maintain brand awareness. We are focusing on making T-Detect Lyme available via our CLIA lab during this Lyme season, while we accelerate data generation and signal validation in select autoimmune disorders. Drug discovery revenue is attributed to the amortization of the Genentech upfront payment, which varies quarter-over-quarter. For our shared product this year, we're on track to deliver up to two additional TCR packages. We also continue to work closely with Genentech to establish the private product specifications and to build our private product data package. Zooming into T-Detect on Slide 10. T-Detect in infectious diseases has served as proof of our T-Detect platform; further investments in COVID and Lyme indications will be pursued opportunistically. Specifically in COVID, our efforts to establish the T-Cell response as a correlate of protection continue. We have been making progress at a policy level. A couple of weeks ago, Adaptive, alongside a group of nearly 70 leading academics, industry leaders, and patient advocates sent a letter to the FDA urging the incorporation of T-Cell response in COVID vaccine studies. This could further drive opportunities for T-Detect and for T-MAP COVID. We also expect to make T-Detect Lyme available in the next quarter. Data from our ImmuneSense Lyme study shows T-Detect sensitivity of 54%, nearly double that of standard-of-care serology at 30%, when we hold specificity at 99% for both. We anticipate the sensitivity to increase as we identify additional Lyme-specific TCRs from new datasets that we will use to update our diagnostic classifier. By making T-Detect available in our CLIA lab, we aim to implement the processes, which will be necessary for all future indications. In parallel, the team is working on initiating a clinical validation study in IBD and continues to improve our signal in MS. Our objective is to launch at least one autoimmune indication by the end of 2023. We're excited about multiple opportunities stemming from our immune medicine business.

Kyle Piskel, Interim CFO

Thanks, Chad. Turning to our financial results on Slide 11. Total revenue in the first quarter was $38.6 million, representing a slight increase from $38.4 million in the same period last year. In prior periods, we've disaggregated revenue in the sequencing and development category, as you can see on the left side of the slide. This quarter, our revenue reporting is now disaggregated to reflect the reorganization of our business around our MRD and immune medicine market opportunities. Immune medicine consists of revenue generated from immunoSEQ and immunoSEQ T-MAP to pharma and research customers, our T-Detect COVID test clinical customers, and our collaboration agreements in drug discovery. MRD consists of revenue generated from clonoSEQ to clinical customers and our MRD services to pharma and research partners. We have included a revenue bridge for the last eight quarters in our earnings release and 10-Q to reflect the revised revenue disaggregation. Our revenue mix for the first quarter consisted of 54% from immune medicines and 46% from MRD. Immune medicine revenue in the first quarter was $20.8 million, a 4% increase from the same period in 2021. Growth in immune medicine was primarily driven by a $3.4 million increase in revenue from our pharma and research partners, partially offset by a $3.3 million reduction in the amortization of our Genentech upfront payment. As a reminder, these revenue amortization amounts may vary quarter-over-quarter. MRD revenue was $17.8 million in the first quarter, down 3% from the same period last year. This change was primarily due to recognizing $7 million in regulatory milestones in Q1 of 2021 versus $3 million this quarter. This reduction was partially offset by a $3.6 million increase in revenue from clonoSEQ clinical testing. clonoSEQ test volumes also increased by 45% versus the prior year. Shifting now to our operating cost and guidance on Slide 12. Total operating expenses for the first quarter of 2022 were $101.7 million, representing a 28% increase from $79.7 million in the same quarter last year. Cost of revenue was $13.2 million during the first quarter of 2022, compared to $10 million for the first quarter last year, representing a 32% increase. Higher costs of revenue were primarily driven by an increase in material costs due to revenue volume growth and an increase in labor and overhead. Research and development expenses for the first quarter of 2022 were $37.8 million, compared to $33.8 million in the first quarter of 2021, representing a 12% increase. This increase was mainly attributable to increased personnel costs, including expenses related to our restructuring activities. Sales and marketing expenses for the first quarter of 2022 were $26.1 million, compared to $20.6 million in the first quarter of 2021, representing an increase of 27%. This growth was largely due to increased personnel costs, primarily due to the expansion of our clonoSEQ sales team and related customer operations teams, as well as increased travel and customer event-related expenses. One-time charges from our restructuring efforts contributed to the growth in expenses. These increases were partially offset by a decrease in marketing expenses due to reduced corporate marketing efforts. General and administrative expenses for the first quarter of 2022 were $24.1 million, compared to $14.9 million in the first quarter of 2021, representing an increase of 62%. The increase was primarily driven by expanding our overall facility footprint and higher depreciation expenses. Net loss for the first quarter of 2022 was $62.8 million, compared to the first quarter of 2021 net loss of $40.6 million. With respect to our full-year guidance, we’re reiterating our revenue range of $185 million to $195 million, which already contemplated the MRD milestone we recognized this quarter. Both our MRD and immune medicine businesses are off to a great start, and we expect them to contribute to our full-year revenue approximately 50-50 at the midpoint of the range. It's early in the year; we are confident in our ability to achieve our full-year commercial goals. Regarding our operating expenses, we are on track for operating expenses to grow at lower rates than revenue as a result of our restructuring activities and as we continue to prudently manage our investments and improve our operating efficiency. We are being thoughtful about our cash and expect to deploy capital off our balance sheet to support those projects with the greatest potential while also reducing our burn rate. We look forward to providing you further updates next quarter.

Chad Robins, CEO and Co-Founder

Thanks, Kyle. As outlined on the call and listed on Slide 13, we execute key strategic decisions around the restructuring of our business and are on track to achieve important milestones during the rest of the year in both MRD and immune medicine. Our capital position is strong and we continue to manage our investments to fuel growth across the businesses. We're looking forward to a great 2022. So with that, I'd like to turn the call back over to the operator and open it up for questions.

Operator, Operator

Thank you, sir. And we have your first question from Brian Weinstein with William Blair. Your line is open.

Brian Weinstein, Analyst

Hey guys, good afternoon. Thanks for taking the question. Hey, I just wanted to go through the growth rate here a little bit because I know there are some moving parts here, it seems like in the quarter, because you posted basically flattish growth, but Kyle or Chad, can you guys just go through some of the factors that drove that flattish growth? I heard some Genentech stuff that was in there? And some other things that might have sort of impacted that growth rate on a one-time basis. I just want to make sure that we understand what those things were?

Kyle Piskel, Interim CFO

Sure, I'll take that, Brian. I’d, kind of, first like to start with the two main components that drive a bit of quarter-to-quarter comparative challenges. The first thing, the MRD milestones, and just as a reminder, in Q1 of last year, we had approximately $7 million of milestones from our MRD business, and this quarter we have $3 million, so we’re seeing $4 million in compression there from a comp perspective. The second component is the Genentech amortization, and comparing that to last year we had about $16 million versus this quarter where we're about $12 million. So those two things kind of really compress the growth. And if you back those out, you’d see about 47% year-over-year growth. So that's kind of driving some of that uptick.

Brian Weinstein, Analyst

And when we think about the Genentech amortization, it’s always somewhat of a black box for us. I think how we should be thinking about that going forward, I mean just so that we're level set here so that we can turn that stuff back out with a little bit more visibility. It's always somewhat confusing for us?

Kyle Piskel, Interim CFO

Yes, I would say that it's related to our expense investment in the Genentech collaboration. For the rest of the year, we are still on track to achieve approximately the same total revenues as last year, possibly with a bit of a bell curve in Q2 and Q3 and then a slight decline in Q4. Overall, I believe it will be quite consistent with last year.

Brian Weinstein, Analyst

Got it and then Chad for you, obviously the markets are very focused on pushes towards profitability, cash flow breakeven. I don't think you guys will give you formal talks about that, but I'd love to kind of have some sort of past that you guys are thinking about towards profitability, the steps that you guys think that you'll need to take and any thoughts on timing there?

Chad Robins, CEO and Co-Founder

Yes, so first I'll just acknowledge that the path to profitability and at least cash flow neutrality is incredibly important for us at Adaptive. I think we got out ahead of it earlier this year and took proactive steps with doing the restructuring and the reduction in force. We continue to look at ways to manage expenses and at the same time, look, we're looking at opportunities to bring in what I'll call non-dilutive cash flow through different partnership and financing mechanisms. Let's face it, the cost of capital is high right now and we are on a path to do what we can, so we don't have to take in capital that will be dilutive to the company in this economic environment. That's a two, where Tycho coming on board, we were really sharpening that long-range plan and should have better visibility into that time horizon to get you kind of cash flow profitability and should be providing that for you within the back half of the year.

Brian Weinstein, Analyst

Okay, thanks guys.

Chad Robins, CEO and Co-Founder

Sure, thanks, Brian.

Operator, Operator

We have your next question from Salveen Richter with Goldman Sachs. Your line is open.

Elizabeth Webster, Analyst

Hey guys, this is Elizabeth on for Salveen, thanks for taking my question. Just on the Genentech, maybe if you could kind of walk us through what might be needed for the private product specification? And what you kind of aim to deliver this year, and just maybe remind us what goes into those data packages? Thank you.

Chad Robins, CEO and Co-Founder

Sure, I'm going to have Sharon Benzeno, who is Head of our Immune Medicine business, take the call. Sharon?

Sharon Benzeno, Head of Immune Medicine

Yes, thanks, Elizabeth. So, as we previously stated, and on the heels of our successful proof-of-concept screens using blood from 60 cancer patients last year, that was the first pass defining certain specifications that we're carrying through this year and expanding that in an additional set of 30 or more cancer patients as well. And so the goal there is, importantly, running the end-to-end workflow on our end in our dedicated South San Francisco lab end-to-end. And in parallel, in conjunction with the pieces of the puzzle that Genentech is putting together, the process being the product. So that’s what we're aiming for this year, building off of the success from last year.

Operator, Operator

We have your next question from Mark Massaro with BTIG. Your line is open.

Mark Massaro, Analyst

Hey guys, thanks for the questions. If I can, I'll ask to all at once, I guess first nice growth from clonoSEQ this quarter. Can you just comment on your visibility of what you're seeing in the field? Are you guys fully open nearly to pre-pandemic levels? And maybe just comment about what kind of access you have reps in the field versus virtual? And then the second question is on Slide 17, you show, you've got Crohn's and MS and Celiac kind of in the lead for your autoimmune diseases; should we think of those as like the lead candidates? I guess what my question really boils down to is, to what extent are you committed to advancing and investing in RA? Obviously, Crohn's and Colitis are linked, so can you just help us think about the priorities of the autoimmune disease portfolio?

Kyle Piskel, Interim CFO

Sure. Hi, Mark. I'm going to have Nitin Sood, who is Head of our MRD business, take the first question. And then with regards to prioritization, Harlan will take that, so, Nitin.

Nitin Sood, Head of MRD Business

Hey, Mark. Yes, so we're seeing an improvement in in-person meetings. It's trending in a positive direction. But I would say today it’s still about 60% of our visits are virtual, but on our day-to-day basis, we see a positive trend, and I expect us to be sort of 50% very shortly in terms of in-person visits.

Mark Massaro, Analyst

Okay, and then just on the priority of the autoimmune disease portfolio?

Harlan Robins, Chief Scientific Officer

Sure, thanks. This is Harlan. We're directing our resources to areas where our signals are most developed and we possess the highest quality samples for early disease diagnosis. Given the significant unmet need, we have placed a higher priority on multiple sclerosis and Crohn's disease compared to rheumatoid arthritis, mainly because we are a bit behind in gathering rheumatoid arthritis samples, not for any other reason. The primary focus for us is on specificity, which sets us apart. We aim to significantly reduce false positives to access the early diagnostic market, and that's our main goal, leading to a substantial increase in our signals. We plan to apply what we learn from this to other diseases as we develop new panels. Specifically for inflammatory bowel disease, we will begin sample collection for a clinical validation study in the upcoming months.

Mark Massaro, Analyst

Great, thank you.

Operator, Operator

We have your next question from Derik de Bruin with Bank of America. Your line is open.

Derik de Bruin, Analyst

Hi, sorry about that my phone dropped earlier. Hey, can you give us some color on the ASPs for clonoSEQ? I mean, you didn't break out the clinical sequencing revenues, I'd like historically. So can you give us some idea on coverage on just the ASP and just give us a bit more clarity?

Nitin Sood, Head of MRD Business

Yes, so I think this is Nitin again. We've seen steady ASP growth for clonoSEQ over the past couple of years and we're anticipating that the growth will continue in the mid-single-digit range over the next two to three years. We're very close to about $1,000 in ASP today, and our expectation is in two to three years, we're in the $1,200 to $1,300 range for ASP.

Derik de Bruin, Analyst

Got it. And I know this was asked earlier, but just want to go back and revisit it. I mean, do you expect, I mean, the cash burn was quite a bit higher in the first quarter; do you expect that to ramp down throughout the rest of the year? Basically, as the question on, do you have enough cash this year?

Kyle Piskel, Interim CFO

Yes, this is Kyle. Yes, so a couple of things in Q1, obviously you don't have the full effect of our restructuring efforts in the cash burn, because of the timing of when we initiated that was late March. The second thing as it relates to Q1 is a bit of seasonality; we have our corporate bonus payouts in Q1. So from a cash perspective, I'm generally thinking of the rest of the three quarters was between $50 million and $60 million is cash flow.

Derik de Bruin, Analyst

Great, thank you. That's helpful. Could you clarify when you expect the NHL assay to be commercialized? I understand you are currently in the validation phase.

Chad Robins, CEO and Co-Founder

Yes, regarding the NHL, we plan to launch it later this year in our CLIA environment. We have submitted our technical assessment to MolDX and are awaiting feedback on reimbursement. However, similar to many of our diagnostics and assays, we plan to launch before we receive reimbursement in the latter half of the year. Currently, it is available in our CLIA environment and alongside the cellular assay. As mentioned earlier, we are actively working on product development to integrate ctDNA into the assay to enhance the product.

Derik de Bruin, Analyst

Great, thank you.

Kyle Piskel, Interim CFO

I’d just add one more item to that. As you know before ahead of that launch, we'll be doing what we call a Clinical Experience Program with 30 physicians, so that's already underway and we're pretty confident that by October, November of this year, we'll have a full commercial launch with strict use and ctDNA assay by October of this year.

Derik de Bruin, Analyst

Thanks.

Operator, Operator

I'm showing no further questions at this time. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, you may now disconnect.

Chad Robins, CEO and Co-Founder

Thank you.