Earnings Call Transcript - ADPT Q2 2021

Operator, Operator

Good day, and thank you for standing by. Welcome to Adaptive Biotechnologies Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to today's speaker, Ms. Karina Calzadilla. Please go ahead.

Karina Calzadilla, Speaker

Thank you, Devin and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies' second quarter 2021 earnings conference call. Earlier today, we issued a press release reporting Adaptive's financial results for the second quarter. The press release can be found 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 Investor 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 the call, and a reconciliation from non-GAAP to GAAP metrics can be found in our earnings release issued earlier. Joining the call today are Chad Robins, our CEO and Co-Founder; Julie Rubinstein, our President; and Chad Cohen, our Chief Financial Officer. In addition, Harlan Robins, Adaptive's Chief Scientific Officer and Co-Founder will be available for Q&A. With that, I will turn the call over to Chad Robins. Chad?

Chad Robins, CEO

Thanks, Karina. Good afternoon, everybody. And thank you for joining us on our second quarter 2021 earnings call. We had another strong quarter, and momentum continues to build across our business areas. Our results reflect our commitment to applying our immune medicine platform to transform disease diagnosis and drug discovery. Adaptive's incredible employees are dedicated to the company and the patients we serve. It's been fantastic seeing our team and meeting new hires for the first time in person. However, we realize the pandemic is still an evolving situation, and we'll continue to monitor our return to Office initiatives. We are energized by our progress and the data emerging from our platform. Moving to the slides, starting on Slide 3, our second quarter results demonstrate solid performance. Revenue in the quarter was $38.5 million, representing significant growth of 83% versus the prior year. We saw substantial progress across our product and pipeline. Our COVID efforts continue to gain traction, especially in light of the Delta variant, as more stakeholders recognize the importance of including T-cells to understand the immune response to the virus and vaccines. Recent data to understand the AstraZeneca and J&J vaccine response to variants using the Immunity Keymap COVID were published in the New England Journal of Medicine and in Nature, respectively. We are also pleased to announce that we signed an agreement with Moderna, in which immunoSEQ T-MAP COVID will be used to measure the T-cell response to their second generation COVID vaccine and their Zika vaccine. Additionally, we signed a license agreement in our drug discovery business with Vaccibody; this is the first time our T-cells data will be used to inform the design and development of a T-cell based SARS-CoV-2 vaccine. Importantly, Adaptive technology may inform the design of an entirely new class of vaccines that elicit a T-cell response for many disease states. We are in active discussions with the FDA, NIH, CMS, CDC, and the White House administration to include the T-cell response in funded studies to address critical questions related to vaccine durability, breakthrough infections, and efficacy in immune-compromised patients. Our view has been that this virus is endemic in the population and that T-cells may provide answers to many of these questions. We are making progress and will keep you informed on these discussions. Beyond COVID, our T-Detect franchise continues to advance. Results from our case control data set with Johns Hopkins have just been published as a preprint and serve as a basis for critical validation. In addition, the immune sense study for our T-Detect line will complete enrollment in the fall. Together, these studies will support bringing T-Detect online in our CLIA lab around year-end. We continue to progress towards T-Detect IBD as a differential diagnostic, having already analyzed more than half of the 5,000 samples from Crohn's and ulcerative colitis patients. We expect to show the data towards the end of this year. We are also seeing significant progress in other autoimmune disorders and are encouraged by an early signal in multiple sclerosis. For those of us who have friends and family suffering from this debilitating disease, we know firsthand that early blood-based diagnosis may alleviate uncertainty and guide treatment paths more effectively. Autoimmune disease diagnosis is a critical next step for Adaptive, and we are prioritizing our development efforts in this area. Additionally, the overall value of our clonoSEQ brand continues to grow, as evidenced by both strong sourcing volumes and yet another major pharma MRD collaboration. Importantly, our team has been building the case that measuring MRD regularly for patients with blood cancers is best practice. Last week, an international panel of multiple myeloma experts published a call to action in clinical cancer research to guide the use of MRD in the clinic for patients with multiple myeloma. Notably, the publication also builds the case for the use of MRD as a regulatory endpoint, for which Adaptive has significant associated regulatory milestones. In our drug discovery efforts with Genentech, our collaboration continues to advance in both shared and private products. We remain on track to deliver the next shared candidate data package to Genentech and extend our proof of concept in the private product from 15 to approximately 60 cancer patients this year. In summary, we are delivering toward our 2021 goals and enabling opportunities stemming from our platform. Before passing the call to Julie on Slide 4, I want to provide some color on how we are using our COVID efforts as a model to unlock multiple commercial opportunities from the same underlying immune receptor dataset. By decoding the fundamental biological link between our immune system and the diseases with which they interact, Adaptive can create value in many disease categories across research, diagnostics, and drug discovery. In this case, we applied our immune code data for a research product called immunoSEQ T-MAP COVID, which is now being used by vaccine developers, academic institutions, and advocacy groups leveraging the same data source. We launched T-Detect COVID, the first indication for our clinical diagnostic T-Detect franchise, and signed a drug discovery agreement with Vaccibody for the design and development of next-generation T-cell based vaccines. This concept of utilizing one dataset to pursue multiple opportunities is an approach that we are applying across many of the disease states we are mapping. So now I'm going to hand the call over to Julie.

Julie Rubinstein, President

Thanks, Chad. Moving to Slide 5 with T-Detect. T-Detect COVID trends continue to ramp up, and now over 10,000 customers have ordered the test. We did observe downward pressure in orders in June and early July as the vaccines rolled out, but concerns with the Delta variant have renewed interest. We expect to launch a COVID immune response website later this month to enable customers to gain additional research insights about their T-Detect test results. To start, it will include a personalized comparison of the strength of an individual's T-cell response to that of others with confirmed SARS-CoV-2 infection. Next, we expect to add more information profiling a person's T-cell response to vaccines. For the T-Detect line, as Chad mentioned, results from our case control data set with Johns Hopkins have been published. These case control data demonstrate that our highly specific T-cell test is three times more sensitive than standard two-tier serology in the first few days post-infection and nearly two times more sensitive in the first one to two weeks. Additionally, the data also supports that the T-cell response precedes the antibody response. The new sense line is enrolling nicely, which will enable us to complete validation and make the test available in CLIA around year-end. During the first half of 2021, data emerging from our TCR mapping efforts have given us confidence in the ability of T-cells to detect various autoimmune diseases. These diseases afflict millions of patients and are challenging to diagnose and treat with highly specific clinical tools. In addition to the exciting data in IBD, we are encouraged by the strong signals we see in Multiple Sclerosis, particularly because it appears robust not only in patients with later-stage disease but also in patients with earlier stages, where MS is particularly challenging to diagnose. With more samples arriving over the next few months, we look forward to improving sensitivity in our MS signal later this year. The early sensitivity we observe in Lyme disease, MS, and other diseases supports the notion that T-cells are the first specific defense cells to encounter disease antigens and should be leveraged for true early and specific detection of many diseases from blood. Switching gears to clonoSEQ on Slide 6. On the left side related to clinical testing, you can see clonoSEQ clinical testing volumes of 5,475 tests in the quarter, grew 75% versus the prior year, and 15% versus the prior quarter. During the quarter, orders were placed by approximately 950 unique healthcare professionals spanning 248 accounts for approximately 3,400 unique patients tested, and clonoSEQ has now been used to treat more than 18,500 unique patients. Importantly, we observed double-digit growth quarter-over-quarter in tests delivered in each FDA-approved indication: Acute Lymphoblastic Leukemia (ALL), multiple myeloma, and Chronic Lymphocytic Leukemia (CLL). This growth reflects recovery in the second quarter and was a result of our continuous sales, marketing, and educational initiatives. That said, the spread of the Delta variant poses challenges to the back half of the year’s growth we had anticipated, primarily in two ways: first, in rep access to clinicians, and second, in reduced clinical visits recommended for our specific blood cancer patient population, who are immunocompromised. Thus, it is now becoming unlikely we will double our clonoSEQ volumes by year-end, but we continue to expect healthy growth in the second half of the year. The recent paper that Chad highlighted is a key indicator of the growing sentiment that minimal residual disease (MRD) testing makes a difference in the treatment of multiple myeloma patients. These prominent international key opinion leaders (KOLs) and FDA regulators assert that quantitative, accurate, standardized, and sensitive MRD testing may provide greater insights into tumor biology and the likelihood of risk of relapse when performed sequentially over multiple time points. They state that a complete response can provide a false sense of disease control, and achieving MRD negativity will predict a better outcome compared to patients who have not achieved the same depth of response with a given therapy. Notably, the publication also aggregates information from nearly 40 ongoing phase III trials, over half of which utilize clonoSEQ and are evaluating MRD-directed therapies or MRD as an endpoint. Endorsements like this are crucial calls to action to change behavior in the clinic. I also want to highlight a recent clonoSEQ publication in the Journal of Clinical Oncology focused on DLBCL patients, which showed that ctDNA-based surveillance of patients undergoing CAR-T therapy may be a useful adjunct to radiologic assessment of disease status. This is one of many ongoing studies as we pave the path for future clonoSEQ testing in non-Hodgkin lymphoma. On the right side of the slide, you can see the number of publicly disclosed pharma partnerships where clonoSEQ is used in clinical trials continues to grow. This quarter, we signed another pan-portfolio, pan-indication MRD partnership with Janssen, which includes both sequencing and potential future development revenue. We also recognized additional development milestone revenue based on the use of MRD data as a clinical endpoint, bringing a total of $8.5 million in recognized revenue from development milestones year-to-date. Lastly, on Slide 7, we are continuing to make good progress on our genetic collaborations. As you can see in the chart, the shared and private product programs are complementary in many ways. There are significant learnings across T-cell identification, engineering, and manufacturing that we plan to leverage from our shared product to inform our private product approach. In fact, just this week, we had our quarterly joint review committee and we are aligned towards both of our programs and look forward to sharing more details at the appropriate time. I also want to highlight the relevance of our new license agreement with a partner using Adaptive-identified viral antigenic peptides to drive T-cell responses for the development of a second-generation T-cell based SARS-CoV-2 vaccine. This vaccine may offer more complete viral protection against known and future variants of concern. A Phase 1/2 trial is expected to start in Q4 of this year and will include testing in unvaccinated and fully vaccinated individuals to assess the true potential of this vaccine candidate as a universal booster. I'll now pass it over to Chad for a financial update.

Chad Cohen, CFO

Thanks, Julie. Turning to our financial results on Slide 8. Total revenue in the second quarter was $38.5 million, representing an 83% increase from $21 million in the same period last year. Our revenue mix for the second quarter consisted of 48% of our revenues coming from our sequencing category and 52% from our development category. Sequencing revenue in the second quarter was $18.6 million, an increase of 132% from the same period in 2020. Growth in sequencing revenue was driven by significant ASP and volume increases over the prior year in our pharma research business and also by volume growth in our clonoSEQ business. Research sequencing volume increased to 6,500 sequences, up 65% from 4,185 sequences delivered in the second quarter of 2020. Clinical sequencing volume, excluding our T-Detect COVID volume, increased 75% to 5,475 clinical tests delivered in the second quarter of 2021, up from 3,136 clinical tests delivered during the same period in 2020. Development revenue grew to $20 million in the second quarter, up 53% from the same period last year. The largest driver of our development revenue continues to be the amortization of our genetic upfront fees. We also saw a $2.2 million increase over the prior year in revenue generated from our MRD development agreements, which includes a $1.5 million regulatory milestone recognized in Q2 2021 from one of our biopharma partners. Even as these milestones materialize, we continue to replenish and grow the available milestones that we can participate in from ongoing demand for using MRD as a regulatory endpoint in clinical trials. Shifting now to our operating costs, total operating expenses for the second quarter of 2021 were $57.9 million, representing a 53% increase from $38 million in the same quarter last year. Breaking down our operating expenses: cost of revenue was $10.8 million during the second quarter of 2021 compared to $4.9 million for the second quarter of last year, representing a 119% increase. Higher costs of revenue were primarily driven by increases in labor and overhead costs as well as an increase in sample volume, which drove higher consumption of materials. We also saw growth in allocated facility expenses stemming from our new high-throughput lab and office space under construction, which is quickly approaching completion. Research and development expenses for the second quarter of 2021 were $37.8 million compared to $26 million in the second quarter of 2020, representing a 45% increase. The growth is largely related to an increase in personnel costs driven by innovation, along with San Francisco seller lab, molecular product development, and software engineering teams, in addition to increased costs of materials and allocated production lab expenses. Sales and marketing expenses for the second quarter of 2021 were $23.2 million, compared to $14.3 million in the second quarter of 2020, representing an increase of 62%. The majority of this growth was due to increased personnel costs, particularly related to the teams supporting our clinical diagnostic businesses and medical affairs, as well as marketing efforts to support our online products. General administrative expenses for the second quarter of 2021 were $16.1 million compared to $12.2 million in the second quarter of 2020, representing an increase of 31%. This increase was primarily driven by growth in headcount and personnel costs. Net loss for the second quarter of 2021 was $49.3 million compared to a net loss of $33.5 million in the second quarter of 2020. Adjusted EBITDA for the second quarter of 2021 was a loss of $35.6 million compared to a loss of $28.5 million in the same period for the prior year. We ended the quarter with approximately $690 million in cash, cash equivalents, and marketable securities, and we have no debt. Regarding our outlook for the year, we are narrowing our full year revenue guidance range to $148 million to $155 million, up from our prior range of $145 million to $155 million. The increase in the bottom end of our range reflects the additional $1.5 million MRD milestone payments in the second quarter, as well as strong execution year-to-date. We still anticipate sequencing revenues to represent 50% to 55% of our total revenues for the full year. We are pleased with our first-half results and are confident in our ability to achieve our full year commercial development goals. We will continue to closely monitor any impact of COVID variants in the second half and look forward to providing you with further updates next quarter. I'll now turn the call back over to Chad Robins for final remarks.

Chad Robins, CEO

Thanks, Chad. I'm very encouraged by the progress we're seeing across all business areas and looking forward to executing on the catalysts outlined in Slide 9. What I'm most excited about is the data emerging from our platform, which we expect to monetize through multiple opportunities in research, diagnostics, and drug discovery. Before opening up for questions, today, we announced an important addition to Adaptive's management team. I want to welcome Nitin Sood as our new Chief Commercial Officer, who will oversee our inline product portfolio. Nitin will lead us through a critical next phase of commercial expansion, including multiple anticipated product launches and international growth. With that, I'd like to turn the call back to the operator and open it up for questions.

Operator, Operator

And our first question is from Derik De Bruin of Bank of America. Please go ahead.

Derik De Bruin, Analyst

Hi, good afternoon. Thank you for the updates. Can you elaborate a little bit more on the Vaccibody agreement and just what you're doing there specifically and what the terms of that are, as well as on the Moderna relationship? Any incremental information would be helpful.

Harlan Robins, Chief Scientific Officer

Thanks, Derik. This is Harlan. To start with, the reason we partnered with Vaccibody is that they have a unique capability to truly target a T-cell response, while most vaccines on the market target generating an antibody response. As we learn more, we realize the virus can escape neutralizing antibody responses, making T-cell responses increasingly important. So to create broad overall protection, we believe a T-cell response is vital. They have the unique capability to target T-cell responses, and we believe this partnership is ideal for leveraging this capability. Moreover, we admire the management and scientific teams there. We've already provided them with some sets of targets, and they are producing robust responses in animal models which have also been favored by Genentech's assessments. In terms of the deal, it's a royalty-based deal where we're in it together with significant long-term potential.

Derik De Bruin, Analyst

Yes, what about the Moderna relationship?

Harlan Robins, Chief Scientific Officer

Yes, we've had a longstanding relationship with Moderna. The world has seen how remarkable they are. We are really excited to work with them to help understand the T-cell response to their vaccine, based on what I just mentioned. They're utilizing our T-MAP product, which provides considerably more information than just standard diagnostic products about the specifics of their vaccine-induced T-cell response and how broad that response is. This allows them to understand vaccine efficacy, even in cases where neutralizing antibodies are reduced. We typically focus on therapeutic development.

Derik De Bruin, Analyst

Last question, regarding clonoSEQ, are you seeing any drop-offs in demand now, or is it something you are just anticipating because of the variants? What's your market perspective?

Harlan Robins, Chief Scientific Officer

Derik, this is Chad. Our profits in context are good. We had a good quarter and anticipate strong growth in the second half, which is still backup weighted. We haven’t seen a significant drop-off. However, given the uncertainties with the Delta variant, we're taking a cautious approach and adjusting our estimates slightly. I want to reiterate that this is just one component of the overall value of our clonoSEQ brand which continues to grow across clinical research and international markets.

Brian Weinstein, Analyst

Good afternoon, and thanks for taking my question. Regarding guidance, it was a strong quarter, way above expectations. You raised the bottom end of the guidance by just $1.5 million, can you discuss this thought process?

Chad Cohen, CFO

Hey, Brian, it's Chad Cohen. We made significant progress in Q2, driven primarily by our sequencing numbers, which grew 132% year-over-year. Our research segment was particularly strong. We're pleased with our numbers, but in light of COVID variants, we're passing the modest increase of $1.5 million along while remaining cautious.

Brian Weinstein, Analyst

Regarding the MS signal, can you discuss the pace of finding these signals and whether you have proper resources to go through multiple stages?

Chad Cohen, CFO

Yes, our signal generation process is standardizing methods and shortening timelines across disease categories. We're investing in hiring skilled teams and leveraging shared resources to enhance signal generation across different indications. It will take time to fully develop our oncology signals, but we are investing in that space.

Doug Schenkel, Analyst

Can you expand on the commercial expansion in diagnostics and whether improved access is driving growth?

Julie Rubinstein, President

Certainly, Doug. Our sales and medical team has put much effort into peer-to-peer education, and we're seeing results in patient education, which is expanding our reach to new accounts. We are indeed seeing nice growth driven by our investments in the field. Although we note some uncertainties with Delta variant impacts, we continue to anticipate growth.

Tycho Peterson, Analyst

Regarding the Moderna deal, how are you thinking about that opportunity?

Chad Robins, CEO

For the Moderna deal, we see it as part of our research revenues with no back-end economics like our Vaccibody deal. We're assisting Moderna in understanding the T-cell responses to their vaccines but focusing on research opportunities.

David Westenberg, Analyst

What are your thoughts on T-Detect pricing and how it might evolve?

Chad Robins, CEO

As we transition from single disease tests to differentiated diagnoses, pricing will differ based on market access and medical needs. Our ultimate goal is to find a sweet spot that achieves broad reimbursement by the payer community. We’re working with payers to address how various tests are priced.

Chad Cohen, CFO

Additionally, as we layer in more signals, the cost will remain low. The gross margins for T-Detect will improve significantly as we continue to expand our offerings.