Adaptive Biotechnologies Corporation (NASDAQ:ADPT) Q4 2023 Earnings Call Transcript

Adaptive Biotechnologies Corporation (NASDAQ:ADPT) Q4 2023 Earnings Call Transcript February 14, 2024

Adaptive Biotechnologies Corporation beats earnings expectations. Reported EPS is $-0.3, expectations were $-0.32. Adaptive Biotechnologies Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by and welcome to the Adaptive Biotechnologies Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions] As a reminder today’s program is being recorded. And now I’d like to introduce your host for today’s program, Karina Calzadilla, Head of Investor Relations. Please go ahead.

Karina Calzadilla: Thank you, Jonathan, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnologies fourth quarter and full year ‘23 earnings conference call. Earlier today, we issued a press release reporting Adaptive financial results for the fourth quarter and full year of ‘23. The press release is available at www.adaptivebiotech.com. We are conducting a live webcast of this call and we’ll be referencing to a slide presentation that has been posted to the Investors section on our corporate website. During the call, management will be making 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. Joining the call today are Chad Robins, our CEO and Co-founder; and Tycho Peterson, our Chief Financial Officer. Additional members from management will be available for Q&A. With that, I will turn the call over to Chad Robins. Chad?

Chad Robins: Thanks, Karina. Good afternoon, everyone, and thank you for joining us on our fourth quarter and full year earnings call. As you can see on Slide 3, 2023 was a year of transformation for Adaptive. Key milestones were cheeky for both MRD and immune medicine. We executed OpEx reduction initiatives to drive efficiencies and reduce burn and we initiated a strategic review process to maximize the value that MRD and immune medicine can deliver to patients and shareholders. We ended the year with $170 million in revenue, including 60% from MRD and 40% from immune medicine. The MRD business grew 27% versus prior year excluding milestones as we experienced outstanding growth from clonoSEQ’s volumes. This growth from MRD was offset by a decline in immune medicine mainly due to the reduction in the upfront amortization of Genentech.

As a reminder, last quarter, we updated total company guidance to exclude revenue from immune medicine. We made this decision based on a strategic shift and immune medicine to focus exclusively on targeted drug discovery. Importantly, we ended the year with a strong cash position of approximately $346 million, which enables us to execute on the strategic priorities of both businesses. In MRD, drive clonoSEQ’s penetration and revenue growth with the goal of reaching profitable profitability by the end of 2025. In immune medicine, advance our targeted drug discovery efforts in cancer and autoimmunity. This includes supporting the partnership with Genentech, validating a therapeutic candidate multiple sclerosis and scaling target discovery and other autoimmune disorders.

Before I go into the details of each business, I’ll provide an update on the strategic review. In the third quarter of 2023, we retained Goldman Sachs to advise on a strategic review to maximize value to our shareholders. The MRD and immune medicine businesses had different value drivers, investment needs and talent requirements. We are evaluating various alternatives to unlock the full potential of each business and we’re on track to communicate the final outcome at the end of this quarter. Let’s now take a closer look at our MRD business starting with Clinical Testing on Slide 6. clonoSEQ’s clinical Revenue the fourth quarter grew 56% versus prior year and 25% prior quarter with growth coming from both volume and ASP. Volumes continue to grow quarter-over-quarter with 15,680 tests delivered in Q4, representing a 49% increase versus prior year and a 4% increase sequentially.

As a reminder, fourth quarter is typically impacted by fewer business days. We are off to a great start this year with record high clonoSEQ quarters year-to-date. Growth came from all marketed indications and multi myeloma continues to be the largest contributor. In addition, the actions we put in place to improve collections and expand coverage are working. ASPs in the fourth quarter grew double-digits sequentially. We continue to be laser focused on driving ASP growth by reducing out of policy and non-contracted claims and further optimizing revenue cycle management. As such, we anticipate an increase of approximately $200 in ASP per test over the next two years. It is encouraging to see positive trends on clonoSEQ key indicators as shown on Slide 7.

Blood-based testing increased and all indications contributing 39% of clonoSEQ test, we expect this percentage to grow as we generate more clinical data in blood and commercialization in non-Hodgkins lymphoma. Blood-based testing is also a key driver of the quarter-over-quarter growth we are seeing in the community, which now contributes really one in four clonoSEQ test. Recent data presented at ASH showed evidence that clonoSEQ MRD from blood predicts progressive free survival early in the treatment cycle multi myeloma patients. Also ordering healthcare providers and ordering accounts grew 33% and 29% versus prior year respectively. EMR integration is a key element of our growth strategy and central to our efforts to further enhance our customer experience.

We completed epic integrations with our first five accounts and expect it to complete 15 to 20 more this year, include several of our largest accounts. Last week, we signed an important new integration partnership with Flatiron Health, a leading provider of EHR software and services for community oncology. We look forward to executing this partnership and expect to make clonoSEQ available to practices via the molecular profiling integration and Flatiron’s OncoEMR system in 2025. Looking at MRD Pharma on Slide 8. Full year revenue was essentially flat versus prior year due to broader macroeconomic factors impacting the biopharma industry, which resulted in lower sample volume across our portfolio prospective trials. That said, we saw some recovery in the fourth quarter, which experienced 23% growth sequentially.

Despite these transitory headwinds, we ended the year with a healthy backlog of about $185 million and we signed two important pan portfolio collaboration with Takeda and BeiGene. 2023 was a great year for clonoSEQ and we are well positioned to cement our leadership as the gold standard in MRD team for clinicians, patients, pharma partners and payers. Looking ahead, as shown on Slide 9 and 10 our priorities for MRD are clear. First, further increase penetration by growing blood-based testing expanding into new indications like MCL and CTCL adding new use cases through data generation and enhancing the customer experience through EMR integrations. Second, improving margins through ASP increases and operating leverage with the primary goal of reaching positive adjusted EBITDA in the second half of 2025 and cash flow breakeven in 2026.

Turning to immune medicine on Slide 12. In 2023, our Immune Medicine business achieved two key milestones, one, FDA IND acceptance was secured for the first T-cell therapy product candidate under our partnership with Genentech. And two, we discovered a novel druggable target in multiple sclerosis, which sheds light on potentially new T-cell biology that may be causative trigger to this devastating disease. These immune medicine milestones further sharpened our focus in target and drug discovery, specifically in high value opportunities in cancer and autoimmunity. As shown on Slide 13, in cancer, we continue to support Genentech in the development of two categories of TCR based cell therapy products. On the first share product we are engaged with Genentech’s development team as it gears up for its first in human trial.

For the fully personalized program, we completed building our regulated process workflow and this year, we’re initiating end-to-end testing for future clinical readiness. The valuable immune receptor data that we have been generating for over a decade is a treasure trove of information that together with our partner Microsoft, we used to develop and train AI ML models to help accelerate our target and drug discovery efforts. In autoimmunity, our focus is to further validate the MS Target in known disease models. In parallel, we’re deploying our antibody platform to identify a therapeutic candidate that specifically binds to this self-antigen and blocks of potential causative event in MS. In addition, we’re applying the exact same approach that we use in MS to discover novel targets and additional prioritized autoimmune indications including Type 1 diabetes and rheumatoid arthritis.

As you can see on Slide 14, in 2024, we will gate our R&D investments based on key proof points that drive future value for both our partnered and wholly-owned drug discovery pipeline. I’ll now pass it over to Tycho.

Tycho Peterson: Thanks, Chad. Starting on Slide 15 with revenue for the fourth quarter and full year. Total revenue in the fourth quarter was $45.8 million with 67% from MRD and 33% from Immune Medicine. MRD revenue grew to $30.8 million, up 9% from a year ago. clonoSEQ clinical performance was the main driver, partially offset by a reduction in revenue from pharma services and regulatory milestones. Excluding regulatory milestones, MRD revenue grew 18% from a year ago. clonoSEQ test volume increased by 49% 15,680 tests delivered from 10,526 tests in the same period last year. Immune medicine revenue was $15 million, down 45% a year ago driven as expected by lower Genentech amortization, which decreased 53% year-over-year. Full year 2023 revenue was $170.3 million, representing an 8% decrease year-over-year.

MRD Revenue was $102.7 million, up 18% from a year ago, driven by 27% increase from MRD service revenue, partially offset by a lack of regulatory milestones. Immune medicine revenue was 67.5 million, down 31% from the prior year. As Chad mentioned, starting with the 3Q ‘23 earnings call, we opted to exclude Immune Medicine from revenue guidance given the shift in focus to target and drug discovery. Moving down to P&L, on the right-hand side of the slide, total gross margin for the quarter was 57%, representing an eight point increase versus the third quarter and a 13 point decline versus a year ago. The sequential increase was largely due to efficiencies from the lab moves. Versus the prior year, the decline was driven by lower amortization of the Genentech upfront and a lack of milestones which have a 100% margin contribution.

R&D, sales and marketing, and G&A operating expenses declined 8% in total versus a year ago as we continue to place a strong emphasis on driving leverage. Net loss for the quarter was $69.5 million, compared to $40.2 million last year. For the full year, operating expenses, excluding the $25.4 million one-time impairment charge in the fourth quarter, which was related to our legacy lab and headquarter space over $371.9 million, compared to $385.5 million in 2022 to representing 4% increase. This reflects our ongoing efforts to drive operating efficiencies, partially offset by higher cost of revenue. Full year net loss was $225.3 million, compared to $200.4 million in 2022 while adjusted EBITDA was a loss of a $116.4 million, compared to a loss of $121.6 million in 2022.

We ended the year with approximately $346 million in cash equivalents and marketable securities. Now turning to 2024 guidance on Slide 16. As mentioned in our last earnings call, revenue guidance will be provided only for the MRD business since immune Medicine resembles a more traditional drug discovery biotech model and we want to ensure that we do not trade off short-term revenues for long-term value. We expect full year revenue for MRD to be between $130 million and $140 million. At the midpoint, we anticipate a 65% and 35% contribution from clinical and pharma services respectively. Guidance includes conservative MRD Pharmacy Services growth as we continue to monitor broader impaction about Pharma industry. It also includes MRD milestones in the low-single-digit millions, which could have upside depending on clinical trial outcomes.

With respect to trends throughout the year, we expect MRD revenue to be 45% to 55% weighted between the first and second half respectively. Of note, given that our Immune Medicine efforts are focused on target and drug discovery, revenue from our IM Pharma collaborations will be used to offset R&D investments. Finally, our collaboration with Genentech continues to advance and we expect to recognize roughly $14 million in amortization of the upfront this year. Moving down the P&L, we expect operating expenses including cost of revenue to be between $360 million and $370 million for the year. This deceleration in the spending reflects our ongoing efforts to optimize resources and drive operating efficiencies, while supporting healthy top-line growth.

We continue to be thoughtful about our cash position, excluding potential one-time costs from the strategic review, we expect to burn average $35 million per quarter representing an annual reduction of 10% versus 2023. With that, I’ll hand it back over to Chad.

Chad Robins: Thanks, Tycho. We’re off to a running start. I’m confident in our ability to continue to grow our clonoSEQ MRD business and to demonstrate our target and drug discovery capabilities in Immune Medicine. I look forward to communicating with you on the outcome of the strategic review, which will enable us to drive success and maximize value for all stakeholders. With that, I’ll turn it back over to the operator and open it up for questions.

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Q&A Session

Operator: [Operator Instructions] [Operator Instructions] Our first question comes from the line of Dan Brennan from Cowen. Your question please.

Dan Brennan: Great. Thanks. Thanks for taking the questions. Maybe Tycho, can you just walk through a little bit of how the OpEx kind of outlook for ‘24 and the revenue kind of what are we considering for burn? I know you touched upon it? But just kind of walk through the key drivers of where the burn goes?

Tycho Peterson : Yeah, yeah, we talked about, $35 million per quarter. We’re obviously continuing to drive efficiencies across the organization. So you’re seeing leverage in sales and marketing G&A and R&D. So, as we’ve kind of mentioned in prior calls, there’s currently no stones unturned as we kind of go through the ongoing business review.

Dan Brennan: Got it. And then, just on the MRD side of the business, the clinical and the Pharma side, just on the clinical side, so how do we think about like the volume and the realized price implicit in the ‘24 guidance?

Tycho Peterson : Yes, Susan, do you want to take that?

Susan Bobulsky: Sure. So, Look I guess the volume, so at the midpoint of the guidance, which was issued represents over 30% growth for the overall business. We’ll talk about the clinical and on the pharma. So the clinical business we expect to have a healthy growth trajectory. We are anticipating 50% revenue growth. The revenue growth will come from both volume growth and ASP. We are focused very closely on ASP increases and on the volume side the consensus I believe is around 35% today, which we think is fair. On pharma side of the business, we are anticipating about 10% growth and I think roughly based on the fact that we anticipate continued industry-wide headwinds that we saw in the previous year, but then we do have a strong backlog, a healthy backlog of over $185 million, which we believe we will be able to continue to draw from we have in the past.

Dan Brennan: Got it. And then, maybe last one.

Tycho Peterson : We did mentioned low-single-digit million in milestones for MRD pharma, as well in the prepared remarks.

Dan Brennan: Thanks, Tycho. And then maybe last one. So, Chad or Tycho, just in terms of what we’re going to hear the end of the quarter in terms of the outcome of the strategic review? Maybe I know there’s a couple of permeations here that could unfold kind of what can you share at this point? And just kind of any color on some of the discussions and how things have gone?

Chad Robins : So, Dan, I can’t really comment on any specific structures or alternative at the moment. What I can tell you is in conjunction, you know with our Board and with Goldman, we’re – our goal is to maximize the value of all stakeholders. We do have a very strong cash position and I can ensure that any decision we make is it going to jeopardize either part of the business and we’re committed to providing an update. So, stay tuned.

Dan Brennan: Great. Okay. Thank you.

Chad Robins : Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from the line of David Westenberg from Piper Sandler. Your question please.

David Westenberg : Hi. Thank you for taking the question. So just on the MRD business kind of the visibility, can you walk through the MRD revenue cadence expectations in the year? How should, shouldn’t think about some of the milestones or other kind of payments from Pharma? And then, I just noticed a slight decrease in the sequential growth rate, and I noticed that same thing happened in Q4 of last year. Is there seasonality in the business that we haven’t been modeling previously just in terms of volume growth that maybe I should say I haven’t been modeling correctly?

Susan Bobulsky: So, I can speak to that part about the recent sequential growth and also seasonality. So, I think you’re pointing to the 4% quarter-over-quarter growth for the Clinical business in Q4. So, I think one thing that we consider is that Q4 typically with fewer business days and other quarters, we do typically see a lighter growth profile than in other quarters, but importantly in Q4, we continue to see all of the leading indicators in the business that we track moving favorably. Additionally, when we broke out the US and ex US clinical businesses in Q4, we note that the US business grew at 7%, whereas the ex US business which is typically more lumpy from quarter-to-quarter grew more slowly contributing to the overall growth rate of 4%.

And then finally, we started 2024 off very strong with record average daily and monthly volumes in January, February to-date is trending even more favorably. So we continue to feel very confident in the strong growth trajectory of that business. And I do think seasonality just based on the number of business days can be a factor. There are other aspects of seasonality that we typically see – for example, in certain summer months, but overall, probably nothing different than you might see in an average business.

Tycho Peterson : And then, Dave, we mentioned in the prepared comments for guidance, we expect MRD revenue to be 45% in the first half 55% in the back half. So more back[Indiscernible].

David Westenberg : Got it. Got it. Okay. No, that’s great. And then, just as we look at the drivers that drew growth in 2024, I mean, 2023 and as we start to cycle those drivers, I mean, how should we think about the impact that you had from Epic? What inning are you in the Epic integration the DBCL integration or ordering pattern and kind of kind of conversion of blood? I mean, I know that’s three different areas, but if you can give those three areas kind of what inning we are in and just to get a sense on how much more growth – how much you can compound this growth in that business? Thank you. I’ll stop there.

Susan Bobulsky: Sure, yeah. So, I mean I think you’re right to think that the growth drivers in 2023 to be worked out in 2024 and in some cases we are in the very early innings in some of those growth drivers for the previous calendar year that we will be able to adapt further in 2024. So, for example Epic integration, very early days in 2023, top of the first inning. We only saw our first five accounts set up to utilize the integration by the end of Q4 and all of those went live just in each, either one in September and the other four were completed in December. So we haven’t yet seen significant lift albeit anecdotally in those accounts. We are seeing really nice results. So we continue to work toward additional Epic integrations.

They are a one-by-one process. We anticipate having 15 to 20 as previously stated by the end of the year, 15 to 20 additional and I think then we will see growth in those accounts, but for the overall business, it’s going to take some time for us to be a very meaningful impact, material impact. We – as Chad noted earlier, we signed another agreement with Flatiron Health, which will really start to have impact on the business in the second half of ‘25. The second thing you asked about DLBCL. We saw a really nice growth trajectory in DLBCL aligned with our internal expectations, and we continue to promote that very actively as well as focus on data generation. We have a number of studies that we are hoping to advance in 2024 that will continue to support the frontline and surveillance setting in used case for the app as well as some nice real world evidence that we will be advancing and other NHL indications which will continue to build the overall business in non-Hodgkins Lymphoma more generally.

So I do think DLBCL as combined with other indications like mantle cell lymphoma in that NHL category will be growth drivers in 2024 more meaningfully than they have been in previous years. And then last thing you asked about was blood. We had some very nice data ASH 2023 which was the end of last year which we’ve been actively leveraging in promotional conversations for multiple myeloma in blood. We expect to expand the analysis of that data set early this year and see it published, as well as present some additional data utilizing circulating tumor DNA in multiple myeloma particularly in the setting of extramedullary disease. We have enough number of other data sets that we’re exploring which may be able to utilize this year. And so I think this will be a continued data generation year for multiple myeloma, but that said we’ve seen the blood based percentage of blood based test continually increase quarter-over-quarter both for myeloma, as well for our business more generally.

We’re up to nearly 40% of tests in blood and by testing blood today as of Q4 and we continue to expect to drive that, which will contribute to increased testing in the community and frequency of testing.

David Westenberg : Great. That was a lot of great detail. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Mark Massaro from BTIG. Your question, please.

Mark Massaro : Hey guys. Thanks for taking the time. You’ve steadily increased the percentage of clonoSEQ tests in blood. I think it was 39% this quarter. Is there a point in time where you think blood can become maybe the majority of your clonoSEQ volumes. And is there a certain target that you have even if it’s out like say, three to five years?

Chad Robins : Absolutely, we think the majority of our tests, blood-based testing is all related to the community, as well. And as we continue to increase and bring on community accounts, the percentage of tests that are done in blood will continue to increase. And so, I don’t know if I can give you an exact dated when it’s going to become a majority, but that that number is growing very rapidly. And we see it being a steadily increasing percentage of our overall test mix.

Mark Massaro : Okay. Excellent. I know at JPMorgan you guys provided the 25% to 30% revenue CAGR for MRD between 2023 and 2027. So obviously, pretty solid top-line growth and then you’ve maintained your expectations to hit MRD profitability in the second half of ‘25. I guess, I’m asking on the cost side. So obviously, you can get to profitability through revenue growth, but I’m just curious are there certain costs that that might be able to come out of the clonoSEQ assay? And maybe if you could speak to input costs or and then maybe some of the instrumentation or reagents that are used. I’d just be curious to see what type of levers you might have on the COGS side?