Adaptive Biotechnologies Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the Adaptive Biotechnology's 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, and if you would like to ask a question during that time, simply press star 1 on your telephone keypad. If anyone should require assistance during the conference, please press star 0. I would now like to hand the conference over to your speaker today, Karina Calcedilla, Head of Investor Relations. Please go ahead, ma'am.

Thank you, Alexander, and good afternoon, everyone. I would like to welcome you to Adaptive Biotechnology's 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 to a slide presentation that has been posted to the investor section in our corporate website. During the call, management will make projections and other forward-looking statements within the meanings of federal security 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 Robbins, our CEO and co-founder, and Kyle Pisco, our Interim Chief Financial Officer. In addition, Harlan Robbins, Adaptive Chief Scientific Officer and co-founder, Nathan Sood, head of our MRD business, and Sharon Benzino, head of the immune medicine business, will be available for Q&A. With that, I'll turn the call to Chad Robbins.

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 ClonoSeek 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 completion of his garden leave. We have prioritized 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 Clonaseq test offered to clinicians and the Clonaseq MRD assay offered to pharma partners who integrate MRD status in their human malignancy trials. Aligning these synergistic components of the MRD business under the same leadership as adaptive will drive execution and enhance 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 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 prior year. The ClonoSeq sales team of 70 reps is now fully hired, trained, and is being deployed to hit the field. Progress continues with payers, data generation, and guideline expansion. For 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. The immune medicine business is also delivering on multiple fronts, generating a total of approximately $21 million this quarter. Revenue from pharma partners that use ImmunoSeq and data generated from our TCR antigen map grew 100% versus prior year. We are well positioned for continued growth as we expand the use of ImmunoSeq in multiple therapeutic areas and secure additional TMAP 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 T-Detect is advancing in both infectious diseases and autoimmune disorders. And in drug discovery, we continue to make good progress with our shared and private product programs under our Genentech collaboration. Moving on to MRD business on slide five. Tests delivered grew 12% to 7,698 tests versus prior quarter, with double-digit growth observed in all three indications. Ordering HCPs and ordering accounts experienced significant growth of 53% and 36%, respectively, versus 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 experiences 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 Moldex 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 Clonaseq. Data show that Clonaseq detected disease in blood that flow missed in marrow. Furthermore, in bone marrow, the performance of Clonaseq was very strong. Clonaseq 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 Clonaseq MRD testing. As mentioned before, our MRD pharma partnerships are a key component of our MRD business. Slide 7 shows our pharma portfolio, which is comprised of partnerships with over 60 companies that integrate Clonaseq in their clinical trials. As efficacy of blood cancer drugs continue to improve, pharma companies are looking for more sensitive ways to measure response. Of note, our Clonaseq MRD assay was used as a clinical endpoint in support of regulatory approval of five drugs to date. Almost everything. Every major pharma company developing a blood cancer drug is using Clonaseq 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 approval from ongoing and future studies. We continue to grow and expand our pharma partnerships and look forward to seeing Clonaseq data derived from these pharma trials to further drive clinical utility of the ClonoC 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 TMAP products, is expected to continue to grow significantly in the short and medium term. The clinical diagnostic area, or T-Detect, is in 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 MunoC 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're 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 a 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 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 care serology at 30% when we hold specificity at 99% for both. We anticipate this sensitivity to increase as we identify additional Lyme-specific TCRs from new data sets 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 test by the end of 2023. We're excited about multiple opportunities stemming from our immune medicine business. I'll now pass it over to Kyle Piskel for a financial update. Kyle?

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 into sequencing and development categories, 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 TMAP to pharma and research customers, our T-Detect COVID test to clinical customers, and our collaboration agreements and 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 10Q to reflect the revised revenue disaggregation. Our revenue mix for the first quarter consisted of 54% from immune medicine and 46% from MRU. 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 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 clinical testing. Clinical test volumes also increased by 45% versus prior year. Shifting now to our operating costs 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 cost of revenue was primarily driven by an increase in material costs due to revenue sample volume growth and an increase in labor, overhead, and facility expenses. Research and development expenses for the first quarter of 22 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. So the 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 field 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 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 four-year guidance, we are reiterating our revenue range of 185 to 195 million, which already contemplated the MRT 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. Although it is early in the year, we are confident on our ability to achieve our full-year commercial and development 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 expected to play 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. I'll now turn the call back to Chad.

Thanks, Kyle. As outlined on the call and listed on slide 13, we executed on 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.

Thank you, sir. At this time, I would like to remind everyone in order to ask a question, press the star one on your telephone keypad. Again, that is star one to ask a question. And we have your first question from Brian Weinstein with William Blair. Your line is open.

Hey, guys. Good afternoon. Thanks for taking the question. Sure, Brian.

Thank you.

Hey. I just want 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 know, you posted basically flattish growth. But, Kyle or Chad, can one of you guys just go through some of the factors that kind of drove that flattest growth. I heard, you know, 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.

Sure. I'll take that, Brian. You know, 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 being the MRD milestones. And just as a reminder, Q1 of last year, we had, you know, approximately 7 million in milestones from our MRD business. And this quarter, we have 3 million. So, you're seeing 4 million in compression there from a comp perspective. The second component is the Genentech amortization. And, you know, comparing that to last quarter, last year, we had about 16 million versus this quarter where we're at 12 million. So, Those two things kind of really compress the growth, and if you back those out, you know, you'd see about 47% year-over-year growth. So that's kind of driving some of that optic issue.

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

Yeah, I'd say for the, you know, it's tied to our expense investment in the Genentech collaboration, I'd say. For the remainder of the full year, we're still on track to be about the same total revenue as last year, maybe a little bit of a bell curve this year through Q2 and Q3, and then come back down a little bit in Q4. But overall, I'd say it would be fairly consistent to last year.

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

Yes. So, First, I'll just acknowledge that the path to profitability and at least cash flow neutrality is incredibly important for us to adapt it. And, you know, 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, 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're kind of on a path to do what we can so that we don't have to take in capital that will be dilutive to the company in this economic environment. That said, too, with Tyco coming on board, we were really sharpening that long-range plan and should have better visibility into that time horizon to get to cash flow profitability and should be providing that for you within the back half of the year.

Okay. Thanks, guys. Sure. Thanks, Brian.

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

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.

Sure. I'm going to have Sharon Benzino, who's head of our immune medicine business, take the call. Sharon?

Yeah, thanks, Elizabeth. So as we've previously stated, and on the heels of our successful proof-of-concept screens using a blood from 60 cancer patients last year, that was the first path at 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 and conjunction with the pieces of the puzzle that Genentech is putting together, the process being the product. So that's what we're aiming this year, building off of the success from last year.

Got it. Thank you. That's helpful. We have your next question from Mark Massaro with BTIG.

Your line is open.

Hey, guys. Thanks for the questions. If I can, I'll ask two all at once. I guess first, nice growth from Clonaseq 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 access. And then the second question is, you know, on slide 17, you know, 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, you know, to what extent are you committed to advancing and investing in RA? You know, obviously Crohn's and colitis are linked to So can you just help us think about the priorities of the autoimmune disease portfolio?

Sure. Hi, Mark. I'm going to have Nitin Sood, who's head of our MRD business, take the first question, and then with regards to prioritization, Harlan will take that. So Nitin?

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

Okay. And then just on the priority of the autoimmune disease portfolio? Sure. Thanks. This is Harlan.

So we're focusing our resources where our signals are most advanced and we have the highest quality samples for early diagnosis of disease and, of course, having a high unmet need. We prioritized MS and Crohn's higher than RA simply because we have We're a little bit farther behind in collecting RA samples, not for any other particular reason. And the key, the real key that we're focusing on as our differentiator is specificity here. So just as reference, you know, we're aiming to really reduce the number of false positives so that we can hit an earlier diagnostic market. And so that's really been the focus, and that's where we've had the biggest increase in our signals as we go. And we're going to take the learnings from this and apply it into other diseases as we create panels. and in particular for IBD as we're going to initiate a sample collection for a clinical validation study in the coming months.

Great. Thank you.

We have your next question from Derek DeBruin with Bank of America.

Your line is open. Excuse me, Derek, your line's open. You may ask your question. Let's go on to the next question.

We have your next question from Tejas Savant with Morgan Stanley. Your line is open.

Hello, this is Yuko on the call for Tejas. Thank you for taking our questions. Would you elaborate on the plans to reduce the workforce? Are the reduction mostly in administrative, overhead, R&DO, commercial? What projects are deprioritized, and should we anticipate any delays in key timelines as it relates to clonal seed inflection, expansion into DL or BCL? Any color around that would be great.

Yeah, sure. Hey, Yuko, I'll take that. So first, there was many areas affected across the business, but it wasn't uniformly distributed. For example, there were very, very few cuts in the MRD business. So to your questions about kind of DLBCL or any of the kind of project development pipeline is all on track. In addition, the kind of the cell therapy group in San Francisco had very little cuts. So there were cuts across kind of general administration, project management, and frankly, some kind of duplicative or stacked hiring as well that we had an opportunity for, frankly, when we thought we could gain some efficiencies and leverage in the existing business. So we're moving forward, and as Harlan said, we're being very, very clinical, if you will, to use a pun here on how we're prioritizing the T-DETECT program, and we're also being very opportunistic about continued investments, for example, in COVID, given that's taken more of an endemic state, and we've seen the T-detect orders kind of wane as COVID kind of becomes more normalized in the population. So hopefully that's helpful color to you in terms of kind of how we looked at the reduction in force and prioritization.

Got it. No, that's super helpful. And then on the product development expansion efforts into NHL, could you walk us through the rationale for using cell-free DNA? Is there a specific advantage to using cell-free DNA in NHL versus some of the other indications? And could this be a strategy that you would like to deploy on a go-forward basis?

Yeah, so I'll answer that question. This is Nitin. Specifically for DLD-CL, there have been studies that have been published that demonstrate that cell-free DNA is a better analyte. But for other diseases, namely CLL, ALL, and multiple myeloma, our cellular assay does really well. So, on an ongoing basis, I don't expect any changes on those three indications, but for non-Hodgkin's lymphoma, and more specifically for DLBCL, we're going with the analyte we know has the best performance. And longer term, you know, we'll also look at potentially combining both the analytes, namely the cell-free DNA analyte and the cellular assay. You know, obviously, we're the one company that can do both. So we'll potentially look at combining both the analytes.

Great. Thank you so much for that, Collar.

We have your next question from Derek DeBruyne with Bank of America. Your line is open.

Hi. Sorry about that. My phone dropped earlier. Hey, can you give us some cover on the ASPs for ClonoSeq? I mean, you didn't break out the clinical sequencing revenues, like, historically, so can you give us some idea on coverage on just the ASP on server data to just give us a little bit more clarity?

Yeah, so I think this is Nitin again. We've seen steady ASP growth for Clonaseq 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. 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, it's a question on, you know, do you have enough cash to get through this year?

Yeah. This is Kyle. Yeah, so a couple 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, you know, a bit of seasonality, we have our corporate bonus payouts in Q1. So from a cash perspective, you know, I'm generally thinking of the rest of the three quarters as between $50 and $60 million as cash per.

Great. Thank you. That's helpful. And I guess any, and I'm sorry, and did you talk about when you'd expect to see the NHL assay to be commercialized? I know you're in validation and CLIA validation now?

Yeah, with respect to NHL, we're going to launch that later this year in our CLIA environment. We've submitted our tech assessment to Moldex and are waiting to hear back on reimbursement. But as with many of our diagnostics and our assays, we'll launch ahead of reimbursement towards kind of the back half of the year. I mean, it's currently available in our CLIA environment with a cellular assay, but we've got, as mentioned earlier, we've got product development efforts ongoing to convert that to incorporate ctDNA into the assay as well to enhance the product.

Great. Thank you.

One more item to that is, you know, before or ahead of that launch, we'll be, you know, 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 strep tubes and a ctDNA assay by October of this year.

Thanks.

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