Q3 2022 Adaptive Biotechnologies Corp Earnings Call

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Yeah.

Good day, and thank you for standing by.

Welcome to the adaptive Biotechnologies third quarter financial results Conference call. At this time, all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is right.

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I would like to now hand, the conference over to your speaker today, Karina Palo Verde, Yeah, Vice President Investor Relations. Please go ahead.

Thank you Felicia and good afternoon, everyone I would like to welcome Lisa.

We have technologies third quarter 2022 earnings conference call.

Earlier today, we issued a press release reporting adopted financial reports for the first quarter of 'twenty to the press release is available at Www dot adaptive biased, but com. We are conducting the lifeblood of this call I will be referencing to slide presentation that has been posted to investor section of our corporate website.

During the call management will make projections and other forward looking statements within the meaning of federal security laws regarding future events and the future financial performance of the company.

These statements reflect management's perspective on the business today actual results may differ materially from today's statements depending on a number of factors, which are set forth in our public filings with the SEC.

Patients.

In addition, non-GAAP financial measures will be discussed during the call and they are a combination of non-GAAP to GAAP metrics can be found in our earnings release.

Joining the call today are Chuck long enough.

Longer I'm, Tycho Peterson, our Chief Financial Officer. In addition, our involvement.

<unk>, Chief Scientific officer, and cofounder and you just don't have the emerging business and Charlotte all had an immune medicine business will be available for Q&A with that I'll turn the call over to shove them Yep.

Thanks Karina.

Afternoon, everybody and thank you for joining us on our third quarter 2022 earnings call.

As always a big thank you to all our adaptive employees for their dedication and for delivering another solid quarter.

As we approach year end, we are well positioned to finish strong in both <unk> and immune medicine.

This quarter is outlined on slide three we achieved important milestones in results.

Starting with key corporate achievements.

As planned we strengthened our cash position to $528 million with an attractive non dilutive royalty financing agreement with orbit.

This agreement extends our cash runway to over three years, while providing the flexibility to make strategic investments.

We also finalized our long range plan update which will enable us to achieve sustainable revenue growth, while reaching adjusted EBITDA profitability in 2025 and cash flow breakeven in 2026 Tech is going to go further detail during his remarks.

Revenue for the third quarter was $47 8 million, representing strong growth of 21% versus prior year.

And our <unk> business, both our pharmacy clinical testing and MLD pharma partnerships delivered solid performance clinics.

Clinical volumes grew 52% versus prior year.

<unk> pharma partnerships also had significant growth of 33% excluding milestones.

Our immune medicine business continues to execute on pharma services and drug discovery opportunities.

Pharmacy services drove 23% growth versus prior year, as we increased penetration into larger trials.

Has delivered grew 11% with volume growth observed across all three marketed indications.

Multiple myeloma was the biggest growth driver and the largest contributor to our business.

Ordering healthcare providers and ordering accounts experienced significant growth of 56% and 53% versus prior year respectively.

[noise] unique patients tested grew 62% in the quarter.

Aspie is now over $1000 per test and we expect it to grow annually in the mid single digits as we finalize price of your agreement with non contracted payers and improve our collection performance.

Our strategy to maintain our leadership and <unk> testing and lymphoid cancers continues to progress as shown on slide five.

First our expanded sales force a structured into two distinct groups key account managers and diagnostic hematology specialists. These groups serve two different customer segments with distinct sales strategies.

Account managers focus on penetrating deeper into our existing established institution. This.

This quarter, 85% of the growth came from existing institutional counts, including Mount Sinai MD Anderson, Dana Farber, Stanford among others.

Our current diagnostic hematology specialists team targets driving adoption in community practice accounts currently representing 12%.

Another key driver of growth as blood based testing, which now accounts for 30% of all <unk> tests and.

Multiple myeloma growth importance over 100% year over year.

Blood based testing is key it has it has the potential to both increased penetration of clemency among clinicians and the number of test run per patient.

In addition, we are launching a clear validated strength to base diffuse large b cell lymphoma product that ash in.

In line with previous expectations, we anticipate bcl to contribute to quantum see growth in the second half of 2023 and beyond.

As a reminder, last quarter, we obtain Medicare coverage for all <unk> patients, 75% of which are Medicare, aged regardless of Lions therapy treatment regimen or testing time point.

Lastly, we are focused on enhancing the overall customer experience, including more seamless integration of currency could the clinical workflow.

As such we signed an agreement with epic to expand access and increase ease of use for currency.

Shifting too are shifting to our emergency farmer portfolio on slide six or.

Clinton seek assay.

Is currently being used by over 60, Biopharma partners and and over 20% of acted industry sponsored clinical trials and lymphoid cancers. Almost every major pharma company developing a blood cancer drug is using cloning seek in their trials as a secondary or primary clinical endpoints.

From these partnerships. Besides sequencing revenue. We are also eligible to receive milestones in excess of $370 million based on potential drug approvals from ongoing and future studies.

We have line of sight to approximately half of the $370 million of milestones from 74 active trials today, which we anticipate recognising over the next five to seven years.

We believe there is a significant growth opportunity for <unk> pharma business.

<unk> is the gold standard and multiply Loma trials and we aim to replicate the success in other indications, especially in non Hodgkins lymphoma, where there are significant ongoing drug development activity.

Now turning to our immune medicine business on slide seven.

Our immune medicine business Leverages, our ability sequencing characterized T cell and be cell receptor is at scale to drive opportunities and various indications.

We character categorize our mid medicine business into two main growth areas farmers services and drug discovery.

Zooming in to farmers services on slide eight.

This quarter farmer services grew 23% year over year.

This growth is driven by our team executing to incorporate key seller <unk> receptor sequencing in more and more clinical trials with existing and new biopharma customers.

Portfolio today consists of more than 140 active studies with more than 85 companies.

We expect this double digit growth to continue in the coming years.

A unique ability to detect and monitor T cell and be silver sponsors delivers rich data back to our customers that informs biomarkers of drug response with the ability to accelerate our farmer customers clinical development programs.

As indicated on this slide we have a diversified portfolio that supports customers and multiple indications.

This includes farmer clinical trials in more than four major therapeutic areas.

Approximately 50% of our current portfolio includes phase one and phase two trials.

Our growth strategy is to continue to grow in these phases and expand into phase three programs, while bringing on new accounts.

Slide nine shows an overview of our drug discovery business.

Drug discovery Leverages, our end to end TCR and VCR discovery capabilities to develop therapeutic assets.

Either in partnership or potentially on our own.

Our partner pipeline today focuses on our shared and private programs with Janine Tech to advance cellular therapies in oncology.

We are also building an early stage adaptive pipeline by investing in our core drug discovery competencies that we've built during the last several years.

Specifically the value of our true TCR discovery and our true Avi antibody discovery approaches gives us a unique ability to identify and characterize therapeutic rate TCR than antibodies at unprecedented scale.

This quarter drug discovery grew 36% versus prior year due to accelerated amortization of our Demandtec upfront. This is due to increase R&D investments and reflects progress on both our shared and private product.

With that I'll hand, it back over to Chad.

Thanks, Tycho as outlined today, we are delivering on our promises both our immune medicine and <unk> businesses have great momentum to achieve the respective catalysts listed on slide 14, and we have a strong balance sheet to support future growth.

I'd like to turn it back over to the operator and open it up for questions.

Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to BMO. Please standby, while we compile the Q&A roster.

The first question comes from the line of David Westenburg of Piper Sandler.

Hey, Hi.

Thank you for taking the questions here.

So I'll start here with the DB ECL.

Adoption ramp.

So what are we thinking about for <unk> adoption ramp given the fact that.

I think quantity and sorry, if you disagree with this characterization you did really really well pandemic had it kind of slower than you had really good momentum and in 2022.

Yeah, I think you have had a little bit of critical mass, particularly in the first half of this year with the clumsy business do you think that you can ride that momentum in <unk> and this is going to be faster than say to say the ramp that you got in multiple myeloma and <unk> and I believe the first one is a L. L right. Okay.

Hey, David It's Hey, David It's John I'll make a yo of one comment and then I'll pass over to that knitting to specifically address the bcl.

We are very still low penetrated in.

In our in our marketed indications in myeloma, <unk> and CLO. So I think there's a significant ramp of our existing indications and with the new launch of <unk>.

But again I'll hand, it over to Nick <unk> specific comment on timing and ramp.

Yeah, and I just want to build on what Chad said in a multiple myeloma, which is a key growth driver for us.

Going forward grew 17% quarter over quarter. This quarter. So we're still at sort of 657% penetration in multiple myeloma says a lot of room.

For multiple myeloma to drive growth going forward into 2023.

Talking specifically about <unk> at Ash this year in December we will launch the <unk> based.

CLIA validated assay, we expect this asset to contribute to growth in the second half of 2023 is it takes time for us to educate physicians on the use of blood based <unk> testing. The current standard of care in <unk> imaging based monitoring.

We have data to show that <unk> is highest specificity than imaging and detection recurrence earlier than imaging. So.

Foundation and the fundamentals are strong.

As we continue to do physical physician education, I think the second half of 2000, Twenty's, where we'll see the growth of <unk>.

Got it.

Maybe maybe a man asking can you kind of can't continuation and with that I mean, I believe your physicians are pretty educated and the fact that this is this is counting T cells and b cells and really theoretically this can be used on any any kind of.

T cell b cell mediated cancer, so can I ask.

How much of this how many of this is actually already being ordered off label.

It would just be as you get Medicare coverage, maybe some some turning on of some additional ASP.

Maybe I'm completely off base with that.

You know around sort of 10% of our ordering volume is outside our main indications. This includes <unk>. This includes the CTC L mcl in other indications.

No.

You know.

You will see obviously, we will get paid on the <unk> component of that test work, but I think as we expand into the community, which is where <unk> is treated.

We'll see.

Greater uptake of <unk>.

In addition, we will continue to file for reimbursements for these other indications like Mcse, Tcl and they'll contribute overall to increasing our ESP as well.

Got it.

Hey, David.

I will just make another comment it's also worth noting.

Look at the the number of trials right now going on in non Hodgkin's lymphoma, particularly into the Ob <unk>.

Necessity to monitor residual disease as these these new therapies, if the market really do drive clinical adoption and awareness. That's why the MRV clinical business <unk> pharma business are incredibly synergistic as we've seen kind of in multiple myeloma, that's what you'll start to see again being conservative in this.

Second half of 2023.

Got it thank you and if I'm not being too greedy here, Ken I'm, just going to squeeze one more in for Tycho here.

Mentioned additional cost cuts into 2023 is this going to be primarily in R&D or SG&A and in terms of I know you've done a lot of restructuring in EMEA medicine business, particularly around.

Specifically around key detect is there some remaining stuff there or is that has that already been.

Are those costs been been mostly removed. Thank you.

Yes, the costs for Peanuts X, specifically are kind of out of the equation. When we made that decision last quarter I think to give you some high level commentary on 23 without getting too quantified guidance, which we'll give on the fourth quarter.

They were looking at a lot of things I mean publicly we've talked about real estate consolidation, we've talked about workflow enhancements leveraging sequencing cost obviously alumina is driving down cost. There. There is some stuff in the cloud compute cost, but the other angle here is yes, we went through our long range planning process. We came up with a list of R&D projects, and triage them and map them to revenue and margin and yes.

There are some opportunities to drive a little bit of R&D leverage G&A I will have some leverage as well and we will communicate more as we give official guidance.

But it's all part of a process of getting more efficient as a company and be more thoughtful about how we invest our dollars.

I appreciate it thank you guys.

The next question comes from <unk> of Morgan Stanley . Please go ahead.

Hey, Good morning, guys. This is our immuno on potatoes.

Just wanted to.

Sure.

Okay.

Just wanted to touch base on your partnership with Epic I was wondering how you envision the integration of their integration into the EMR system will embark on a speak volumes once it goes live in 'twenty three.

Okay.

Sure Nick.

Cover that as well.

Yes.

We initiated work with epic and expect to have accounts up and running in 2023.

Starting with the four pilot accounts and expect that integration to be completed within six months.

Overall, we're anticipating impact our order volumes in the second half of 2023, and a more considerable much bigger impact in 2024 and the way we think about this as you know of course epic will.

Sort of standardize the use of Kronos seek in accounts that we already have some sort of drive deeper penetration in the accounts that we have and then reduce the barrier for adoption in the newer accounts.

So overall, we're pretty excited about this were underway and we expect to announce more updates on this.

In 2023.

Got it and then on peers in the space have talked about hospital staffing issues and you've also noted seeing order spikes.

I was wondering if this change is this kind of has changed over the past few months and separately on the Biopharma side I'm curious also noticed.

Michael Charles sample collection and on deliveries being slowed down due to the staffing shortages are you seeing similar trends here.

Okay.

Go ahead Ben.

Yes.

Yes, I mean I think.

I would say, we're not seeing sort of any significant.

And the impact we see some variability here and there related to <unk>.

Various events, but I would say both.

Our pharma business as well as our clinical business looks.

You know it looks.

After a good start in Q4 and.

We're pretty feeling pretty good that we continue to grow robustly above 50% in 2023.

Great. Thank you.

Okay.

Our next call comes from Julia Chin of J P. Morgan Chase. Please go ahead.

Thank you for taking my question.

Jo Anne.

I wanted to thank you all right.

Deeper into your 2023.

Thank you Arlen shenkman quality color are getting on in headlines in tailwind.

Indicators of factor I think you could share with us.

Okay.

Yes, we were really going to I don't think we want to say a lot about 2023 until we're ready to officially guide I did mentioned in my prepared comments, we're going to continue to drive operating leverage. So that's an ongoing focus and we laid out a path to profitability obviously on the on the call today.

I don't know.

You can just touch on the hospital end market I mean is there anything else you would add in terms of end market dynamics for MLD that you want to flag for yeah.

Yeah, I mean, I think I'd, just like to again sort of highlight the fact that all the leading indicators are looking strong the number of Hcp's and accounts grew 50%.

Our year over year this quarter. It has been in the last few quarters. The number of unique patients tested grew 60%.

So and that combined with the fact that our penetration both in the pharma space as well as in the clinical diagnostic space is low.

We feel.

<unk> will decrease very nicely in 2023, and and all the leading indicators are positive and we will provide specific guidance as to iqos.

Q4.

And Sharon can you make a couple of comments on our immune medicine business, particularly genentech.

Oh, absolutely NASDAQ again, we're making great progress on both fronts worth sharing in private practice.

I had mentioned.

Significant growth in terms of what we achieved in Q3.

Let's give you the same closing out this year into next year as it relates to the new medical pharma services. Similarly, we expect good growth trajectory as well.

And beyond.

With significant opportunity to penetrate in later stage clinical trials and across multiple indications.

Relevance to our fleet.

Well the one thing I'll add just from the financial perspective again, we're going to wait till to officially guide with our fourth quarter call, but we will take a more conservative view around the MRV pharma milestones you saw that in the narrowing of the range for the fourth quarter those can move around quarter to quarter of course, and I think as we go forward, we're going to try to kind of de risked the reliance on those so that's one area.

Oh flagged a ahead of official guidance will be a little bit more conservative.

That's very helpful. Thank you and then another question go ahead.

Go ahead.

Okay.

Sorry was there an additional question.

Operator, you want to go then next one.

Sure. The next question comes from the line of Derik de Bruin from Bank of America.

Please go ahead.

We can go to the next one.

Okay. Operator, if you want to go to the next question would be great. Thank you.

Sure. The next question comes from the line of solving Richter of Goldman Sachs. Please go ahead.

Hey, guys. This is Elizabeth on personnel me and thanks for taking our question.

Had a question on the drug discovery efforts and specifically of the antibody therapeutics area. What are adaptive key differentiator then can you speak to the status of those discovery efforts currently thank you.

Sure sure anyone figure absolutely Howard.

So similar to our TCR discovery efforts.

With Genentech to endless chapel Genentech amongst many of our capabilities is the sheer scale at which we discover and are able to characterize naturally occurring <unk> T cell receptor the same apply for antibody discovery.

Technology and the platform that we've built and validated for the past several years allow us to identify the ultra.

<unk> antibody, which you alluded to.

Have a portfolio of neutralizing antibody they happen to be against us for the Q.

And we're pursuing additional capability to be able to focus on areas that really differentiate us against our target.

That we may discover in areas that are unmet need like autoimmune disorders.

Got it and when can we expect the next catalyst or our milestone from that program.

So we're our strategy is to monetize on our existing assets as I mentioned neutralizing antibody because of the portfolio of antibody we've identified.

We have some are several of them that are still relevant given some of these areas that exist today. So our core strategy is partnering to bell, but in the interim it really heads down on elaborating as Jim mentioned.

One potential pipeline.

Our antibody discovery can really make make a unique differentiator for <unk>.

Advancing those assets, either a partnership or perhaps in the future.

Got it thanks for the color.

Our next question comes from Derrick the brine from Bank of America. Please go ahead.

Hi, Good afternoon. This is John on for Derek can you hear me.

Yes, we can hear you.

Alright, yes, apologies I was double muted forgot to mute the other one.

In terms of any commercial benefit down the road from your work on <unk> is there sort of a timeframe on when you might decide that data might become positive.

And along with that thank you for the five year long term plan.

Just wondering.

Looking at the profit.

<unk> ability to target by 25, and the cash flow positivity by 'twenty six Youre obviously.

Looking to spend less and burn less cash, but if you could just provide any puts and takes there.

And if I could just squeeze in one more there if you're.

And that same long term range.

Was wondering what sort of contribution you're assuming from Mike.

Perhaps like future target discovery and therapeutics or for instance, how much contribution you might be assuming from my Covid in TD Tech Covid in line given that you've talked about how the financial contribution should be minimal in the coming quarters.

Okay.

Apologies for the mine.

Yes.

Thanks, Sean a lot there Sharon I'll have you cover the.

Post treatment line disease syndrome, and then Tycho I'll have recovered some of the puts and takes on.

Future cash flow and then how we're moving kind of bringing in the profitability of years, and then I'll make some overall comments on <unk>.

On strategic direction, So you want to start absolutely.

<unk>.

Because of the investment we previously have made but we are wrapping up.

The last time point of the cohort that we enrolled and that can speak to sort of our assessment in different settings.

Of individuals that line. The goal there is strategy as overarching wafer PSX is opportunities that we may have with our panel partners.

As you May know there are a number of therapeutics out there now both the vaccine, but other modalities.

And so we're going to be opportunistic to leverage that data, including in the PEO.

Okay.

On the long term guidance, you know as we kind of laid out on the slide there. It's a 20% to 30% revenue CAGR. The goal is to try to drive Opex leverage you know over the long term plan, we do expect low single digit opex growth over that same period.

One nuance of difference on the EBITDA positivity in 2025 is that is because that we're excluding stock comp and then cash flow breakeven in 'twenty six.

The cash flow components include the royalty payments to or met and obviously working capital I don't know that we were going to give a lot more color on kind of what's behind the revenue projections. We certainly don't want to get into kind of talking about specific partners or deals in our long range plan.

So I think thats, all well kind of say it at this point, yes, and I'll just make your comment with respect to our immune medicine business and our strategy, which is we built a unique set of capabilities over the last several years to identify targets and then find immune receptors, both T cells and antibodies against those.

Targets and what were doing kind of from from an investment standpoint is prioritizing opportunities to either ourselves or in partnership to kind of leverage those capabilities moving into more into the therapeutic area. So that's what I'll say about that for now obviously genentech is the first set of.

Cowboys, but behind that we're working on.

Quite quite a few things that kind of leverage those capabilities and just to round. It out you know the long term guidance does not assume revenues from from key detect we kind of made that decision last quarter to pause and online in particular, so there's really nothing on the long term outlook for <unk> on the diagnostics lab.

Got you. Thank you for that and if I could ask on the <unk> as well.

You're obviously trying to increase youre trying to educate the physicians here and you're having conversations with pharma sponsors either clinical trial sponsors.

Any update on the physician access for better for worse.

Or has it held steady and is there any additional channels youre finding.

Helpful in getting in front of them, what what sort of work are you doing.

Did you want to take that.

Yeah, I mean, I, if I understand the question correctly.

Physician access in general is improving in.

Include quite a bit it's it's.

Also region dependent in certain regions.

Thanks.

So on in person meetings in other regions.

Physicians have.

Sort of permanently shifted over to the meeting virtually.

And.

I think overall.

You know.

Which is driving growth in multiple ways, you know I think epic integration is going to help a lot.

Spanning into DLT C L.

The community is going to help a lot. So I think there's a there's a lot of catalysts for growth going forward.

Appreciate the color. Thank you.

Last call for questions as a reminder, if you'd like to participate in the Q&A. Please press star one one on your telephone and wait to be allowed.

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Oh. Thank you for your participation in today's call. This does conclude the program you may now, but thank you for your.

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