ADPT - Adaptive Biotechnologies: Getting Closer To The 'Buy Zone'

2023-07-07 14:00:03 ET

Summary

• Shares of diagnostics and drug discovery concern Adaptive Biotechnologies Corporation have crashed over 90% as the commercial-stage concern struggles with profitability.
• On the top line, the company’s clonoSEQ test volume increased 57% year-over-year in Q1 2023 and has room for continued robust growth.
• With a to-date fruitless foray into drug discovery but relationships with ~175 biopharma concerns, this diagnostic concern merited further investigation.
• A full investment analysis follows in the paragraphs below.

It is not the strongest or the most intelligent who will survive but those who can best manage change ."? Leon C. Megginson.

Today, we take an in-depth look at a small diagnostic concern. The company has developed a " best of breed" immunosequencing platform. Adaptive is seeing some rapid revenue growth and has relationships with myriad Big Pharma concerns. Despite this, the shares are well off their highs. Is this a buying opportunity? An analysis follows below.

Company Overview

Adaptive Biotechnologies Corporation ( ADPT ) is a Seattle-based provider of diagnostic tests for the detection of hematologic malignancies, immune receptor data packages, and drug discovery programs to healthcare providers, their patients, the biopharmaceutical industry, and academia. With an endgame of leveraging its understanding of the adaptive immune system into new diagnostic and drug products, the company boasts commercial relationships with 175 biopharma concerns as of YE22. Adaptive was formed in 2009 and went public in 2019, raising net proceeds of $315.9 million at $20 a share. The stock currently trades around six bucks a share, translating to an approximate market cap of $875 million.

Platform

Adaptive has developed the gold standard immunosequencing platform (immunoSEQ), which translates the genetic language of the adaptive immune system, comprised of T cells and B cells. These cells have Y-shaped receptors that recognize disease causing antigens. Owing to the fact that there are millions of antigens in the human body, the genetic sequences of the T cell and B cell receptors need to "reshuffle" in order to identify the correct anecdote for a particular receptor. It's the equivalent of trying to open a combination lock with billions of possible combinations. This reshuffling eventually results in the location of the correct combination - at which point, some of the "unlocking" immune cells rapidly multiply to attack the disease, while others form a long-term memory for future recognition against the same malady. In a healthy individual, millions of these unique receptors are widely distributed in the blood to rapidly respond to unwanted antigens.

Adaptive's platform leverages proprietary chemistry, computational biology, and machine learning to identify and translate these adaptive immune system properties at scale, precision, and speed, which allows for the development of disease monitoring and clinical diagnostic tests, as well as the development of immunotherapeutics.

Products & Services

After the company onboarded a new CFO in 1Q22, it restructured around two core businesses utilizing its immunosequencing platform: Minimal Residual Disease {MRD} and Immune Medicine.

MRD . Adaptive's MRD operation derives revenue from its next generation sequencing clonoSEQ diagnostic test, which detects and monitors MRD - the remaining number of cancer cells during and after cancer treatment - in bone marrow and blood samples of patients with T cell or B cell lymphoid malignancies. Specifically, it is the only FDA-authorized assay for the detection of multiple myeloma [MM] (in the bone marrow), B cell acute lymphoblastic leukemia [ALL] (bone marrow), and chronic lymphocytic leukemia (bone marrow and blood). It is also Clinical Laboratory Improvement Amendments {CLIA}-certified for diffuse large B cell lymphoma with FDA clearance anticipated in 2H23. Revenue is primarily generated from reports to clinical customers and testing services to biopharma and academic institutions.

MRD contributed FY22 revenue of $87.1 million, up 32% from FY21 and 47% of total. ClonoSEQ test volume improved by 51% (FY22 vs. FY21) to 36,871 tests, while the assay is being employed in 187 active trials, representing 21% of all industry-sponsored lymphoid cancer studies (as of December 31, 2022).

Although other concerns such as Natera ( NTRA ) and Guardant Health ( GH ) provide MRD services for solid cancer, the company's clonoSEQ blood cancer assay in clinical diagnostics doesn't contend with any meaningful competition, except for would-be clients performing flow cytometry in-house. Management recently indicated that clonoSEQ has ~20% share of the ALL market and ~8% share of the MM market, signifying that there is plenty of room for expansion.

Immune Medicine . Adaptive also leverages its platform to provide immune receptor data to biopharma and academia with is packages in use in ~120 active trials. Even though management expects this service to generate ~25% CAGR over the next three to five years, it also eyes a potentially bigger opportunity in drug discovery, where it can leverage its platform to discover and develop T cell receptor (TCR) or antibody therapeutics - either on its own (with a focus on autoimmunity) or with partners.

The company's first foray into drug discovery was a collaboration with Roche's ( OTCQX:RHHBY ) Genentech to advance TCR cellular oncology therapeutics into the clinic. Inked in December 2018, Adaptive received an upfront payment of $300 million and is eligible to receive over $1.8 billion in milestones, as well as tiered royalties from mid-single digits to mid-teens on any worldwide net sales of products arising from this agreement. That said, nothing from this arrangement has advanced into the clinic, although management expects IND acceptance of Genentech's first compound sometime in 2023.

Immune Medicine provided FY22 revenue of $98.2 million, up 11% over FY21 and 53% of total.

It should be noted that Immune Medicine also included sales from two diagnostic tests (T-Detect COVID and T-Detect Lyme) that were shelved in FY22 due to a tepid uptake from physicians and payors.

Share Price Performance

Armed with a sexy platform, Adaptive was a very hot IPO, opening at $39.01 on a $20 pricing. It eventually rose to an all-time high of $71.25 in January 2021, representing a market cap of $9.9 billion, or an absurd 64.3 times FY21 revenue. That line item did surge 57% over FY20 and grew 20% in FY22, but with breakeven cash flow not likely until FY26, shares of ADPT have cratered 89%.

Q1 2023 Results & Outlook

With its three-pronged approach to revenue growth, Adaptive reported 1Q23 financials on May 3, 2023, which consisted of a loss of $0.40 a share ((GAAP)) and Adj. EBITDA of negative $37.1 million on revenue of $37.6 million versus a loss of $0.44 a share ((GAAP)) and Adj. EBITDA of negative $43.1 million on revenue of $38.6 million in 1Q22. Although the top line was down 3% year-over-year, it was actually up 8% if the decelerating amortization of the Genentech upfront payment is factored out of the algebra. Revenue did beat Street consensus by $0.7 million.

ClonoSEQ test volume improved 15% sequentially and 57% year-over-year to 12,079.

After the quarter, Adaptive announced a collaboration with Takeda Pharmaceutical Company ( TAK ) in which the latter will use clonoSEQ to assess MRD to facilitate the development of its lymphoid malignancy clinical candidates.

Management reiterated its FY23 revenue outlook of $210 million (based on a range midpoint) and stated that operating expenses would be below the $385.5 million experienced in FY22.

Balance Sheet & Analyst Commentary

To bolster its cash position , Adaptive entered into an agreement with OrbiMed Royalty & Credit Opportunities in September 2022, which provided $125 million of upfront funding with another $125 million available. On March 31st, the company held cash and marketable securities of $440.7 million, providing it a cash runway likely into late 2025, when it expects to achieve positive Adj. EBITDA. As stated previously, breakeven cash flow is anticipated in FY26. These projections assume a 20%-30% CAGR FY22-FY27.

Street analysts are somewhat neutral on Adaptive, featuring two buy and two outperform ratings against one hold and one underperform. JPMorgan assumed an Overweight rating on ADPT and $15 price target earlier this week. Their median (and mode) price objective is $15. On average, they expect the company to generate a loss of $1.23 a share (GAAP) on revenue of $207.6 million in FY23, followed by a loss of $1.01 a share (GAAP) on revenue of $260.7 million in FY24, representing 26% growth at the top line.

Verdict

Adaptive Biotechnologies Corporation's businesses are solid, and the company has clear visibility on top line growth. However, with no line of site on profitability until FY26 or FY27, just under two times FY24E revenue (net of cash) seems like a fair but uncompelling valuation. The wild card is drug discovery, but it's been five years since it received $300 million upfront from Genentech and that collaboration has yet to produce a clinical asset - although that may change this year. As such, it is unlikely that a similar deal is in the offing. Furthermore, its own autoimmune R&D efforts have yielded nothing to date. Even with the cash remaining on its royalty agreement with OrbiMed, the bet here is that Adaptive will have to return to the capital markets. That return or Adaptive's stock trading below $5 a share could prompt a more bullish posture, but for now the recommendation is to stay to the sidelines.

Human beings can get used to virtually anything, given plenty of time and no choice in the matter whatsoever. "? Tom Holt, Open Sesame.

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