Adaptive Biotechnologies Isn't Quite Your Portfolio's Immune Booster

Summary

• ADPT is, in my opinion, still too early in its development cycle to warrant a buy recommendation.
• That being said, I believe the company is moving in the right direction and am excited to see what it will deliver in the long term.
• ADPT has a strong balance sheet, and I expect the company to maintain its current funding structure for at least until 2025.

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Investment Thesis

Adaptive Biotechnologies (NASDAQ:ADPT) developed a system for parsing the genetic data stored in our adaptive immune systems in order to provide targeted diagnostics and therapies. The company's platform can make products for three types of businesses: life science research, clinical diagnostics, and drug discovery. The Seattle-based biotech has a robust immune genetics database. Its unique platform makes it stand out in the crowded genetic diagnostic market with a scalable immune medicines platform highly regarded by research and academic institutions. It also has multiple FDA-approved diagnostic products, contributing to its moat, compared to other companies that market their products as CLIA-waived Laboratory Developed Tests.

However, the company is at the very early stages of commercialization and realizing the potential of its immune medicine platform, and it will likely be unprofitable for a long time. It has many nascent projects, with many variables that make forecasting revenue or success almost impossible. Our hold rating mirrors the company's low earnings visibility and developing product portfolio, weighed against a unique technological moat in the immunotherapy space.

Revenue Trends

ADPT generates revenue from three main sources; first, its collaboration agreement with Genentech (part of Roche (OTCQX:RHHBY)). Second, its immune cell profiling service markets to biopharma companies, and finally, its Minimal Residual Disease "MRD" diagnostic service to physicians treating patients with blood cancers, namely Multiple Myeloma "MM," Acute lymphoblastic leukemia "ALL" and Chronic Lymphocytic Leukaemia "CLL."

In 2019, the company partnered with Genentech to develop multiple drugs utilizing its platform, in return for $300 million in cash prepayment and $1.7 billion in milestone payments. The company recorded the $300 million prepayment on its balance sheet and continues to amortize the lump sum as it continues supporting Genentech's R&D activities, which amounted to $21.3 million or 45% of total revenue in Q3 2022, up from $15 million in the previous quarter. This figure will likely fluctuate according to the progress made in Genentech's three pre-clinical drug development programs utilizing ADPT's platform.

In addition to a drug-development partnership, the company sells multiple diagnostic products to healthcare providers. In the past quarter, ADPT derived 42% of revenue from its FDA/CMS-approved products targeting patients with blood cancers needing recurrence monitoring using its clonoSEQ service. As one can imagine, given these dynamics, ADPT's revenue is a function of sales and marketing activities aimed at spreading awareness of its FDA/CMS approved bone-marrow and liquid biopsy diagnostic tests and its high-level management efforts to secure strategic partnerships utilizing its immune medicine platform.

Balance Sheet

ADPT is unprofitable and will likely remain this way for at least two or three years. The company's tactical moves to generate revenue in the MRD and COVID-testing segments are not enough to cover R&D expenses incurred as ADPT continues building its immune Medicine library platform. One also can't ignore the R&D expenses related to its efforts to demonstrate the clinical validity of its non-FDA-approved products. This is critical to enhance adoption and convince physicians and Key Opinion Leaders to utilize ADPT's liquid biopsy MRD diagnostic test.

As of Sept 2022, the company had $564 million in current assets, weighed against approximately $105 million in current liabilities, and a $160 million annualized cash burn rate. The company solidified its balance sheet with $250 million in non-dilutive, royalty-based funding from OrbiMed in July 2022. This, along with its reorganization plan, which saw ADPT lay off about 100 employees in March 2022, significantly enhanced its financial position. This is critical for ADPT, given that, unlike its peers, it doesn't have enough revenue to leverage itself into profitability in my view.

Market Position

ADPT's crown jewel is its TCR-Antigen Map, linking billions of T-receptors with corresponding antigens of viruses and bacteria trying to invade the body every day. Its database, marketed under the immunoSEQ brand to biopharma and academic institutions, has the potential to unlock a long-overlooked asset in fighting diseases; the patient's immune system.

For some time now, I have been keeping up with the latest developments in the field of molecular immunotherapies. These developments have led to the creation of ground-breaking new cancer treatments that make use of T-cells. In 2018, Novartis (NVS) rolled out Kymriah, a CAR-T therapy for the treatment of ALL, Follicular Lymphoma, and Diffuse Large B-cell Lymphoma (DLBCL). In the same year, Gilead (GILD) developed Yescarta, targeting the same indications (except ALL). These are the first CAR-T therapies introduced to the nascent market and have proven to be pretty lucrative for biotech companies. From my understanding, both drugs are generating more than a billion in revenue, and as a result, the CAR-T market is booming. However, ADPT doesn't directly benefit from the booming CAR-T market. The company has a different focus, leveraging a TCR-Antigen platform, which, although it has a broader application, at least theoretically, is less known or used. For example, while CAR-T therapies can detect specific proteins on the surface of the cancer cell, TCR therapies can detect cancer DNA inside the cancer cell, allowing for broader applications. However, in my view, ADPT is ahead of the curve in terms of drug development focus, and I don't believe we should expect a rapid or exponential increase in revenue, at least from the immunoSEQ business line.

How I might Be Wrong

Our hold rating implies that the risk-reward balance of holding ADPT is inferior to the broader index. However, if the company was able to leverage its tactical opportunities (the low-hanging fruits) manifested in its liquid biopsy offerings, ADPT's ticker might surge.

Last week the company introduced clonoSEQ for DLBCL and recently made its ALL, MM, and CLL offerings available as blood tests instead of bone marrow, marketing the tests as CLIA-waived, CMS-approved products. Blood samples are much easier to collect than bone marrow samples, allowing for more frequent testing and, thus, higher revenue. Anyone who has been following the industry can see how quickly physicians and KOLs are adopting these cfDNA solutions. If the company is able to leverage this business segment, I believe ADPT will outperform its peers.

Summary

Is ADPT a great value at current price levels? It's hard to say. The company estimates its addressable market at around $40 billion, and its market position in the immunotherapy market is favorable. However, as mentioned above, the path to profitability is not as clear as one might think. The immunotherapy market is still nascent, and immunoSEQ is, in my view, far ahead of the curve in terms of practical use. It's been three years since ADPT signed its strategic drug development agreement with Genentech, and we still don't have a clinical trial to report.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.