Adaptive Biotechnologies Corporation — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; amounts below are in U.S. dollars. The company develops immune-sequencing products and services, including immunoSEQ and the clonoSEQ clinical diagnostic, and is developing additional diagnostics and cellular therapies.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $26.3 million | $26.1 million | $68.2 million | $60.9 million |
| Sequencing revenue | $11.3 million | $11.7 million | $28.7 million | $29.6 million |
| Development revenue | $15.0 million | $14.4 million | $39.5 million | $31.2 million |
| Cost of revenue | $6.1 million | $5.6 million | $16.3 million | $16.3 million |
| Gross margin, calculated | 77.0% | 78.5% | 76.1% | 73.2% |
| Operating loss | $(37.0) million | $(18.1) million | $(108.6) million | $(54.2) million |
| Net loss | $(36.7) million | $(14.0) million | $(101.7) million | $(48.0) million |
| Net loss per share, basic and diluted | $(0.27) | $(0.11) | $(0.79) | $(0.97) |
| Adjusted EBITDA, non-GAAP | $(28.4) million | $(12.7) million | $(84.9) million | $(38.8) million |
Q3 revenue rose 1% year over year; nine-month revenue rose 12%. Q3 clinical tests delivered increased 58% to 4,023, while research sequences delivered fell 38% to 6,541. For the nine months, clinical tests increased 54% to 10,677 and research sequences declined 32% to 16,756. Management attributed weaker research activity partly to an expired biopharma agreement, trial delays and project deferrals.
Operating expenses increased substantially: Q3 R&D rose 48% to $30.3 million, sales and marketing rose 59% to $14.5 million, and general and administrative rose 42% to $12.1 million. For the nine months, those expenses increased 62%, 66% and 63%, respectively. Higher investment in personnel, T-Detect, the TCR-Antigen Map, clonoSEQ marketing and drug-discovery efforts contributed. Share-based compensation was $17.5 million for the nine months, versus $9.7 million a year earlier.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $497.1 million; marketable securities were $354.5 million. Together, cash, cash equivalents and marketable securities totaled $851.5 million.
- Current assets were $877.4 million and current liabilities $100.8 million. Total liabilities were $320.4 million, including $46.3 million of operating lease liabilities and $253.0 million of deferred revenue. No finance leases were outstanding; the filing reports no material debt balance.
- Nine-month operating cash flow was negative $109.8 million, compared with positive $232.2 million in 2019. The prior-year inflow largely reflected Genentech’s $300 million upfront payment. 2020 operating cash use included a $27.3 million reduction in deferred revenue, primarily as Genentech revenue was recognized.
- Investing activities provided $223.0 million, primarily from marketable-security maturities and sales; financing activities provided $287.3 million. The latter included $271.8 million net proceeds from a July 2020 offering of 7.2 million shares at $40 per share.
- Management stated existing cash, cash equivalents and marketable securities should fund operating expenses and capital needs for at least the next 12 months. It may seek additional capital; future equity issuance could dilute shareholders.
- A planned Seattle facility lease had $89.8 million of future undiscounted payments over a 12.7-year lease term; the lease had not yet commenced. The South San Francisco lease amendment added $9.0 million of obligations.
Business developments, outlook and risks
- Genentech accounted for 48.1% of Q3 revenue and 55.1% of nine-month revenue. The company recognized $12.3 million and $35.9 million of Genentech revenue in Q3 and the nine-month period, respectively. It may receive more than $1.8 billion in future development, regulatory and commercial milestones, plus royalties, but these amounts are contingent and were excluded from the recognized transaction price.
- Up to $313.5 million in additional milestones could be received under MRD development agreements if customers’ therapies obtain specified regulatory approvals.
- Management expects R&D, sales and marketing, and G&A expenses to continue increasing in absolute dollars. It expects revenue to grow over the long term as clinical products and drug discovery expand, but gave no quantified revenue or earnings guidance.
- COVID-19 disrupted operations and may continue to affect customer sample availability, clinical programs, suppliers, reagent lead times and revenue. The company reported fewer-than-projected enrollments in its ImmuneSENSE Lyme study: 467 participants as of September 30, 2020, potentially extending its timeline and increasing costs.
- The company launched immunoSEQ T-MAP COVID in August 2020. The filing also notes a November 2020 plan to launch T-Detect COVID, after the reporting date. Management cautioned that COVID-related products may fail to achieve validation, regulatory clearance, timely commercialization or commercial success.
- In July 2020, the company entered an option allowing Amgen to develop and commercialize neutralizing antibodies the company may discover. The filing does not provide an outcome or value for this option.
- Lease accounting adoption in 2020 brought operating lease right-of-use assets and liabilities onto the balance sheet; the company reported no material impact on operating results or cash flows. It was not party to material legal proceedings and reported effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether clinical-test growth can offset declining research sequencing and customer project deferrals.
- How much revenue remains concentrated in Genentech and the timing, cost and uncertainty of collaboration milestones and royalties.
- Cash consumption, deferred-revenue recognition and the assumptions behind management’s at-least-12-month liquidity assessment.
- Progress, enrollment, validation and regulatory status of T-Detect, COVID-related offerings and the ImmuneSENSE Lyme study.
- Whether rising operating expenses and share-based compensation translate into durable revenue growth; compare non-GAAP Adjusted EBITDA with GAAP net loss and cash flow.
- Potential dilution from outstanding equity awards and future financing, as well as the obligations associated with the planned Seattle facility.