Adaptive Biotechnologies Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Amounts are in U.S. dollars; financial statement figures below are in millions unless stated otherwise. The company commercializes immunoSEQ sequencing services and clonoSEQ minimal residual disease tests, and develops immune-based products and therapies.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $26.1 | $17.2 | $60.9 | $38.5 |
| Sequencing revenue | $11.7 | $8.5 | $29.6 | $22.5 |
| Development revenue | $14.4 | $8.7 | $31.2 | $15.9 |
| Cost of revenue | $5.6 | $5.4 | $16.3 | $14.4 |
| Gross margin | 78.5% | 68.8% | 73.2% | 62.6% |
| Operating loss | $(18.1) | $(9.2) | $(54.2) | $(35.6) |
| Net loss | $(14.0) | $(8.3) | $(48.0) | $(33.2) |
| Adjusted EBITDA, non-GAAP | $(12.7) | $(5.1) | $(38.8) | $(23.1) |
Q3 revenue rose 52%; nine-month revenue rose 58%. Development revenue growth primarily reflected the Genentech collaboration. Sequencing revenue growth included higher research and clinical volumes. Q3 clonoSEQ clinical tests delivered increased 36% year over year to 2,551; nine-month tests increased 41% to 6,950. R&D, sales and marketing, and general and administrative costs increased substantially as the company expanded development and commercialization activities. Interest and other income increased with the larger investment portfolio.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $74.9 million and marketable securities were $633.8 million, totaling $708.7 million. Current assets were $601.4 million and current liabilities $73.4 million.
- Nine-month operating cash flow was $232.2 million, compared with cash use of $26.8 million in 2018. The 2019 inflow was primarily driven by a $276.2 million increase in deferred revenue, including Genentech’s upfront payment; it should not be read as recurring operating cash generation.
- Investing cash use was $528.4 million, mainly purchases of marketable securities; financing cash inflow was $318.2 million, mainly IPO proceeds. Property and equipment purchases were $8.8 million.
- The filing reports no conventional borrowings. It records a $23.4 million build-to-suit lease financing obligation. Contractual operating lease obligations were $140.8 million and purchase commitments $13.7 million.
Material changes, outlook and risks
- The July 2019 IPO raised $315.9 million net of underwriting discounts and offering expenses; 93.0 million preferred shares converted to common stock. Common shares outstanding were 124.3 million at quarter-end.
- Genentech paid a non-refundable $300 million upfront fee in February 2019. The agreement may provide more than $1.8 billion in additional development, regulatory and commercial milestones and royalties, but these amounts are contingent, were excluded from recognized transaction price where constrained, and are not assured. The company recognized $11.4 million from the collaboration in Q3 and $26.2 million in the first nine months. Revenue recognition is expected over approximately seven to eight years, subject to changes in development activity.
- Management expects revenue to grow over the long term, with a potential shift toward clinical diagnostics and drug discovery, but gave no specific numerical revenue or earnings guidance. It expects R&D and commercial spending to increase in absolute dollars and believes available cash, cash equivalents and marketable securities will fund operations and capital needs for at least 12 months.
- Key risks include continued losses and spending, uncertain adoption and reimbursement for clonoSEQ, dependence on customer and regulatory milestones, significant customer concentration (Genentech represented 43.9% of Q3 revenue), reliance on a limited number of suppliers, and execution of planned laboratory and facility expansion. A hypothetical 100-basis-point rate increase was estimated to reduce the fair value of available-for-sale securities by approximately $4.0 million.
- The company reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.
Investor verification priorities
- Track Genentech program progress, collaboration spending and revenue recognition; distinguish contingent milestones and royalties from contracted or realized revenue.
- Assess recurring cash burn separately from deferred revenue and investment maturities, and monitor operating expenses against revenue growth.
- Verify clonoSEQ test utilization, payer coverage, collections and reimbursement estimates, including Medicare treatment-cycle assumptions.
- Review customer concentration, long-term lease commitments and whether facility expansion supports demand without materially increasing fixed costs.