Adaptive Biotechnologies Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Financial statements are unaudited. Amounts below are in millions of dollars, except per-share data and percentages.
Business context
Adaptive is a commercial-stage immune-medicine company whose products and services include clonoSEQ MRD testing, immunoSEQ sequencing, T-Detect COVID, and development work with biopharmaceutical partners. Genentech is its principal collaboration partner. The company formed Spin Technologies in 2021 to develop an early-stage sequencing technology and owns 70% of it.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sequencing revenue | $22.1 | $11.3 | $55.8 | $28.7 |
| Development revenue | $17.4 | $15.0 | $60.6 | $39.5 |
| Total revenue | $39.5 | $26.3 | $116.4 | $68.2 |
| Cost of revenue | $14.2 | $6.1 | $34.9 | $16.3 |
| Gross margin | 64.0% | 77.0% | 70.0% | 76.1% |
| Operating loss | $(56.3) | $(37.0) | $(147.4) | $(108.6) |
| Net loss attributable to Adaptive | $(55.9) | $(36.7) | $(145.8) | $(101.7) |
| Net loss per share | $(0.40) | $(0.27) | $(1.04) | $(0.79) |
| Adjusted EBITDA, non-GAAP | $(41.1) | $(28.4) | $(106.8) | $(84.9) |
Gross margin percentages are calculated from reported revenue and cost of revenue. At September 30, cash and cash equivalents were $122.4 and marketable securities totaled $510.0, for combined cash, cash equivalents and marketable securities of $632.4, down from $806.8 at December 31, 2020. Total assets were $992.6 and shareholders’ equity was $651.5. The filing reports no borrowings; operating lease liabilities totaled $113.2, including $5.1 current. Current assets were $467.0 and current liabilities $122.4.
For the first nine months, operating cash use was $138.9, investing activities provided $114.0 (including net maturities of marketable securities), and financing activities provided $23.9, primarily from stock-option exercises. Capital expenditures were $52.5. Management said existing cash, cash equivalents and marketable securities should fund operating expenses and capital needs for at least the next 12 months.
Changes versus prior comparable periods
- Q3 revenue increased 50% year over year; nine-month revenue increased 71%. Sequencing revenue rose 96% in Q3 and 94% for nine months, while development revenue rose 16% and 53%, respectively.
- Clinical test volume, excluding T-Detect COVID, increased 47% in Q3 and 51% for nine months. Research sequencing volume increased 33% and 35%, respectively.
- Losses widened: Q3 net loss attributable to Adaptive increased from $36.7 to $55.9; nine-month loss increased from $101.7 to $145.8. Operating expenses rose as the company expanded research, commercial, and administrative activities.
- Cost of revenue rose faster than revenue, reducing calculated gross margin. Management cited higher sample-related materials, labor, overhead, and facility costs.
- Operating cash use increased to $138.9 from $109.8 for the nine-month comparison. The reduction in deferred revenue was a significant cash-flow factor. Cash and securities declined by $174.4 from year-end.
Outlook, commentary, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects revenue to grow over the long term, with a hoped-for shift toward clinical products and drug discovery; timing depends on customer adoption and usage.
- Management expects continued investment in research and development, sales and marketing, laboratory operations, equipment, and facilities. It expects near-term capital expenditures to increase.
- Management identified uncertainty in sample delivery, customer development decisions, milestone timing, cost estimates, and the continuing effects of COVID-19 as factors that may cause revenue variability. Supplier concentration, reimbursement and adoption of clinical tests, product development and regulatory outcomes are also relevant risks.
- Genentech contributed 39.8% of Q3 revenue and 42.6% of nine-month revenue. Revenue recognition under the collaboration depends on estimated research and development progress. The company said it could receive up to $333.5 million in additional MRD agreement milestones if specified customer-therapy regulatory approvals are achieved; these payments are contingent, not assured.
- Q3 and nine-month revenue included estimate-related recognition, including $3.2 million for changes in expected samples under certain MRD development agreements during the first nine months and $2.0 million of Medicare sequencing revenue from revised estimates concerning further testing. The company also recognized customer regulatory milestone revenue.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2021. The filing describes the Genentech collaboration as potentially eligible for more than $1.8 billion in milestones and tiered royalties, subject to development and commercial success.
Important facts for investors to verify
- Whether clonoSEQ and other clinical products sustain test-volume growth and broaden reimbursement and customer adoption.
- How much revenue and cash flow depend on Genentech and other collaboration or milestone payments, and whether development estimates change.
- Whether revenue growth can outpace cost of revenue and operating expense growth, improving gross margin and reducing losses.
- Cash burn, planned capital expenditures, and management’s stated minimum 12-month liquidity outlook.
- Progress, regulatory status, and commercial prospects for T-Detect Lyme, T-Detect COVID, the TCR-Antigen Map, and therapeutic candidates.
- Potential dilution from equity compensation and future financing: common shares outstanding increased to 141.0 million from 137.6 million at year-end, with 39.5 million shares reserved for outstanding awards and future issuance.