Adaptive Biotechnologies Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company develops immune-based diagnostic, sequencing and therapeutic products, including clonoSEQ and immunoSEQ. Financial amounts below are in U.S. dollars; tables are in millions except per-share data.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $21.0 | $22.1 | $41.9 | $34.8 |
| Sequencing revenue | $8.0 | $11.9 | $17.5 | $17.9 |
| Development revenue | $13.0 | $10.3 | $24.4 | $16.9 |
| Net loss | $(33.5) | $(15.7) | $(64.9) | $(34.0) |
| Net loss per share | $(0.26) | $(1.23) | $(0.51) | $(2.68) |
| Adjusted EBITDA, non-GAAP | $(28.5) | $(10.9) | $(56.5) | $(26.1) |
Q2 cost of revenue was $4.9 million, implying a gross margin of approximately 76.6%, compared with 74.1% a year earlier. For the first half, cost of revenue was $10.3 million and implied gross margin was approximately 75.5%, versus 69.2% in 2019. Operating expenses rose to $57.9 million in Q2 from $38.2 million; first-half operating expenses were $113.4 million, up from $71.0 million.
At June 30, cash and cash equivalents were $365.4 million and marketable securities were $262.3 million, totaling $627.8 million. Six-month operating cash use was $62.7 million; investing activities provided $320.3 million, primarily from marketable-security maturities and sales. Cash, cash equivalents and restricted cash ended the period at $367.6 million. There was no conventional borrowing reported; operating lease liabilities totaled $45.7 million. Deferred revenue was $263.2 million.
Material changes and business drivers
- Q2 revenue declined 5% year over year: development revenue rose 27%, chiefly from the Genentech collaboration, while sequencing revenue fell 33%.
- Research sequencing volume fell 54% in Q2, reflecting trial-enrollment delays and project deferrals among biopharmaceutical and academic customers. Clinical test volume increased 31%. For the first half, research sequencing volume fell 27% while clinical tests increased 51%.
- First-half revenue grew 20%, primarily due to an $8.8 million increase in Genentech-related revenue; sequencing revenue was slightly lower.
- Operating costs increased substantially, including first-half R&D up 72%, sales and marketing up 70%, and general and administrative expense up 76%. Management attributed growth mainly to personnel, platform and product development, marketing, and public-company costs.
Outlook, risks and notable items
- Management gave no numerical revenue or earnings guidance. It expected existing cash and investments at June 30 to fund operating and capital needs for at least 12 months. In July 2020, the company raised approximately $271.7 million net by selling 7.2 million shares at $40 per share; this was subsequent to quarter-end.
- Management expects investment in commercial activities, R&D, the immune medicine platform and laboratory capacity to continue. Longer-term revenue growth and a shift toward clinical products and drug discovery depend on adoption and use of products and services.
- COVID-19 created uncertainty around research sample availability, clinical testing, trials, operations, supply chains and development timelines. The company reported confirming a clinical signal for SARS-CoV-2 detection and launched the ImmuneCODE data initiative; it also described a COVID-19 research product launched in August, after quarter-end.
- Genentech represented 63.0% of Q2 revenue and 58.7% of first-half revenue, creating substantial customer and collaboration concentration. Up to $1.8 billion or more in potential Genentech milestones and royalties remains contingent on development and commercial outcomes; milestone amounts were not included in the recognized transaction price.
- The company disclosed up to $269.0 million in potential milestone payments under MRD development agreements, subject to customer therapeutics receiving specified regulatory approvals. These are contingent, not assured revenue.
- Signed leases not yet commenced carried $91.2 million of future undiscounted payments; commencement may be delayed, including due to COVID-19. The company reported no material legal proceedings and stated disclosure controls were effective at June 30, 2020.
Important facts for investors to verify
- Whether research customer sample volumes and clinical test growth recover, and how COVID-19 affects revenue and pipeline timelines.
- The sustainability and concentration of development revenue, especially Genentech-related revenue, and the progress and economics of that collaboration.
- Cash burn relative to the reported liquidity, including the effect of the July offering and planned spending.
- How customer adoption, reimbursement coverage and test utilization affect clonoSEQ and future diagnostic revenue.
- Potential dilution: 7.2 million shares were issued in the July offering; at June 30, 16.2 million shares were subject to outstanding options or RSUs, with additional equity-plan reserves.
- Comparability of reported loss per share: the 2019 period preceded the July 2019 IPO and preferred-stock conversion, so weighted-average share counts differ substantially.