Adaptive Biotechnologies Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company develops immune-system sequencing products and services, including immunoSEQ and the clonoSEQ blood-cancer test, and collaborates on therapeutic discovery. Figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Sequencing revenue | $9.5 | $6.1 | +56% |
| Development revenue | $11.4 | $6.6 | +74% |
| Total revenue | $20.9 | $12.7 | +65% |
| Cost of revenue | $5.3 | $5.0 | +7% |
| Gross margin | 74% | 61% | +13 percentage points |
| Research and development | $23.9 | $12.5 | +92% |
| Sales and marketing | $14.0 | $7.8 | +79% |
| General and administrative | $11.8 | $7.0 | +69% |
| Operating loss | $(34.6) | $(20.0) | Loss widened |
| Net loss | $(31.4) | $(18.4) | Loss widened |
| Adjusted EBITDA (non-GAAP) | $(28.0) | $(15.2) | Loss widened |
| Net loss per share | $(0.25) | $(1.45) | Share count differs substantially |
Revenue growth reflected higher clinical and research sequencing activity and increased Genentech collaboration revenue. Genentech accounted for 54.4% of Q1 2020 revenue. Research sequencing volume rose 23% to 6,030 sequences; clinical test volume rose 75% to 3,518 tests. Higher R&D spending supported platform, immunoSEQ Dx, antigen-map and T-cell-receptor discovery work.
Cash, liquidity and balance sheet
- Cash and cash equivalents were $212.7 million; marketable securities were $443.1 million. Combined cash, cash equivalents and marketable securities totaled $655.8 million at quarter-end, down from $682.3 million at December 31, 2019.
- Operating cash flow was $(31.6) million, versus $278.3 million provided in Q1 2019. The prior-year inflow primarily reflected Genentech’s $300 million upfront payment. Investing activities provided $142.8 million, principally from marketable-security maturities and sales; financing activities provided $5.0 million, mainly from option exercises.
- Total assets were $874.9 million and shareholders’ equity was $551.6 million. Accumulated deficit was $396.8 million.
- Total liabilities were $323.3 million, including $273.4 million of deferred revenue and $38.0 million of operating lease liabilities. The filing reports no finance leases at March 31, 2020 and does not identify conventional borrowings outstanding.
- Management stated existing cash, cash equivalents and marketable securities should fund operating expenses and capital requirements for at least the next 12 months.
Material changes, outlook and risks
- Compared with Q1 2019, revenue increased 65%, but operating expenses grew 70% and net loss widened. Gross margin improved as cost of revenue grew more slowly than revenue.
- Management expects revenue to increase over the long term, with a greater contribution from clinical diagnostics and drug discovery, but provided no numerical revenue or earnings guidance. It expects R&D, sales and marketing, and G&A expenses to rise in absolute dollars.
- COVID-19 may reduce near-term research sample procurement and clinical testing, disrupt clinical trials, delay milestones and pipeline work, and affect laboratory operations, suppliers, and expansion plans. Management also cautioned that market disruption could constrain future access to capital.
- In March 2020 the company extended its Microsoft collaboration to study COVID-19; it began enrolling the virtual ImmuneRACE study in May. In April it signed a memorandum of understanding with Amgen on a potential COVID-19 antibody-therapy partnership; definitive terms were still to be agreed.
- Genentech may provide more than $1.8 billion in future development, regulatory and commercial milestones, plus royalties, but these amounts are contingent and were not included in the recognized transaction price. The company recognized $10.9 million of Genentech revenue in Q1 2020 and expects to recognize the upfront-payment revenue over an estimated seven to eight years from the agreement’s effective date.
- Other potential milestone payments of up to $233 million under MRD development agreements depend on customer therapeutic regulatory approvals. These are contingent, not assured revenue.
- Adoption of lease accounting on January 1, 2020 materially changed the balance sheet, recognizing operating lease assets and liabilities and derecognizing a $36.6 million build-to-suit asset and financing obligation. Signed leases not yet commenced carried $100.1 million of undiscounted future payments; commencement could be delayed by COVID-19.
- The company reported no material legal proceedings and no off-balance-sheet arrangements. Its disclosure controls were assessed as effective at March 31, 2020.
Key facts for investors to verify
- Whether COVID-19 materially affects sequencing volumes, clonoSEQ testing, clinical programs, laboratory capacity or customer collections.
- How quickly clonoSEQ reimbursement coverage and utilization expand, and whether clinical revenue growth continues.
- Genentech program progress, expected development timeline and the conditions for milestone and royalty payments; also whether the proposed Amgen collaboration reaches a definitive agreement.
- Cash use and expense growth relative to management’s stated liquidity runway, including potential working-capital needs and future lease commitments.
- Revenue-recognition estimates for collaboration and clinical contracts, including deferred revenue of $273.4 million and the timing of its conversion to recognized revenue.