Adaptive Biotechnologies Corporation — Q2 2019 Form 10-Q
Business context and period. This unaudited report covers the quarter and six months ended June 30, 2019. Adaptive is a commercial-stage immune medicine company, with sequencing products and services (immunoSEQ and clonoSEQ) and development collaborations. Its IPO closed July 1, 2019, after quarter-end, so June 30 financial statements exclude the IPO proceeds and preferred-stock conversion.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sequencing revenue | $11.9m | $8.3m | $17.9m | $14.1m |
| Development revenue | $10.3m | $3.3m | $16.9m | $7.2m |
| Total revenue | $22.1m | $11.6m | $34.8m | $21.3m |
| Net loss | $(15.7)m | $(12.5)m | $(34.0)m | $(24.9)m |
| Net loss per share attributable to common shareholders | $(1.23) | $(1.01) | $(2.68) | $(2.02) |
| Adjusted EBITDA, non-GAAP | $(10.9)m | $(9.4)m | $(26.1)m | $(18.0)m |
- Margins and expenses: Gross margin, calculated as revenue less cost of revenue, was approximately 74% in Q2 2019 versus 56% in Q2 2018; for the first half it was approximately 69% versus 58%. Operating loss was $16.1m for Q2 and $36.2m for the first half. R&D, sales and marketing, and general and administrative expenses all rose year over year.
- Cash flow: First-half operating cash flow was $262.3m, versus cash used of $15.2m in 2018. The increase primarily reflects the $300m Genentech upfront payment recorded as deferred revenue, not recurring operating cash generation. Investing used $267.5m, including $358.7m of marketable-security purchases; financing used $1.4m. Cash, cash equivalents and restricted cash ended the period at $48.5m.
- Liquidity and balance sheet: Cash, cash equivalents and marketable securities totaled approximately $423.0m at June 30, 2019. Total assets were $601.4m; current liabilities were $74.9m. Deferred revenue was $302.1m, including $285.2m related to Genentech. The filing reports no debt borrowings. Shareholders’ deficit was $284.4m.
- IPO: The July 1 offering sold 17.25m shares at $20 per share and generated approximately $316m net proceeds. All outstanding preferred shares converted into common stock at closing.
Material changes versus the prior comparable period
- Q2 revenue increased 91% year over year, with development revenue up 213%, primarily reflecting $8.5m recognized under the Genentech collaboration. First-half revenue rose 64%; Genentech contributed $14.8m of development revenue.
- Sequencing revenue increased 43% in Q2 and 28% in the first half. Clinical test volume rose 50% in Q2 and 44% in the first half. Research sequencing volume rose 22% in Q2 but declined 2% in the first half.
- Despite revenue growth and higher gross margin, net loss widened: Q2 loss increased from $12.5m to $15.7m; first-half loss increased from $24.9m to $34.0m. R&D spending increased 75% in Q2 and 58% in the first half.
- Deferred revenue increased from $13.4m at year-end 2018 to $302.1m, largely due to Genentech’s upfront payment. Marketable securities rose from $110.0m to $374.5m.
Outlook, risks and unusual items
- Management expects long-term revenue growth, with a potential shift toward clinical diagnostics and drug discovery, but notes that adoption, test frequency and milestone timing may cause period-to-period fluctuations. No numerical revenue or earnings guidance is provided.
- Management expects R&D, sales and marketing, and public-company costs to increase in absolute dollars. It states that existing resources, together with IPO proceeds, should fund operations and capital requirements for at least 12 months.
- The Genentech agreement provides a $300m non-refundable upfront payment, potential milestone payments of more than $1.8bn and tiered royalties. Milestones and royalties are contingent; milestone consideration was excluded from the transaction price at June 30 because of uncertainty. Genentech represented 40.0% of Q2 revenue and 43.6% of first-half revenue.
- Management cited risks including customer adoption and reimbursement, dependence on limited suppliers, research and regulatory uncertainty, and the possibility that additional financing may be needed. A hypothetical 100-basis-point interest-rate increase was estimated to reduce the fair value of available-for-sale securities by approximately $1.4m.
- After quarter-end, the company entered into a lease for a planned 100,000-square-foot Seattle facility and expanded its current headquarters space. Estimated future minimum payments for these leased spaces total $135.2m, assuming target commencement dates. The filing reports no material legal proceedings.
- Disclosure controls and procedures were assessed as effective at June 30, 2019. Management reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- How much future revenue and cash generation depends on Genentech, and whether development progress supports potential milestones and royalties.
- Whether clinical test adoption and reimbursement coverage, including Medicare coverage for clonoSEQ, translate into sustained sequencing revenue and collections.
- Operating cash burn excluding the Genentech upfront payment, and how long cash and IPO proceeds support planned investment and expansion.
- Whether rising R&D and commercial spending can produce improved operating leverage while the company remains loss-making.
- The timing, total costs and cancellation or delivery conditions for the substantial post-quarter Seattle lease commitments.